UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35068
ACELRX PHARMACEUTICALS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
41-2193603
(IRS Employer
Identification No.)
351 Galveston Drive
Redwood City, CA 94063
(650) 216-3500
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $0.001 par value
Trading Symbol(s)
ACRX
Name of Each Exchange on Which Registered
The Nasdaq Global Market
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of
Regulation S-T (§-232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such
files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or
an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Emerging growth company
Accelerated filer ☐
Smaller reporting company ☑
☐
☑
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any
new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal
control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Exchange Act Rule 12b-2) Yes ☐ No ☑
The aggregate market value of the voting stock held by non-affiliates of the registrant on June 30, 2020 (the last business day of the registrant’s most
recently completed second fiscal quarter), based upon the last sale price reported on the Nasdaq Global Market on that date, was approximately
$95,491,775. The calculation excludes 1,971,363 shares of the registrant’s common stock held by current executive officers and directors that the registrant
has concluded are affiliates of the registrant. Exclusion of such shares should not be construed to indicate that any such person possesses the power, direct
or indirect, to direct or cause the direction of the management or policies of the registrant or that such person is controlled by or under common control
with the registrant.
As of March 9, 2021, the number of outstanding shares of the registrant’s common stock was 118,947,830.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's notice of annual meeting of stockholders and proxy statement to be filed pursuant to Regulation 14A within 120 days
after Registrant's fiscal year end of December 31, 2020, are incorporated by reference into Part III of this report.
1
ACELRX PHARMACEUTICALS, INC.
2020 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
Item 1. Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2. Properties
Item 3. Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
Item 16. Form 10-K Summary
Signatures
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Unless the context indicates otherwise, the terms “AcelRx,” “AcelRx Pharmaceuticals,” “we,” “us” and “our” refer to AcelRx Pharmaceuticals, Inc., and its
consolidated subsidiaries. “DZUVEO” is a trademark, and “ACELRX”, “DSUVIA” and “Zalviso” are registered trademarks, all owned by AcelRx
Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.
2
Forward-Looking Statements
This Annual Report on Form 10-K, or Form 10-K, contains “forward-looking statements” within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act, which are subject to the “safe harbor” created by that section. The forward-looking statements in this Form
10-K are contained principally under “Item 1. Business,” “Item 1A. Risk Factors” and “Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” In some cases, you can identify forward-looking statements by the following words: “may,” “will,” “could,”
“would,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “potential,” “continue,” “ongoing” or the negative
of these terms or other comparable terminology, although not all forward-looking statements contain these words. These statements involve risks,
uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the
information expressed or implied by these forward-looking statements. Although we believe that we have a reasonable basis for each forward-looking
statement contained in this Form 10-K, we caution you that these statements are based on a combination of facts and factors currently known by us and our
projections of the future, about which we cannot be certain. Many important factors affect our ability to achieve our objectives, including:
•
•
the accuracy of our estimates regarding the sufficiency of our cash resources, future revenues, expenses, capital requirements and needs for
additional financing, and our ability to obtain additional financing;
the uncertainties and impact arising from the worldwide COVID-19 pandemic, including restrictions on the ability of our sales force to contact and
communicate with target customers and resulting delays and challenges to our commercial sales of DSUVIA® (sufentanil sublingual tablet, 30
mcg);
• our success in commercializing DSUVIA in the United States, including the marketing, sales, and distribution of the product, whether alone or with
contract sales organizations and other collaborators, such as Zimmer Biomet Dental;
• our ability to comply with FDA regulations concerning the advertising and promotion of DSUVIA, including resolving the concerns raised by FDA
in the warning letter delivered to us on February 11, 2021;
•
•
the expected benefits of the promotion agreement with La Jolla Pharmaceutical Company, or La Jolla;
the size and growth potential of the markets for DSUVIA, and Zalviso® (sufentanil sublingual tablet system), if approved in the United States, and
our ability to serve those markets;
• our ability to maintain regulatory approval of DSUVIA in the United States, including effective management of and compliance with the DSUVIA
Risk Evaluation and Mitigation Strategies, or REMS, program;
•
•
acceptance of DSUVIA by physicians, patients and the healthcare community, including the acceptance of pricing and placement of DSUVIA on
payers’ formularies;
the integration and performance of any assets or businesses we acquire;
• our ability to develop sales and marketing capabilities in a timely fashion, whether alone through recruiting qualified employees, by engaging a
contract sales organization, or with potential future collaborators;
•
successfully establishing and maintaining commercial manufacturing with third parties;
• our ability to manage effectively, and the impact of any costs associated with, potential governmental investigations, inquiries, regulatory actions or
lawsuits that may be brought against us;
continued demonstration of an acceptable safety profile of DSUVIA;
effectively competing with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings, including IV-
opioids and any subsequently approved products;
•
•
• our ability to maintain regulatory approval of DZUVEO™ in the European Union, or EU, and enter into a collaboration agreement with a strategic
partner for the commercialization of DZUVEO in Europe;
• our ability to manufacture and supply DZUVEO in Europe to any future strategic partner;
• our ability to timely and efficiently close-out our relationship with Grünenthal GmbH, or Grünenthal, following the termination of our
Collaboration and License Agreement and the Manufacture and Supply Agreement;
• our ability to fulfill our obligations under the Purchase and Sale Agreement with SWK Funding, LLC, or SWK, (assignee of PDL BioPharma, Inc.,
or PDL) including our obligation to use commercially reasonable efforts to negotiate a replacement license agreement for Zalviso with a third party;
• our ability to successfully execute the pathway towards a resubmission of the Zalviso New Drug Application, or NDA, and subsequently obtain and
maintain regulatory approval of Zalviso in the United States and comply with any related restrictions, limitations, and/or warnings in the label of
Zalviso, if approved;
3
•
the outcome of any potential FDA Advisory Committee meeting held for Zalviso;
• our ability to successfully commercialize Zalviso, if approved in the United States;
•
the rate and degree of market acceptance of Zalviso, if approved in the United States;
• our ability to obtain adequate government or third-party payer reimbursement;
• our ability to attract additional collaborators with development, regulatory and commercialization expertise;
• our ability to successfully retain our key commercial, scientific, engineering, medical or management personnel and hire new personnel as needed;
•
•
•
regulatory developments in the United States and foreign countries;
the performance of our third-party suppliers and manufacturers, including any supply chain impacts or work limitations resulting from shelter-in-
place orders related to COVID-19;
the success of competing therapies that are or become available;
• our liquidity and capital resources; and
• our ability to obtain and maintain intellectual property protection for DSUVIA/DZUVEO and Zalviso.
In addition, you should refer to “Item 1A. Risk Factors” in this Form 10-K for a discussion of these and other important factors that may cause our actual
results to differ materially from those expressed or implied by our forward-looking statements. As a result of these factors, we cannot assure you that the
forward-looking statements in this Form 10-K will prove to be accurate. Furthermore, if our forward-looking statements prove to be inaccurate, the
inaccuracy may be material. In light of the significant uncertainties in these forward-looking statements, you should not regard these statements as a
representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. Also, forward-
looking statements represent our estimates and assumptions only as of the date of this Form 10-K. We undertake no obligation to publicly update any
forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.
PART I
Item 1. Business
Overview
We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised
settings.
Our Portfolio
The following table summarizes our portfolio.
Product
DSUVIA®
Sufentanil sublingual tablet, 30
mcg
Description
Target Use
Status
DZUVEO™
Sufentanil sublingual tablet, 30
mcg
Zalviso®
Sufentanil sublingual tablet
system, 15 mcg
Moderate-to-severe acute pain in
a medically supervised setting,
administered by a healthcare
professional
Moderate-to-severe acute pain in
a medically supervised setting,
administered by a healthcare
professional
Moderate-to-severe acute pain in
the hospital setting, administered
by the patient as needed
Received U.S. Food and Drug Administration, or
FDA, approval in November 2018; commercial
launch began first quarter of 2019.
Granted European Commission, or EC, marketing
approval in June 2018.
In the U.S., positive results from Phase 3 trial,
IAP312, announced in August 2017. Currently
evaluating the timing of the resubmission of the
New Drug Application, or NDA, which is in part
dependent on the finalization of the FDA’s new
opioid approval guidelines and process.
Approved in the European Union, where it is
marketed commercially by Grünenthal until May
2021.
4
Product
ARX-02
Description
Target Use
Status
Higher Strength Sufentanil
Cancer breakthrough pain in
Sublingual Tablet
opioid-tolerant patients
Phase 2 clinical trial and End of Phase 2 meeting
completed. Investigational New Drug, or IND,
application was inactivated.
Future development contingent upon identification
of corporate partnership resources.
ARX-03
Combination
Sufentanil/Triazolam Sublingual
Tablet
Mild sedation and pain relief
during painful procedures in a
physician’s office
Phase 2 clinical trial and End of Phase 2 meeting
completed. IND application was inactivated.
Future development contingent upon identification
of corporate partnership resources.
We have created a proprietary sublingual (under the tongue) formulation of sufentanil intended for the treatment of moderate-to-severe acute pain. We
believe our non-invasive, proprietary sublingual sufentanil tablet potentially overcomes many of the limitations of current treatment options available for
moderate-to-severe acute pain. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma levels and short duration
of action observed with IV administration. The sublingual formulation retains the therapeutic value of sufentanil, and novel delivery devices provide a non-
invasive route of administration. Sufentanil is highly lipophilic which provides for rapid absorption in the mucosal tissue, or fatty cells, found under the
tongue, and for rapid transit across the blood-brain barrier to reach the mu-opioid receptors in the brain. The sublingual route of delivery used by DSUVIA
and Zalviso provides a predictable onset of analgesia. The sublingual delivery system also eliminates the risk of intravenous, or IV, complications, such as
catheter-related infections. In addition, because patients do not require direct connection to an IV infusion pump, or IV line, DSUVIA and Zalviso may
allow for ease of patient mobility.
We have chosen sufentanil as the therapeutic ingredient for DSUVIA and Zalviso. Opioids have been utilized for pain relief for centuries and are the
standard-of-care for the treatment of moderate-to-severe acute pain. Sufentanil, a high-therapeutic index opioid, which has no active metabolites, is
available as an injectable in several markets around the world and is used by anesthesiologists for induction of sedation or as an epidural; however, the
injectable formulation is not suitable for the treatment of acute pain. Sufentanil has many pharmacological advantages over other opioids. Published studies
demonstrate that sufentanil produces significantly less respiratory depressive effects relative to its analgesic effects compared to other opioids, including
morphine and fentanyl. These third-party clinical results correlate well with preclinical trials demonstrating sufentanil’s high therapeutic index, or the ratio
of the toxic dose to the therapeutic dose of a drug, used as a measure of the relative safety of the drug for a particular treatment. Accordingly, we believe
that sufentanil can provide an effective and well-tolerated treatment for acute pain. The following table illustrates the difference between the therapeutic
index of different opioids.
Opioid
Meperidine
Methadone
Morphine
Hydromorphone
Fentanyl
Sufentanil
Therapeutic
Index
5
12
71
250
277
26,716
In addition, the pharmaceutical attributes of sufentanil, including lipid solubility and ionization, result in rapid cell membrane penetration and onset of
action, which we believe make sufentanil an optimal opioid for the treatment of acute pain.
5
Although the analgesic efficacy and safety of sufentanil have been well established, the product’s use has been historically limited due to its short duration
of action when delivered intravenously. Sublingual delivery of sufentanil avoids the high peak plasma levels and short duration of action of intravenous, or
IV, administration.
DSUVIA®
DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018 (and by the European Medicines Agency, or EMA, in June 2018), is
indicated for use in adults in certified medically supervised healthcare settings, such as hospitals, surgical centers, and emergency departments, for the
management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. DSUVIA was designed to
provide rapid analgesia via a non-invasive route and to eliminate dosing errors associated with IV administration. DSUVIA is a single-strength solid
dosage form administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently
marketed for IV and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma
levels and short duration of action observed with IV administration.
Examples of potential patient populations and settings in which DSUVIA could be used include: emergency room patients; perioperative use for patients
who are undergoing inpatient, short-stay or ambulatory surgery; inpatient use for up to 72 hours in patients with moderate-to-severe acute pain; procedural
suite use for painful procedures such as oral surgery or cosmetic procedures; patients being treated and transported by paramedics; and for battlefield
casualties. In the emergency room and in procedural suite environments, patients often do not have immediate IV access available, or may not require IV
access. Moreover, IV dosing results in high peak plasma levels, thereby limiting the opioid dose and requiring frequent redosing intervals to titrate to
satisfactory analgesia. Oral pills and liquids generally have slow and erratic onset of analgesia. Based on internal market research conducted to date, we
believe that an additional treatment option that provides timely analgesia without requiring an IV for moderate-to-severe acute pain is needed, in both
civilian and military settings, as an alternative to currently available opioids.
DSUVIA was approved with a REMS which restricts distribution to certified medically supervised healthcare settings in order to prevent respiratory
depression resulting from accidental exposure. DSUVIA is only distributed to facilities certified in the DSUVIA REMS program following attestation by
an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become certified, a healthcare setting is required to
train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory depression. DSUVIA is not available in retail
pharmacies or for outpatient use. As part of the REMS program, we monitor distribution and audit wholesalers’ data, evaluate proper usage within the
healthcare settings and monitor for any diversion and abuse. We de-certify healthcare settings that are non-compliant with the REMS program.
Zalviso®
While still under development in the United States, Zalviso is approved and marketed in the European Union, or EU. Zalviso is intended for the
management of moderate-to-severe acute pain in hospitalized adult patients. Zalviso consists of a pre-filled cartridge of 40 sufentanil sublingual tablets, 15
mcg, delivered by the Zalviso System, a needle-free, handheld, patient-administered, pain management system. Zalviso is a pre-programmed non-invasive
system that allows hospital patients with moderate-to-severe acute pain to self-dose with sufentanil sublingual tablets, 15 mcg, to manage their pain.
Zalviso is designed to help address certain problems associated with post-operative IV patient-controlled analgesia, or PCA. Zalviso allows patients to self-
administer sufentanil sublingual tablets via a pre-programmed, secure system designed in part to eliminate the risk of healthcare provider programming
errors.
The Zalviso System consists of the following components: a disposable dispenser tip, a disposable dispenser cap, an adhesive thumb tag, a cartridge of 40
sufentanil sublingual 15 mcg tablets (approximately a two-day supply) in a disposable radio frequency identification and bar-coded cartridge, a reusable,
rechargeable handheld controller, a tether, and an authorized access card.
The potential benefits of Zalviso are the result of combining the following three elements:
•
•
sufentanil, a high therapeutic index opioid;
sufentanil sublingual tablets, our proprietary, non-invasive sublingual dosage form; and
• our novel, pre-programmed, handheld PCA device that enables simple patient-controlled delivery of sufentanil sublingual tablets in the hospital
setting and eliminates the risk of programming errors.
6
Drugs are classified or scheduled by the Drug Enforcement Agency, or DEA, according to their potential for abuse and addiction. Sufentanil is classified as
a Schedule II controlled substance. Scheduled drugs, when they are under patient control in a hospital setting, must be secured and have adequate dose
access control and tracking mechanisms. Our novel handheld PCA device has the following safety features:
•
•
an authorized access card, which is a wireless system access key for the healthcare professional;
a wireless, electronic, adhesive thumb tag that acts as a single-patient identification key;
• pre-programmed 20-minute lock-out to avoid overdosing;
•
•
•
tablet singulation, or dispensing, motion that eliminates runaway motor delivery risk;
a security tether that is designed to prevent theft and misuse; and
fully automated inventory record of sufentanil sublingual tablet usage.
We submitted an NDA for Zalviso in September 2013, or the Zalviso NDA, and on July 25, 2014, the Division of Anesthesia, Analgesia, and Addiction
Products of the FDA issued a Complete Response Letter, or CRL, for the Zalviso NDA. The CRL contained requests for additional information on the
Zalviso System to ensure proper use of the device. The requests include submission of data demonstrating a reduction in the incidence of device errors,
changes to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. In March 2015, we
received correspondence from the FDA stating that, in addition to the work we had performed to address the items in the CRL, a clinical study would be
required to test the modifications to the Zalviso device and mitigations put in place to reduce the risk of inadvertent dosing/misplaced tablets.
Our IAP312 study was designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into
account comments from the FDA on the study protocol. In the IAP312 study, 320 hospitalized, post-operative patients used Zalviso to self-administer 15
mcg sublingual sufentanil tablets as often as once every 20 minutes for 24-to-72 hours to manage their moderate-to-severe acute pain. Throughout the
study, for which top-line results were announced in August 2017, 2.2% of patients experienced a Zalviso device error, which was statistically less than the
5% limit specified in the study objectives. None of these device errors resulted in an over-dosing event. This 2.2% rate was lower (p < 0.001) than the 7.9%
rate of device errors during patient use previously reported for the earlier version of the Zalviso device in the Phase 3 IAP311 study. In addition, results of
this study supported earlier clinical findings, with favorable tolerability and a significant majority of “good” or “excellent” ratings provided by both
patients and healthcare providers when assessing the method of pain control. These results will supplement those of our earlier Phase 3 studies (IAP309,
IAP310 and IAP311), all of which met safety and efficacy endpoints, in the Zalviso NDA resubmission. The timing of the resubmission of the Zalviso
NDA is dependent upon the finalization of the FDA’s new opioid approval guidelines and process.
Zalviso was approved for commercial sale in the European Union, or EU, in September 2015 and Grünenthal GmbH, or Grünenthal, began its commercial
launch of Zalviso in the EU in April 2016. On May 18, 2020, we received a notice from Grünenthal that it was exercising its right to terminate the
Collaboration and License Agreement, or, as amended, the License Agreement, which granted Grünenthal the European rights to commercialize Zalviso in
the 28 EU member states at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway and Australia, or the Territory, for human use in
pain treatment in medically supervised settings, and the related Manufacture and Supply Agreement, or, as amended, the MSA, under which AcelRx
exclusively manufactured and supplied Zalviso to Grünenthal for commercial sales in the Territory. The MSA, together with the License Agreement, are
referred to as the Grünenthal Agreements. The terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its
Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Territory revert back to us in May 2021.
On September 18, 2015, we sold a majority of the expected royalty stream and commercial milestones from the sales of Zalviso in Europe by Grünenthal to
PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty Monetization. On August 31, 2020, PDL announced it sold its royalty interest for
Zalviso to SWK Funding, LLC, or SWK. Under the Royalty Monetization, we have a continuing obligation to use commercially reasonable efforts to
negotiate a replacement license agreement for Zalviso, or New Arrangement; however, we have not yet entered into such an arrangement. For additional
information regarding the Grünenthal Agreements, see Note 5 “Revenue from Contracts with Customers” in the accompanying notes to the Consolidated
Financial Statements. For additional information on the Royalty Monetization, see Note 8 “Liability Related to Sale of Future Royalties” in the
accompanying notes to the Consolidated Financial Statements.
7
Clinical Trials
Zalviso®
Zalviso has completed three Phase 3 clinical trials: two placebo-controlled efficacy and safety trials and one open-label active comparator trial, in which
Zalviso was compared to IV PCA morphine. Each of the three Phase 3 trials successfully achieved its primary endpoint. Based on FDA feedback, we
completed a fourth study, IAP312, in a diverse post-surgical population to further evaluate the overall performance of the Zalviso System.
Active comparator trial (IAP309)
In November 2012, we reported top-line data showing that Zalviso had met its primary endpoint of non-inferiority in the Phase 3 open-label active
comparator trial designed to compare the efficacy and safety of Zalviso (15 mcg/dose) to IV PCA with morphine (1mg/dose) for the treatment of moderate-
to-severe acute post-operative pain. Utilizing a randomized, open-label, parallel group design, this trial enrolled 359 adult patients at 26 U.S. sites for the
treatment of pain immediately following open-abdominal or major orthopedic surgery (hip and knee replacement). Patients were randomized 1:1 to
treatment with Zalviso or IV PCA morphine and were treated for a minimum of 48 hours and up to 72 hours.
Double-blind, placebo-controlled, abdominal surgery trial (IAP310)
In March 2013, we reported top-line data results demonstrating that Zalviso met its primary endpoint in a pivotal Phase 3 trial designed to compare the
efficacy and safety of Zalviso to placebo in the management of acute post-operative pain after major open abdominal surgery. Adverse events reported in
the trial were generally mild or moderate in nature and similar in both placebo and treatment groups. Utilizing a randomized, double-blind, placebo-
controlled design, this Phase 3 trial enrolled 178 adult patients at 13 U.S. sites. Patients were treated for post-operative pain for a minimum of 48 hours, and
up to 72 hours. Patients were randomized 2:1, with 119 patients randomized to sufentanil sublingual tablet treatment and 59 to placebo treatment. Both
treatments were delivered by the patient, as needed, using Zalviso with a 20-minute lock-out period. Patients in both groups could receive up to 2 mg
morphine intravenously per hour as a rescue medication, the primary purpose of this rescue medication being to provide placebo-treated patients access to
pain medication to enable them to stay in the trial as long as possible. Pre-rescue pain scores were imputed to minimize the impact of this rescue opioid on
efficacy evaluations.
The primary endpoint evaluated pain intensity over the 48-hour study period compared to baseline, or Summed Pain Intensity Difference, or SPID-48, in
patients following major open abdominal surgery. Patients receiving sufentanil sublingual tablets demonstrated a significantly greater SPID-48 compared to
placebo-treated patients during the study period (105.6 and 55.6, respectively; p=0.001).
Double-blind, placebo-controlled, orthopedic surgery trial (IAP311)
In May 2013, we reported top-line data results demonstrating that Zalviso met its primary endpoint in a pivotal Phase 3 trial designed to compare the
efficacy and safety of Zalviso to placebo in the management of acute post-operative pain after major orthopedic surgery. Adverse events reported in the
study were generally mild or moderate in nature and were similar in both placebo and treatment groups for the majority of adverse events. Utilizing a
randomized, double-blind, placebo-controlled design, this pivotal Phase 3 study enrolled 426 adult patients at 34 U.S. sites for treatment of moderate-to-
severe acute pain immediately following major orthopedic surgery. Seven patients did not receive study drug, resulting in 419 patients being included in the
ITT population. Patients were treated for a minimum of 48 hours, and up to 72 hours. Patients were randomized 3:1, with 321 patients randomized to
sufentanil sublingual tablet treatment and 105 to placebo treatment. Both treatments were delivered by the patient, as needed, using the Zalviso System
with a 20-minute lock-out period. Patients in both groups could receive up to 2 mg morphine intravenously per hour as a rescue medication, the primary
purpose of this rescue medication being to enable placebo-treated patients to stay in the study. Pain scores recorded just prior to the delivery of rescue
medication were gathered and imputed forward to minimize the impact of this rescue opioid on efficacy evaluations.
The primary endpoint evaluated SPID-48 in patients following major orthopedic surgery. Patients receiving Zalviso demonstrated a significantly greater
SPID-48 compared to placebo-treated patients during the study period (+76.2 and -11.4, respectively; p < 0.001). Two hundred fifteen (68.3%) sufentanil
sublingual tablet-treated patients completed the 48-hour study period, compared to 43 (41.3%) placebo-treated patients. Primary reasons for drop-out in the
sufentanil sublingual tablet- and placebo-treated groups were adverse events (7.0% and 6.7%, respectively) and lack of efficacy (14.3% and 48.1%,
respectively).
Four patients (three in the sufentanil sublingual tablet group and one in the placebo group) experienced a serious adverse event, or SAE, considered
possibly or probably related to the study drug by the investigator. The SAEs observed in the patients in the sufentanil sublingual tablet group included
severe oxygen saturation decrease, sinus tachycardia, and confusional state.
8
Combined related adverse events for the two placebo-controlled pivotal studies (IAP310 and IAP311) compared to placebo are shown below. Only pruritus
(itching) was statistically different for Zalviso compared to placebo (p = 0.002).
Adverse Events Occurring in > 2% in Either Group
Possibly or Probably Related Adverse Events
At least 2% in either group
Nausea
Vomiting
Oxygen Saturation Decreased
Pruritus
Dizziness
Constipation
Headache
Insomnia
Hypotension
Confusional state
Zalviso
n=429
Placebo
n=162
Two Placebo-
Controlled
Phase 3 Studies
29.4%
8.9%
6.1%
4.7%
4.4%
3.7%
3.3%
3.3%
3.0%
2.1%
22.2%
4.9%
2.5%
0%
1.2%
0.6%
3.7%
1.9%
1.2%
0.6%
3 patients (0.7%) in the Zalviso group had treatment-emergent respiratory events that required naloxone reversal.
Multi-center, single-arm, open-label study (IAP312)
IAP312 was a Phase 3 study designed to evaluate the overall performance of the Zalviso System, in response to the CRL received from the FDA for
Zalviso. Throughout the study in 320 enrolled patients, 2.2% of patients experienced a Zalviso device error, which was statistically less than the 5% limit
specified in the study objectives. Importantly, none of these device errors resulted in an over-dosing event. This 2.2% rate was lower (p < 0.001) than the
7.9% rate of device errors during patient use previously reported for the earlier version of the Zalviso device in the Phase 3 IAP311 study.
In addition, as requested by FDA, the IAP312 study prospectively evaluated the number of inadvertently misplaced tablets which occurred during patient
dosing. A small number of inadvertently misplaced tablets (less than 0.1% of total dispensed tablets) was observed in the original Phase 3 studies.
However, the presence of inadvertently misplaced tablets had not been routinely assessed as part of the previous protocols. Throughout the IAP312 study,
patients self-administered a total of 7,293 sufentanil tablets. Per the updated Zalviso training instructions electronically displayed on the hand-held device,
6 patients called the nurse when they failed to properly self-administer a single tablet to allow for proper retrieval and disposal of the tablet. Also, during
inspection by the nurse, which occurred every two hours per protocol, a total of 7 misplaced tablets (<0.1% of total dispensed tablets) were discovered with
6 additional patients. No patient had a repeat incidence of an inadvertently misplaced tablet following re-training on the device. This combination of patient
training and nurse inspection, along with the tracking features of the Zalviso device, could potentially address the FDA's concerns regarding drug
accountability.
Finally, in this study, 86%, 89% and 100% of patients at the 24, 48 and 72-hour time points, respectively, recorded "good" or "excellent" ratings on the
patient global assessment, or PGA, of the method of pain control, which measures a patient's satisfaction with their quality of analgesia. Healthcare
professional global assessment, or HPGA, of the method of pain control was similarly strong, with 91%, 95% and 100% of nurses rating Zalviso as "good"
or "excellent" over each respective 24-hour period. Zalviso was shown to be well tolerated by study participants, with nausea, hypotension and vomiting
representing the most commonly reported adverse events. A total of 5 patients experienced serious adverse events, but all were considered unrelated to
study drug by investigators.
The Market Opportunity for DSUVIA and Zalviso
Unmet Medical Need
Examples of potential patient populations and settings in which patients might require the short-term management of moderate-to-severe acute pain include
emergency room patients; perioperative use for patients who are undergoing inpatient, short-stay or ambulatory surgery; inpatient use for up to 72 hours in
patients with moderate-to-severe acute pain; procedural suite use for painful procedures such as oral surgery or cosmetic procedures; patients being treated
and transported by paramedics; and for battlefield casualties.
9
While IV opioids are currently employed to control moderate-to-severe acute pain in many of these settings, the use of IV opioids suffers from the
following:
• potential high peaks and troughs of plasma concentrations;
•
•
infection risk associated with the invasive nature of IV delivery;
consumption of hospital resources including an IV pump, a bed where the patient can be monitored, and nurse time; and
• possible impairment of a patient’s cognitive abilities, which can make it difficult to provide accurate medical history to physicians during
evaluation.
We believe healthcare providers and hospital administrators caring for patients in moderate-to-severe acute pain in the aforementioned medically
supervised settings could significantly benefit from the following items:
•
a pharmacokinetic profile that avoids the high peak plasma levels and short duration of action observed with IV administration;
• non-invasively delivered analgesic that utilizes fewer hospital resources, thereby incurring less cost;
•
effective and rapid-acting pain relief with sufficient duration of effect allowing efficient treatment while assuring patient satisfaction;
• pain relief that does not sacrifice cognitive function; and/or
•
infection risks due to invasive routes of delivery, such as IV.
In our Phase 1 through Phase 3 clinical studies, sublingual sufentanil has demonstrated the following attributes:
•
•
a pharmacokinetic profile that blunts peak plasma levels compared to IV administration;
ease of administration;
• pain reduction (as much as 3-points on a validated 10-point scale) beginning as early as 15-to-30 minutes after administration;
• maintenance of cognitive function;
•
•
adverse event types similar to IV opioids, such as nausea, headache, vomiting and dizziness; and
lower percentage of patients with decreased oxygen saturation events compared to IV-PCA morphine.
We believe that sublingual sufentanil provides a safety, efficacy and tolerability profile enabling our products to potentially replace IV opioid use in
patients with moderate-to-severe acute pain in the proposed medically supervised settings. This may be especially true for DSUVIA in the post-operative
settings where, because of the unique pharmacokinetic profile, the healthcare practitioner may be able to manage patient-flow more efficiently in the
recovery room after surgery, and in emergency medical settings. The number of emergency departments is decreasing in the United States, resulting in an
increased focus on resource management to treat a growing number of patients in an efficient manner.
United States Market
Based on commissioned research conducted in 2016, we estimate that there are over 90 million patients who are treated in various medically supervised
settings for their moderate-to-severe acute pain which is significant enough to warrant the use of an opioid. We believe these patients may be eligible for
treatment with DSUVIA, and in some cases Zalviso, if approved in the United States. The target patient population for DSUVIA are those patients in a
certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for less than 24 hours. The target patient
population for Zalviso are patients in a hospital setting for greater than 24 hours. Our current estimate of patients in moderate-to-severe acute pain in
medically supervised settings, by setting, is as follows:
Emergency services (includes pre-hospital and Emergency Department treatment)
Outpatient surgery
Hospital/surgery center/office-based procedures
Inpatient surgery/inpatient conditions
52 million
11 million
20 million
10 million
10
The market for Zalviso, given the target patients in a hospital setting for greater than 24 hours, is the approximately 10 million inpatient surgeries and
inpatient conditions above. There can be no assurance that our estimates regarding the number of patients treated in the various settings will be accurate.
European Market
Based on commissioned research conducted in 2016, there are an estimated 142 million patients in the EU5 (France, Germany, Italy, Spain, and the United
Kingdom) represented across DZUVEO target care settings annually. Each year, there are an estimated 110 million emergency attendances and 32 million
surgical procedures performed each year. It is anticipated that there are 51 million patients in emergency medicine with moderate-to-severe acute pain and
16 million with moderate-to-severe acute pain following surgery each year.
ARX-02(higher strength sufentanil sublingual tablet)
A Phase 2 trial evaluating the efficacy and safety of ARX-02 for the treatment of cancer breakthrough pain in opioid-tolerant patients has been completed.
The IND application for ARX-02 was inactivated as there is no ongoing clinical development.
ARX-03(combination sufentanil/triazolam sublingual tablet)
A Phase 2 trial which evaluated the efficacy and safety of this product for procedural anxiety and acute pain has been completed. The IND application for
ARX-03 was inactivated as there is no ongoing clinical development.
ARX-02 and ARX-03 are investigational product candidates and are not approved by the FDA or any other regulatory agency. We do not intend to invest
resources in these development stage product candidates; accordingly, any future development of these development stage product candidates is contingent
on funding from a corporate partnership or other external funding source.
Our Strategy
Our strategy remains focused upon the commercial launch of DSUVIA into the medically supervised healthcare settings market, such as hospitals, surgical
centers and emergency departments. The process of selling into these settings and obtaining approval for a product to be used within these types of
institutions is complex and takes time.
Our four-pillar strategy for DSUVIA revenue growth is focused on delivering the most effective and efficient commercialization of DSUVIA through
different channels, plus business development to expand the number of products in our portfolio.
The first pillar is concentrated on supporting broader use within the DoD after DSUVIA achieved U.S. Army Milestone C approval and was added to the
Joint Deployment Formulary in 2020. We believe the opportunity for DSUVIA revenue growth includes deployed or deploying military troops, domestic-
based military, military treatment facilities and Veterans Administration facilities. We are using a small internal commercial team of three that are focused
on achieving our objectives within this first pillar.
The second pillar is focused on what we call specialty markets, which are typically large market opportunities, but more geographically dispersed with a
lower concentration of patient visits than a hospital or surgery center. Examples of these specialty markets include oral/dental surgery, emergency medical
services and plastic surgery. We intend to leverage the use of commercial partnerships with more established companies already serving customers in these
specific markets. An example of an initiative in this pillar is our exclusive partnership with Zimmer Biomet Dental in oral/dental surgery. Our objective is
to focus on finding additional partners for these other specialties that align with our values and goals.
The third pillar is centered around the hospital and ambulatory surgery centers. We intend to continue the launch of DSUVIA in the United States focused
on promotion to hospitals, emergency departments and surgery centers with our internal commercial team, plus the support of La Jolla’s promotion efforts.
The fourth pillar involves identifying and licensing, or acquiring, complementary products to DSUVIA. We believe having a single product to market and
sell into this setting is inherently inefficient and building a portfolio of products is important to mitigate such inefficiency. Accordingly, we will focus on
business development activities to increase the number of products in our portfolio.
Supporting the DSUVIA commercial strategy is the production strategy, focused on the completion of our transition to automated packaging equipment
with our contract manufacturing organization, to leverage improved technology to lower production cost.
Our specific strategy with respect to Zalviso is to (a) continue to use commercially reasonable efforts to negotiate a New Arrangement as required under the
Royalty Monetization; and (b) upon the FDA providing further guidance about new opioid approval guidelines, evaluate resubmission of the Zalviso NDA
to seek regulatory approval in the United States and, if successful, promote Zalviso as a follow-on product to DSUVIA, or potentially seek a commercial
partner.
11
Business Development
In addition to partnering DSUVIA in large market, non-core specialty areas outside the hospital and ambulatory surgery centers (e.g., oral/dental surgery,
plastic surgery, EMS, etc.), and identifying and licensing, or acquiring, complementary products to DSUVIA, as well as out-licensing DSUVIA/DZUVEO
in other geographies with potential partners, we are actively pursuing ways to leverage our commercial infrastructure by identifying, evaluating and
executing transactions to bring in additional products for healthcare institutions.
Sales and Marketing
Our four-pillar commercial strategy is focused on leveraging our internal commercial organization, plus collaboration partners, to commercialize DSUVIA.
We have established and will continue developing our distribution capability and commercial organization in the United States to market and sell DSUVIA
in the United States. In geographies where we decide not to commercialize ourselves, we will seek to out-license commercialization rights. In specialty
areas that are not core to the hospital, ambulatory surgery centers, or ASCs, or emergency room settings, (e.g., plastic surgeries), we will seek
commercialization partners that will support accessing these markets.
We are building commercial capability in the United States progressively to support the launch of DSUVIA in the United States market. We foresee two
stages of commercial execution to support successful introduction of DSUVIA in the United States:
To date, we have:
•
•
•
created and deployed a focused scientific support team to gather a detailed understanding of individual emergency room and hospital needs in order
to present DSUVIA effectively;
increased awareness of the clinical profile of sublingual administration of sufentanil through publication of our clinical data;
engaged appropriate Advisory Boards that include representative emergency room physicians, anesthesiologists, surgeons, nurses, pharmacy and
therapeutics, or P&T, committee members and other related experts to provide us with input on appropriate commercial positioning for DSUVIA
for each of these key audiences;
• built a sales and marketing organization that can define appropriate segmentation and positioning strategies and tactics for DSUVIA;
•
established DSUVIA on hospital and ambulatory surgery center formularies through deployment of an experienced team to explain the clinical and
health economic attributes of DSUVIA;
• gathered relevant clinical and health economic data identifying the limitations of IV opioids and other relevant treatments for moderate-to-severe
acute pain in use today; and
• partnered with La Jolla to promote DSUVIA, which allows us to adjust the number of people in our sales organization and rely on an existing
salesforce of a commercial partner;
Next steps in our commercialization plan include:
•
as needed, continuing to build and progressively deploy a high-quality, customer-focused and experienced sales organization in the United States
dedicated to bringing innovative, highly valued healthcare solutions to patients, payers and healthcare providers;
• potentially expanding the label to include pediatric populations by conducting post-approval clinical trials for DSUVIA; and
•
continuing to establish DSUVIA as a suitable choice for moderate-to-severe acute pain in certified medically supervised settings.
If we are unable to establish successful sales and marketing capabilities or enter into agreements with third parties to market and sell our products, we may
be unable to generate any product revenue. For a more comprehensive discussion of the risks related to our commercialization, please see “Risk Factors—
Risks Related to Commercialization of DSUVIA and Zalviso” appearing elsewhere in this Form 10-K.
12
Promotion Agreement
On March 15, 2020, we entered into a Co-Promotion Agreement, or the Co-Promotion Agreement, with Tetraphase Pharmaceuticals, Inc., or Tetraphase, to
co-promote DSUVIA and Tetraphases’s XERAVA™ (eravacycline). On July 28, 2020, Tetraphase was acquired by La Jolla Pharmaceutical Company, or
La Jolla. On October 1, 2020, we entered into a Promotion Agreement, or the Promotion Agreement, with La Jolla and Tetraphase, effective as of
September 30, 2020, pursuant to which AcelRx, La Jolla and Tetraphase restructured their co-promotion arrangement, with La Jolla agreeing to detail and
promote DSUVIA and AcelRx and Tetraphase agreeing to terminate the Co-Promotion Agreement between them. Refer to Note 1 “Organization and
Summary of Significant Accounting Policies” for additional information.
Distribution Agreement
On July 17, 2020, we entered into a distribution agreement, or the Distribution Agreement, with Zimmer Biomet Dental, or ZB Dental, pursuant to which
ZB Dental obtained the exclusive right to promote, market, sell, and arrange to distribute DSUVIA in the United States to clinicians, dentists, surgeons and
other licensed health care practitioners that perform dental (including specialty dental), oral-maxillofacial, cranio-maxillofacial or oral surgery procedures,
or Professionals, and their respective institutions and facilities that are permitted to use DSUVIA.
ZB Dental’s distribution rights are non-exclusive for crossover ambulatory surgery centers and certain government customers, and do not extend to
ambulatory care centers outside the class of trade or into hospitals. ZB Dental will conduct any distribution activities in a manner consistent with
DSUVIA’s FDA-approved indication and REMS program, and within the parameters established in the Distribution Agreement. ZB Dental has the right to
sublicense its distribution rights to its qualified marketing partners but may not otherwise sublicense its distribution rights to any third party without our
prior written consent.
Intellectual Property
We seek patent protection in the United States and internationally for DSUVIA, DZUVEO and Zalviso. Our policy is to pursue, maintain and defend patent
rights developed internally and to protect the technology, inventions and improvements that are commercially important to the development of our
business. We cannot be sure that patents will be granted with respect to any of our pending patent applications or with respect to any patent applications
filed by us in the future, nor can we be sure that any of our existing patents or any patents granted to us in the future will be commercially useful in
protecting our technology. We also rely on trade secrets to protect DSUVIA, DZUVEO and Zalviso. Our commercial success also depends in part on our
non-infringement of the patents or proprietary rights of third parties. For a more comprehensive discussion of the risks related to our intellectual property,
please see “Risk Factors—Risks Related to Our Intellectual Property” appearing elsewhere in this Form 10-K.
Our success will depend significantly on our ability to:
• obtain and maintain patent and other proprietary protection for DSUVIA, DZUVEO and Zalviso;
• defend our patents;
• preserve the confidentiality of our trade secrets; and
• operate our business without infringing the patents and proprietary rights of third parties.
We have established and continue to build proprietary positions for DSUVIA, DZUVEO and Zalviso and related technology in the United States and
abroad.
As of December 31, 2020, we are the owner of record of 26 issued U.S. patents, which together provide coverage for sufentanil sublingual tablets, and the
device components of Zalviso and DSUVIA. These patents provide coverage to at least 2027. We also hold nine issued European patents, each valid in at
least eight countries in Europe. In addition, we own seven patents in Japan, eight in China and seven in Korea, and a number of other international patents
which provide coverage to at least 2027. We are also pursuing a number of U.S. and foreign patent applications. The patent applications that we have filed
and have not yet been granted may fail to result in issued patents in the United States or in foreign countries. Even if the patents do successfully issue, third
parties may challenge the patents.
We continue to seek and expand our patent protection for both compositions of matter and delivery devices, as well as methods of treatment related to
DSUVIA, DZUVEO and Zalviso. In particular, we are pursuing additional patent protection for our DSUVIA, DZUVEO and Zalviso formulations, our
Zalviso device, the combination of drugs and our Zalviso device, our DSUVIA and DZUVEO SDA, as well as to methods of treatment using such drug and
device compositions.
13
We have filed for additional patent coverage in the United States, Europe as well as many other foreign jurisdictions including, Japan, China, India, Canada
and Korea. If issued, and if the appropriate maintenance, renewal, annuity or other governmental fees are paid, we expect that these patents will expire
between 2027 and 2031, excluding any additional term for patent term adjustments or patent term extensions in the United States. We note that the patent
laws of foreign countries differ from those in United States, and the degree of protection afforded by foreign patents may be different from the protection
offered by U.S. patents.
Further, we seek trademark protection in the United States and internationally where available and when appropriate. We have registered our ACELRX,
DSUVIA and Zalviso marks in Class 5, “Pharmaceutical preparations for treating pain; pharmaceutical preparations for treating anxiety,” and Class 10,
“Drug delivery systems; medical device, namely, a mechanical and electronic device used to administer medications, perform timed medication delivery,
and to provide secure access to and delivery of medications,” in the United States.
Our ACELRX, DSUVIA and Zalviso marks are also registered in the European Union, as well as other countries. Our DZUVEO mark is registered in the
European Union.
Competition
Our industry is highly competitive and subject to rapid and significant technological change. Our potential competitors include large pharmaceutical and
biotechnology companies, specialty pharmaceutical and generic drug companies, and medical technology companies. We believe the key competitive
factors that will affect the development and commercial success of our products are the safety, efficacy and tolerability profile, the patient and healthcare
professional satisfaction with using our products in relation to available alternatives and the reliability, convenience of dosing, price and reimbursement of
our products. Over the past year, we have monitored changes in the pharmaceutical industry in response to opioid use in the United States. Pharmaceutical
companies engaged in the distribution and sale of opioids, in particular for the treatment of chronic pain, are refocusing their efforts in order to support
responsible opioid use. While our products are designed for the treatment of moderate-to-severe acute pain for use in medically supervised settings, rather
than for the treatment of chronic pain or for outpatient use, these industry changes could impact the commercial success of DSUVIA, or Zalviso, if
approved, in the United States.
DSUVIA competes, and Zalviso, if approved in the U.S., will compete, with a number of existing and future pharmaceuticals and drug delivery devices
developed, manufactured and marketed by others. In particular, DSUVIA may compete with a wide variety of products and product candidates including (i)
injectable opioid products, such as morphine, fentanyl, hydromorphone and meperidine; (ii) oral opioids such as oxycodone and hydrocodone; (iii) generic
injectable local anesthetics, such as bupivacaine or branded formulations thereof; (iv) non-steroidal anti-inflammatory drugs, or NSAIDS, including
ketorolac in intranasal or generic IV form, and IV meloxicam; and (v) transmucosal fentanyl products. Zalviso, if approved in the U.S., may compete with a
number of opioid-based treatment options, including IV PCA pumps, oral PCA devices, and transdermal opioid PCAs.
Many of our competitors and potential competitors have substantially greater financial, technical and human resources than we do and significantly greater
experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approval of products, and the commercialization of
those products. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for drugs and achieving widespread market
acceptance. Our competitors’ drugs or drug delivery systems may be more effective, have fewer adverse effects, be less expensive to develop and
manufacture, or be more effectively marketed and sold than any product we may seek to commercialize. This may render our products obsolete or non-
competitive. We anticipate that we will face intense and increasing competition as new drugs enter the market, additional technologies become available,
and competitors establish collaborative or licensing relationships, which may adversely affect our competitive position.
Pharmaceutical Manufacturing and Supply
We currently rely on contract manufacturers to produce sufentanil sublingual tablets for commercial production of DSUVIA and Zalviso under current
Good Manufacturing Practices, or cGMP, with oversight by our internal managers. Equipment specific to the pharmaceutical manufacturing process was
purchased and customized for us and is currently owned by us. We plan to continue to rely on contract manufacturers and, potentially, collaboration
partners to manufacture commercial quantities of our products, if and when approved for marketing by the FDA. We currently rely on a single
manufacturer for the commercial supplies of the active pharmaceutical ingredient, or API, for DSUVIA and Zalviso, and intend to qualify a second source.
We have identified other manufacturers that could satisfy our commercial supply and packaging requirements and we continue to evaluate those
manufacturers.
14
Device Manufacturing and Supply
All contract manufacturers and component suppliers have been selected for their specific competencies in the manufacturing processes and materials that
make up DSUVIA and Zalviso. We currently rely on single manufacturers for the commercial supplies of our drug components and packaging for
DSUVIA and Zalviso, and do not currently have agreements in place for redundant supply or a second source for either DSUVIA or Zalviso. DSUVIA
utilizes an SDA in the delivery of the tablets. FDA regulations require that materials be produced under cGMPs or Quality System Regulation, or QSR, as
required for the respective unit operation within the manufacturing process. We outsource injection molding of all the plastic parts for the SDA, and
product sub-assemblies; and filling, packaging and labeling of SDAs.
The device components of Zalviso are manufactured by contract manufacturers, component fabricators and secondary service providers. We outsource
injection molding of all the plastic parts for the cartridge and device and product sub-assemblies; tablet cartridge filling and packaging; and assembly,
packaging and labeling of the dispenser and controller.
Government Regulation
Government authorities in the United States at the federal, state and local level, and in other countries, extensively regulate, among other things, the
research, development, testing, manufacture, quality control, approval, labeling, packaging, storage, record-keeping, promotion, advertising, distribution,
marketing, export and import of products such as DSUVIA and Zalviso. Product candidates, such as Zalviso, must be approved by the FDA through the
NDA process before they may legally be marketed in the United States.
In the United States, the FDA regulates drugs under the Federal Food, Drug, and Cosmetic Act, or FDCA, and its implementing regulations. The process of
obtaining regulatory approvals and complying with applicable laws and regulations requires the expenditure of substantial time and financial resources.
Failure to comply at any time during the product development and approval process, or after approval, may subject an applicant to administrative or
judicial sanctions. These sanctions could include the FDA’s refusal to approve pending applications, withdrawal of an approval, a clinical hold, warning
letters, product recalls, product seizures, total or partial suspension of production or distribution, injunctions, fines, refusals of government contracts,
restitution, disgorgement or civil or criminal penalties. For example, on February 11, 2021, we received a warning letter from the Office of Prescription
Drug Promotion, or OPDP, of the FDA relating to a banner advertisement we submitted to the OPDP on December 6, 2019 and a tabletop display we
submitted on February 28, 2020, and resubmitted to the OPDP at its request on September 23, 2020. We submitted the materials to the OPDP pursuant to
the FDA requirement that sponsors submit all promotional materials to the FDA at the time of their initial dissemination or publication. The FDA’s
concerns identified in the letter include its view that the promotional material makes misleading claims and representations about the risks and efficacy of
DSUVIA because the material does not reveal facts that are material in light of the representations made. As a result, we conducted a review of our
marketing materials to identify any potential revisions in light of the letter. We responded to the FDA within the timeframe requested in the letter and
sought guidance and clarification from the FDA on the concerns raised in the letter. We cannot give any assurances, however, that the FDA will be satisfied
with our response to the letter or that such response will resolve the issues identified in the letter.
The process required by the FDA before a drug product may be marketed in the United States generally involves the following:
•
•
•
•
•
completion of non-clinical laboratory tests, animal trials and formulation studies according to Good Laboratory and Manufacturing Practices
regulations;
submission to the FDA of an investigational new drug, or IND, application which must become effective before human clinical trials may begin;
performance of adequate and well-controlled human clinical trials according to Good Clinical Practices, or GCP, to establish the clinical safety and
efficacy of the proposed drug product for its intended use;
submission to the FDA of an NDA for a new drug product;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the drug product and the drug substance(s) are
produced to assess compliance with cGMP;
• payment of application, annual program fees; and
• FDA review and approval of the NDA.
The testing and approval process requires substantial time, effort and financial resources and we cannot be certain that approval for our product candidate,
Zalviso, will be granted on a timely basis, if at all.
Human clinical trials are typically conducted in three sequential phases that may overlap or be combined:
• Phase 1. The product is initially introduced into healthy human subjects and tested for safety, dosage tolerance, absorption, metabolism, distribution
and excretion. In the case of some products for severe or life-threatening diseases, especially when the product may be too inherently toxic to
ethically administer to healthy volunteers, the initial human testing is often conducted in patients.
15
• Phase 2. Involves trials in a limited patient population to identify possible adverse effects and safety risks, to preliminarily evaluate the efficacy of
the product for specific targeted conditions and to determine dosage tolerance and optimal dosage and schedule.
• Phase 3. Clinical trials are undertaken to further evaluate dosage, clinical safety and efficacy in an expanded patient population at geographically
dispersed clinical trial sites. These trials are intended to establish the overall risk/benefit ratio of the product and provide an adequate basis for
product labeling.
Progress reports detailing the results of the clinical trials must be submitted at least annually to the FDA and safety reports must be submitted to the FDA
and the investigators for serious and unexpected adverse events. The FDA or the sponsor may suspend or terminate a clinical trial at any time on various
grounds, including a finding that the research subjects or patients are being exposed to an unacceptable health risk. Similarly, an Institutional Review
Board, or IRB, can suspend or terminate approval of a clinical trial at its institution if the clinical trial is not being conducted in accordance with the IRB’s
requirements or if the drug or biological product has been associated with unexpected serious harm to patients.
Concurrent with clinical trials, companies usually complete additional animal trials and must also develop additional information about the chemistry and
physical characteristics of the product and finalize a process for manufacturing the product in commercial quantities in accordance with cGMP and QSR for
medical device requirements. The manufacturing process must be capable of consistently producing quality batches of the product candidate and, among
other things, the manufacturer must develop methods for testing the identity, strength, quality and purity of the final product. Additionally, appropriate
packaging must be selected and tested, and stability studies must be conducted to demonstrate that the product candidate does not undergo unacceptable
deterioration over its shelf life.
The results of product development, preclinical trials and clinical trials, along with descriptions of the manufacturing process, analytical tests conducted on
our drug products, proposed labeling and other relevant information, will be submitted to the FDA as part of an NDA for a new drug product, requesting
approval to market the product in the United States. The submission of an NDA is subject to the payment of a substantial user fee; a waiver of such fee may
be obtained under certain limited circumstances. During its review of an NDA, the FDA may inspect our manufacturers for GMP and QSR compliance,
and our pivotal clinical trial sites for GCP compliance.
In addition, under the Pediatric Research Equity Act, an NDA or supplement to an NDA must contain data to assess the safety and effectiveness of the drug
product for the claimed indications in all relevant pediatric subpopulations and to support dosing and administration for each pediatric subpopulation for
which the product is safe and effective. The FDA may grant deferrals for submission of data or full or partial waivers.
The approval process is lengthy and difficult, and the FDA may refuse to approve an NDA if the applicable regulatory criteria are not satisfied or may
require additional clinical data or other data and information. Even if such data and information is submitted, the FDA may ultimately decide that the NDA
does not satisfy the criteria for approval. Data obtained from clinical trials are not always conclusive and the FDA may interpret data differently than we
interpret the same data. The FDA issues a Complete Response Letter at the conclusion of its review if the NDA is not yet deemed ready for approval. A
Complete Response Letter generally outlines the deficiencies in the submission and may require substantial additional testing or information for the FDA to
reconsider the application. If, or when, those deficiencies have been addressed to the FDA’s satisfaction in a resubmission of the NDA, the FDA will issue
an approval letter. The FDA has committed to reviewing such resubmissions in two or six months depending on the type of information included.
If a product candidate does receive regulatory approval, the approval may be limited to specific conditions and dosages or the indications for use may
otherwise be limited, which could restrict the commercial value of the product. DSUVIA was approved with a REMS to mitigate the risk of respiratory
depression resulting from accidental exposure by ensuring that DSUVIA is dispensed only to patients in certified medically supervised healthcare settings.
Zalviso, if approved, will also require a REMS, which can include a medication guide, patient package insert, a communication plan, elements to assure
safe use and implementation system, and must include a timetable for assessment of the REMS. Further, the FDA may require that certain
contraindications, warnings or precautions be included in the product labeling and may require testing and surveillance programs to monitor the safety of
approved products that have been commercialized. In addition, the FDA may require post-approval testing which involves clinical trials designed to further
assess a drug product’s safety and effectiveness after the NDA.
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Post-Approval Requirements
Any drug products for which we receive FDA approval are subject to continuing regulation by the FDA, including, among other things, record-keeping
requirements, reporting of adverse experiences with the product, providing the FDA with updated clinical safety and efficacy information, product
sampling and distribution requirements, complying with certain electronic records and signature requirements and complying with FDA promotion and
advertising requirements. Phase 4 clinical trials are conducted after approval to gain additional experience from the treatment of patients in the intended
therapeutic indication or when otherwise requested by the FDA in the form of post marketing requirements or commitments. Failure to promptly conduct
any required Phase 4 clinical trials could result in withdrawal of NDA approval. The FDA strictly regulates labeling, advertising, promotion and other types
of information on products that are placed on the market. Drug products may be promoted only for the approved indications and in accordance with the
provisions of the approved label. Further, manufacturers of drug products must continue to comply with cGMP requirements, which are extensive and
require considerable time, resources and ongoing investment to ensure compliance. In addition, changes to the manufacturing process generally require
prior FDA approval before being implemented and other types of changes to the approved product, such as adding new indications and additional labeling
claims, are also subject to further FDA review and approval.
Drug product manufacturers and other entities involved in the manufacturing and distribution of approved drug products are required to register their
establishments with the FDA and certain state agencies, and are subject to periodic unannounced inspections by the FDA and certain state agencies for
compliance with cGMP and other laws. The cGMP requirements apply to all stages of the manufacturing process, including the production, processing,
packaging, labeling, storage and shipment of the drug product. Manufacturers must establish validated systems to ensure that products meet specifications
and regulatory standards, and test each product batch or lot prior to its release. In the case of Zalviso, the device component must comply with FDA’s
Quality Systems Regulation.
We rely, and expect to continue to rely, on third parties for the production of clinical and commercial quantities of our products. Future FDA and state
inspections may identify compliance issues at the facilities of our contract manufacturers that may disrupt production or distribution or may require
substantial resources to correct.
The FDA may withdraw a product approval if compliance with regulatory standards is not maintained or if problems occur after the product reaches the
market. Later discovery of previously unknown problems with a product may result in restrictions on the product or even complete withdrawal of the
product from the market. Further, the failure to maintain compliance with regulatory requirements may result in administrative or judicial actions, such as
fines, warning letters, holds on clinical trials, product recalls or seizures, product detention or refusal to permit the import or export of products, refusal to
approve pending applications or supplements, restrictions on marketing or manufacturing, injunctions or civil or criminal penalties.
Foreign Regulation
In addition to regulations in the United States, we will be subject to a variety of foreign regulations governing clinical trials and commercial sales and
distribution of our products to the extent we choose to sell any products outside of the United States.
In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain
in medically monitored settings. We currently intend to commercialize and promote DZUVEO in Europe with a strategic partner, although we have not yet
entered into such an arrangement.
We are responsible for maintaining Zalviso device regulatory approval in the EU in order to support the manufacturing and supply of Zalviso for
commercial sales. We completed the Conformité Européenne approval process for the Zalviso device, more commonly known as a CE Mark approval. We
received CE Mark approval in December 2014, which permits the commercial sale of the Zalviso device in the European Union. In connection with the CE
Mark approval, we were also granted International Standards Organization, or ISO, 13485:2003 certification of our quality management system. This is an
internationally recognized quality standard for medical devices. The CE Mark was originally issued by the British Standards Institution, or BSI, a Notified
Body, or NB, located in the United Kingdom, or U.K., or BSI-U.K. We transferred the CE Mark file and certification to the Netherlands NB of BSI, or BSI-
NL, to mitigate the uncertainty with regards to Brexit. The ISO certification issued through BSI-U.K. was upgraded in 2019 to the latest version of the
standard, ISO 13485:2016 through BSI-U.K. in 2019 and remains in effect, regardless of Brexit. BSI ISO 13485:2016 certification recognizes that
consistent quality policies and procedures are in place for the development, design and manufacturing of medical devices. The certification indicates that
we have successfully implemented a quality system that conforms to ISO 13485 standards for medical devices. Certification to this standard is one of the
key regulatory requirements for a CE Mark in the EU and EEA, as well as to meet equivalent requirements in other international markets.
Controlled Substances Regulations
Sufentanil, a Schedule II controlled substance, is the API in DSUVIA and Zalviso. Controlled substances are governed by the DEA. Similarly, sufentanil is
regulated as a controlled substance in Europe and other territories outside of the U.S. The handling of controlled substances and/or drug product by us, our
contract manufacturers, analytical laboratories, packagers and distributors, are regulated by the Controlled Substances Act and regulations thereunder.
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The Drug Supply Chain Security Act of 2013, or DSCSA, imposes obligations on manufacturers of pharmaceutical products, among others, related to
product tracking and tracing. Among the requirements are that manufacturers must provide certain information regarding the drug product to individuals
and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.
Further, manufacturers have drug product investigation, quarantine, disposition, and notification responsibilities related to counterfeit, diverted, stolen, and
intentionally adulterated products, as well as products that are the subject of fraudulent transactions or which are otherwise unfit for distribution such that
they would be reasonably likely to result in serious health consequences or death.
Unforeseen delays to the drug substance and drug product manufacture and supply chain may occur due to delays, errors or other unforeseen problems with
the permitting and quota process. Also, any one of our suppliers, contract manufacturers, laboratories, packagers and/or distributors could be the subject of
DEA violations and enforcement could lead to delays or even loss of DEA license by the contractors.
Federal and State Fraud and Abuse and Data Privacy and Security and Transparency Laws and Regulations
In addition to FDA restrictions on marketing of pharmaceutical products, federal and state healthcare laws restrict certain business practices in the
pharmaceutical industry. These laws include, but are not limited to, anti-kickback, false claims, data privacy and security, and transparency statutes and
regulations.
The federal Anti-Kickback Statute prohibits, among other things, any person or entity from knowingly and willfully offering, paying, soliciting or receiving
remuneration, directly or indirectly, overtly or covertly, in cash or in kind, to induce or in return for, purchasing, leasing, ordering or arranging for the
purchasing, leasing or ordering of any item or service reimbursable under Medicare, Medicaid or other federal healthcare program. The term
“remuneration” has been broadly interpreted to include anything of value, including for example, gifts, discounts, the furnishing of supplies or equipment,
credit arrangements, payments of cash, waivers of payment, ownership interests and providing anything at less than its fair market value. The Anti-
Kickback Statute has been interpreted to apply to arrangements between pharmaceutical manufacturers on one hand and prescribers, purchasers and/or
formulary managers on the other. Although there are a number of statutory exemptions and regulatory safe harbors protecting certain common activities
from prosecution, the exceptions and safe harbors are drawn narrowly, and practices involving remuneration that may be alleged to be intended to induce
purchasing, leasing or ordering may be subject to scrutiny if they do not qualify for an exception or safe harbor. The failure to satisfy all of the
requirements of an applicable exception or safe harbor do not make the conduct per se illegal under the Anti-Kickback Statute. Instead, the legality of the
arrangement will be evaluated on a case-by-case basis based on a cumulative review of all of its facts and circumstances. Our practices may not in all cases
meet all of the criteria for protection under an exception or safe harbor.
Additionally, the intent standard under the federal Anti-Kickback Statute was amended by the Patient Protection and Affordable Care Act of 2010, as
amended by the Health Care and Education Reconciliation Act of 2010, collectively, the Affordable Care Act to a stricter standard such that a person or
entity no longer needs to have actual knowledge of the federal Anti-Kickback Statute or specific intent to violate it in order to have committed a violation.
Rather, if “one purpose” of the remuneration is to induce referrals, the federal Anti-Kickback Statute is violated. In addition, the Affordable Care Act
codified case law that a claim that includes items or services resulting from a violation of the federal Anti-Kickback Statute also constitutes a false or
fraudulent claim for purposes of the civil False Claims Act (discussed below).
The federal civil False Claims Act and related laws prohibit, among other things, any person or entity from knowingly presenting, or causing to be
presented, a false or fraudulent claim for payment or approval to the federal government or knowingly making, using or causing to be made or used a false
record or statement material to a false or fraudulent claim to the federal government. Pharmaceutical and other healthcare companies have been prosecuted
under these laws for, among other things, allegedly providing free product to customers with the expectation that the customers would bill federal programs
for the product. Companies have been prosecuted for causing false claims to be submitted because of the companies’ marketing of the product for
unapproved, and thus non-reimbursable, uses. Further, the Civil Monetary Penalties Law imposes penalties against any person or entity who, among other
things, is determined to have presented or caused to be presented a claim to, among others, a federal healthcare program that the person knows or should
know is for a medical or other item or service that was not provided as claimed or is false or fraudulent.
In addition, we may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations,
imposes certain requirements relating to the privacy, security and transmission of individually identifiable health information. Among other things,
HITECH makes HIPAA’s privacy and security standards directly applicable to business associates that are independent contractors or agents of covered
entities that receive or obtain protected health information in connection with providing a service on behalf of a covered entity. HITECH also created four
new tiers of civil monetary penalties, amended HIPAA to make civil and criminal penalties directly applicable to business associates, and gave state
attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA laws and seek attorney’s fees
and costs associated with pursuing federal civil actions. In addition, state laws govern the privacy and security of health information in certain
circumstances, many of which differ from each other in significant ways and may not have the same effect, thus complicating compliance efforts.
International laws, such as the European Union General Data Protection Regulation, or GDPR, (EU 2016/679) and Swiss Federal Act on Data Protection,
regulate the processing of personal data within the European Union and between countries in the European Union and countries outside of the European
Union, including the United States. Failure to provide adequate privacy protections and maintain compliance with safe harbor mechanisms could jeopardize
business transactions across borders and result in significant penalties.
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Additionally, the federal Physician Payments Sunshine Act within the Affordable Care Act and its implementing regulations, require that certain
manufacturers of drugs, devices, biologicals and medical supplies, for which federal healthcare program payment is available, report information related to
certain payments or other transfers of value made or distributed to physicians, (defined to include doctors, dentists, optometrists, podiatrists and
chiropractors) and teaching hospitals, or to entities or individuals at the request of, or designated on behalf of, the physicians and teaching hospitals and to
report annually certain ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable
manufacturers also will be required to report such information regarding its payments and other transfers of value to physician assistants, nurse
practitioners, clinical nurse specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives during the previous
year.
Also, many states have similar healthcare statutes or regulations that apply to items and services reimbursed under Medicaid and other state programs, or,
in several states, apply regardless of the payer. FDA and some states require the posting of information relating to clinical studies. In addition, certain states
such as California require pharmaceutical companies to implement a comprehensive compliance program that includes a limit on expenditures for, or
payments to, individual medical or health professionals. Moreover, several states have enacted legislation requiring pharmaceutical manufacturers to,
among other things, file periodic reports with the state, make periodic public disclosures on sales and marketing activities, report information related to
drug pricing, require the registration of sales representatives, and prohibit certain other sales and marketing practices.
If our operations are found to be in violation of any of the health regulatory laws described above or any other laws that apply to us, we may be subject to
penalties, including potentially significant criminal, civil and/or administrative penalties, damages, fines, disgorgement, imprisonment, exclusion of
products from reimbursement under government programs, contractual damages, reputational harm, administrative burdens, diminished profits and future
earnings, additional reporting requirements and/or oversight if we become subject to a corporate integrity agreement or similar agreement to resolve
allegations of non-compliance with these laws and the curtailment or restructuring of our operations, any of which could adversely affect our ability to
operate our business and our results of operations. To the extent that any of our products will be sold in a foreign country, we may be subject to similar
foreign laws and regulations, which may include, for instance, applicable post-marketing requirements, including safety surveillance, anti-fraud and abuse
laws and implementation of corporate compliance programs and reporting of payments or transfers of value to healthcare professionals.
Pharmaceutical Coverage, Pricing and Reimbursement
In both domestic and foreign markets, our sales of any approved products will depend in part on the availability of coverage and adequate reimbursement
from third-party payers. Third-party payers include government health administrative authorities, managed care providers, private health insurers and other
organizations. Sales of our products will depend substantially, both domestically and abroad, on the extent to which the costs of our products will be paid
by third-party payers. These third-party payers are increasingly focused on containing healthcare costs by challenging the price and examining the cost-
effectiveness of medical products and services. In addition, significant uncertainty exists as to the coverage and reimbursement status of newly approved
healthcare products. Such payers may limit coverage to specific drug products on an approved list, also known as a formulary, which might not include all
of the FDA-approved drugs for a particular indication. Third-party payers and hospitals may refuse to include a particular branded drug in their formularies
or otherwise restrict patient access to a branded drug when a less costly generic equivalent or other alternative is available. Because each third-party payer
individually approves coverage and reimbursement levels, obtaining coverage and adequate reimbursement is a time-consuming, costly and sometimes
unpredictable process. We may be required to provide scientific and clinical support for the use of any product to each third-party payer and hospital
separately with no assurance that approval would be obtained, and we may need to conduct expensive pharmacoeconomic studies in order to demonstrate
the cost-effectiveness of our products. This process could delay the market acceptance of any product and could have a negative effect on our future
revenues and operating results. We cannot be certain that DSUVIA and Zalviso, once approved for commercial sale, will be considered medically
necessary or cost-effective. Because coverage and reimbursement determinations are made on a payer-by-payer basis, obtaining acceptable coverage and
reimbursement from one payer does not guarantee that we will obtain similar acceptable coverage or reimbursement from another payer. If we are unable to
obtain coverage of, and adequate reimbursement and payment levels for, our approved products from third-party payers, physicians may limit how much or
under what circumstances they will prescribe or administer them. This in turn could affect our ability to successfully commercialize our products and
impact our profitability, results of operations, financial condition and future success. Third-party payers, government healthcare programs, wholesalers,
group purchasing organizations, and hospitals frequently require that pharmaceutical companies negotiate agreements that provide discounts or rebates
from list prices. We expect increasing pressure to offer larger discounts or discounts to a greater number of these organizations to maintain acceptable
reimbursement levels for and access to our products. Net prices for drugs may be reduced by these mandatory discounts or rebates required by government
healthcare programs, private payers, wholesalers, group purchasing organizations, hospitals, and by any future relaxation of laws that presently restrict
imports of drugs from policy and payment limitations in setting their own reimbursement policies. In addition, if our competitors reduce the prices of their
products, or otherwise demonstrate that they are better or more cost effective than our products, this may result in a greater level of reimbursement for their
products relative to our products, which would reduce sales of our products and harm our results of operations.
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There have been, and there will continue to be, legislative and regulatory proposals to change the healthcare system in ways that could impact our ability to
commercialize our products profitably. We anticipate that the federal and state legislatures and the private sector will continue to consider and may adopt
and implement healthcare policies, such as the Affordable Care Act, intended to curb rising healthcare costs. These cost containment measures may
include: controls on government-funded reimbursement for drugs; new or increased requirements to pay prescription drug rebates to government health
care programs; controls on healthcare providers; challenges to or limits on the pricing of drugs, including pricing controls, or limits or prohibitions on
reimbursement for specific products through other means; requirements to try less expensive products or generics before a more expensive branded
product; and public funding for cost effectiveness research, which may be used by government and private third-party payers to make coverage and
payment decisions.
In addition, in many foreign countries, particularly the countries of the European Union, the pricing of prescription drugs is subject to government control.
In some non-U.S. jurisdictions, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements governing drug
pricing vary widely from country to country. For example, the EU provides options for its member states to restrict the range of medicinal products for
which their national health insurance systems provide reimbursement and to control the prices of medicinal products for human use. A member state may
approve a specific price for the medicinal product, or it may instead adopt a system of direct or indirect controls on the profitability of the company placing
the medicinal product on the market. We may face competition for our products from lower-priced products in foreign countries that have placed price
controls on pharmaceutical products. In addition, there may be importation of foreign products that compete with our own products, which could negatively
impact our profitability.
Healthcare Reform
In the United States and foreign jurisdictions, there have been, and we expect there will continue to be, a number of legislative and regulatory changes to
the healthcare system that could affect our future results of operations as we begin to commercialize our products. In particular, there have been and
continue to be a number of initiatives at the United States federal and state level that seek to reduce healthcare costs. Government payment for some of the
costs of prescription drugs may increase demand for our products for which we receive marketing approval. However, any negotiated prices for our future
products will likely be lower than the prices we might otherwise obtain from non-governmental payers. Moreover, private payers often follow federal
healthcare coverage policy and payment limitations in setting their own payment rates.
Furthermore, political, economic and regulatory influences are subjecting the healthcare industry in the United States to fundamental change. Initiatives to
reduce the federal deficit and to reform healthcare delivery are increasing cost-containment efforts. We anticipate that Congress, state legislatures and the
private sector will continue to review and assess alternative benefits, controls on healthcare spending through limitations on the growth of private health
insurance premiums and Medicare and Medicaid spending, the creation of large insurance purchasing groups, price controls on pharmaceuticals and other
fundamental changes to the healthcare delivery system. Any proposed or actual changes could limit or eliminate our spending on development projects and
affect our ultimate profitability.
In the United States, the Affordable Care Act was enacted in an effort to, among other things, broaden access to health insurance, reduce or constrain the
growth of healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and impose additional health
policy reforms. Aspects of PPACA that may impact our business include:
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extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care
organizations;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
expansion of eligibility criteria for Medicaid programs, thereby potentially increasing manufacturers’ Medicaid rebate liability;
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expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government
investigative powers and enhanced penalties for non-compliance;
a requirement to annually report drug samples that manufacturers and distributors provide to physicians; and
a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along
with funding for such research.
There remain judicial and Congressional challenges to certain aspects of the Affordable Care Act. Currently, Congress has considered legislation that
would repeal, or repeal and replace all or part of the Affordable Care Act. While Congress has not passed comprehensive repeal legislation, several bills
affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act of 2017 includes a
provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on certain individuals who
fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”. Additionally, the 2020 federal
spending package permanently eliminated, effective January 1, 2020, the Affordable Care Act’s mandated “Cadillac” tax on high-cost employer-sponsored
health coverage and medical device tax and, effective January 1, 2021, also eliminated the health insurer tax. In December 2018, the Centers for Medicare
& Medicaid Services, or CMS, published a final rule permitting further collections and payments to and from certain Affordable Care Act qualified health
plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to the outcome of federal district court litigation
regarding the method CMS uses to determine this risk adjustment. Further, the Bipartisan Budget Act of 2018, or the BBA, among other things, amends the
Affordable Care Act, effective January 1, 2019, to increase from 50% to 70% the point-of-sale discount that is owed by pharmaceutical manufacturers who
participate in Medicare Part D and to close the coverage gap in most Medicare drug plans, commonly referred to as the “donut hole”. On December 14,
2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional in its entirety because the “individual mandate” was repealed
by Congress as part of the Tax Cuts and Jobs Act of 2017. Additionally, on December 18, 2019, the U.S. Court of Appeals for the 5th Circuit upheld the
District Court ruling that the individual mandate was unconstitutional and remanded the case back to the District Court to determine whether the remaining
provisions of the Affordable Care Act are invalid as well. The U.S. Supreme Court is currently reviewing this case, but it is unknown when a decision will
be reached. Although the U.S. Supreme Court has not yet ruled on the constitutionality of the Affordable Care Act, on January 28, 2021, President Biden
issued an executive order to initiate a special enrollment period from February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance
coverage through the Affordable Care Act marketplace. The executive order also instructs certain governmental agencies to review and reconsider their
existing policies and rules that limit access to healthcare, including among others, reexamining Medicaid demonstration projects and waiver programs that
include work requirements, and policies that create unnecessary barriers to obtaining access to health insurance coverage through Medicaid or the
Affordable Care Act. It is unclear how the Supreme Court ruling, other such litigation, and the healthcare reform measures of the Biden administration will
impact the Affordable Care Act. We expect that the Affordable Care Act, as currently enacted or as it may be amended or repealed in the future, and other
healthcare reform measures that may be adopted in the future, could have a material adverse effect on our industry generally and on our ability to
successfully commercialize DSUVIA, and if approved in the United States, Zalviso.
In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. Aggregate
reductions of Medicare payments to providers of 2% per fiscal year went into effect on April 1, 2013 and will stay in effect through 2030 unless
Congressional action is taken. However, COVID-19 relief legislation suspended the 2% Medicare sequester from May 1, 2020 through March 31, 2021.
The American Taxpayer Relief Act further reduced Medicare payments to several providers, including hospitals.
Moreover, the DSCSA imposes additional obligations on manufacturers of pharmaceutical products, among others, related to product tracking and tracing.
Among the requirements of this new legislation, manufacturers will be required to provide certain information regarding the drug product to individuals
and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records regarding the drug product.
AcelRx is engaging Contract Manufacturing Organizations, or CMOs, and solution providers in serialization to implement the requirements of the DSCSA
on our products. The acceptability of the approach that AcelRx is implementing will be ultimately subject to review by the FDA.
Legislative and regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities for
pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or
interpretations will be changed, or what the impact of such changes on the marketing approvals of our products, if any, may be.
We cannot predict the likelihood, nature or extent of government regulation that may arise from future legislation or administrative action, either in the
United States or abroad. If we or our collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or
policies, or if we or our collaborators are not able to maintain regulatory compliance, our products may lose any regulatory approval that may have been
obtained and we may not achieve or sustain profitability, which would adversely affect our business.
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There has been increasing legislative and enforcement interest in the United States with respect to specialty drug pricing practices. Specifically, there have
been several U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency
to drug pricing and reform government program reimbursement methodologies for drugs. For example, at the federal level, the Trump administration’s
budget proposal for the fiscal year 2021 included a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase
competition, lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On July 24, 2020 and
September 13, 2020, the Trump administration announced several executive orders related to prescription drug pricing that attempt to implement several of
the administration’s proposals. On November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from
pharmaceutical manufacturers to plan sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required
by law. The implementation of this rule has been delayed by the Biden administration from January 1, 2022 to January 1, 2023 in response to ongoing
litigation. The rule also creates a new safe harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee
arrangements between pharmacy benefit managers and manufacturers, the implementation of which has also been delayed pending review by the Biden
administration until March 22, 2021. Further, on November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored
Nation executive order, which would tie Medicare Part B payments for certain physician-administered drugs to the lowest price paid in other economically
advanced countries, effective January 1, 2021. On December 28, 2020, the U.S. District Court in Northern California issued a nationwide preliminary
injunction against implementation of the interim final rule. However, it is unclear whether the Biden administration will work to reverse these measures or
pursue similar policy initiatives. At the state level, legislatures are increasingly passing legislation and implementing regulations designed to control
pharmaceutical and biological product pricing, including price or patient reimbursement constraints, discounts, restrictions on certain product access and
marketing cost disclosure and transparency measures, and, in some cases, measures designed to encourage importation from other countries and bulk
purchasing.
Further, there may continue to be additional proposals relating to the reform of the U.S. healthcare system, some of which could further limit the prices we
are able to charge for our products, or the amounts of reimbursement available for our products. If future legislation were to impose direct governmental
price controls and access restrictions, it could have a significant adverse impact on our business. Managed care organizations, as well as Medicaid and other
government agencies, continue to seek price discounts. Some states have implemented, and other states are considering, price controls or patient access
constraints under the Medicaid program, and some states are considering price-control regimes that would apply to broader segments of their populations
that are not Medicaid-eligible. Due to the volatility in the current economic and market dynamics, we are unable to predict the impact of any unforeseen or
unknown legislative, regulatory, payer or policy actions, which may include cost containment and other healthcare reform measures. Such policy actions
could have a material adverse impact on our profitability.
Employees and Human Capital Resources
As of December 31, 2020, we employed 54 full-time employees, approximately half of whom work out of our corporate offices in Redwood City, CA. The
rest of our employees work remotely in various locations throughout the United States and are members of our commercial team. We have completed a
Diversity, Equity and Inclusion, or DEI, training to reflect our commitment to DEI as an organization and build awareness. AcelRx is committed to pay
equity, regardless of gender or race/ethnicity, and conducts pay equity analyses on an annual basis.
We invest in our workforce by offering competitive salaries, wages, and benefits. We endeavor to foster a strong sense of ownership by offering all
employees stock options and restricted stock units under our broad-based stock incentive program. We also offer comprehensive and locally relevant
benefits for all eligible employees. We recognize and support the growth and development of our employees.
We have implemented COVID-19 policies at our Redwood City office designed to ensure the safety and well-being of all employees and the people
associated with them. In addition, we have implemented COVID-19 policies for our sales force to ensure safe access to hospitals and other medically
supervised settings, as appropriate. As a result of the COVID-19 pandemic, to reduce risk, our corporate employees have been asked to work remotely, and
all employees have been asked to avoid all non-essential travel, adhere to good hygiene practices, and engage in physical distancing.
None of our employees are subject to a collective bargaining agreement. We consider our relationship with our employees to be good.
Corporate Information
We were originally incorporated as SuRx, Inc. in Delaware on July 13, 2005. We subsequently changed our name to AcelRx Pharmaceuticals, Inc. on
August 13, 2006. We file electronically with the U.S. Securities and Exchange Commission, or SEC, our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended, or the Exchange Act. We make available on our website at www.acelrx.com, free of charge, copies of these reports as soon as
reasonably practicable after filing these reports with, or furnishing them to, the SEC.
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Item 1A. Risk Factors
Our operations and financial results are subject to various risks and uncertainties. You should carefully consider the risks described below, together with
all of the other information in this report, including our financial statements and notes thereto. If any of the following risks actually materialize, our
business, financial condition, results of operations, liquidity, and future prospects could be materially harmed, the price of our common stock could decline,
and you could lose part or all of your investment.
Summary Risk Factors
Our business is subject to numerous risks, as more fully described in this section below this summary. You should read these risks before you invest in our
common stock. We may be unable, for many reasons, including those that are beyond our control, to implement our business strategy. In particular, our
risks include:
● Our business is being adversely impacted by the COVID-19 pandemic.
● We have incurred significant losses since our inception, anticipate that we will continue to incur significant losses in 2021 and may continue to incur
losses in the future
● We have not yet generated significant product revenue and may never be profitable.
● We will require additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our commercialization
efforts and product development programs and could cause us to cease operations.
● Positive clinical results obtained to date for Zalviso may be disputed in FDA review, do not guarantee regulatory approval and may not be obtained
from future clinical trials.
● Existing and future legislation may increase the difficulty and cost for us to commercialize our products and affect the prices we may obtain.
● Guidelines and recommendations published by government agencies, as well as non-governmental organizations, and existing laws and regulations
can reduce the use of DSUVIA, and Zalviso, if approved in the United States.
● Zalviso may cause adverse effects or have other properties that could delay or prevent regulatory approval or limit the scope of any approved label or
market acceptance. DSUVIA may cause adverse effects or have other properties that could limit market acceptance.
● Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso in the United States, we and our
collaborators face extensive regulatory requirements and our products may face future development and regulatory difficulties.
● The commercial success of DSUVIA and Zalviso, if approved, in the United States, as well as DZUVEO and Zalviso in Europe, will depend upon
the acceptance of these products by the medical community, including physicians, nurses, patients, and pharmacy and therapeutics committees.
● If we are unable to maintain or grow our sales and marketing capabilities or enter into agreements with third parties to market and sell our products,
we may be unable to generate sufficient product revenue.
● A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our products,
particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which may significantly
limit our ability to develop and commercialize our products successfully, if at all.
● If we cannot defend our issued patents from third party claims or if our pending patent applications fail to issue, our business could be adversely
affected.
● The market price of our common stock may be highly volatile.
Risks Related to COVID-19 Pandemic
Our business is being adversely impacted by the COVID-19 pandemic.
Our business has been adversely affected by the recent COVID-19 outbreak. Federal, state, local and foreign government orders on account of the COVID-
19 pandemic are preventing us from conducting certain activities and obtaining supplies required to manufacture and deliver certain components for
Zalviso. Furthermore, following local and state government orders in California and the counties in which our corporate office is located and many of our
employees live, we implemented work from home policies, which are limiting certain of our operations. If the COVID-19 outbreak continues, we may need
to limit operations further and implement additional limitations, such as extending our work from home policies. Moreover, some hospitals and other
healthcare facilities have implemented policies that limit access of our representatives to such facilities, which is causing a delay to, and thwarting, our
educational and promotional efforts with respect to such facilities. Some governments, hospitals and doctors, as a measure to combat the further spread of
COVID-19, have reduced the number of procedures in which DSUVIA is administered as part of the pain treatment program, and temporarily halted
performing elective surgeries, which will adversely impact the levels of our sales relating to such procedures. The ultimate impact of the COVID-19
outbreak is highly uncertain and subject to change. We do not yet know the full extent of potential delays or impacts on our business, healthcare systems or
the global economy as a whole. However, these effects could have a material impact on our operations, and we will continue to monitor the COVID-19
situation closely.
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Risks Related to Commercialization of DSUVIA® and Zalviso®
Our success is highly dependent on our ability to successfully commercialize DSUVIA. To the extent DSUVIA is not commercially successful, our
business, financial condition and results of operations will be materially harmed.
We invested a significant portion of our efforts and financial resources to develop and gain regulatory approval for DSUVIA and expect to continue making
significant investments to commercialize DSUVIA. We believe our success is highly dependent on, and a significant portion of the value of our company
relates to, our ability to successfully commercialize DSUVIA in the United States. The commercial success of DSUVIA depends heavily on numerous
factors, including:
• our ability to market, sell, and distribute DSUVIA;
• our ability to establish and maintain commercial manufacturing with third parties;
•
•
acceptance of DSUVIA by physicians, patients and the healthcare community;
acceptance of pricing and placement of DSUVIA on payers’ formularies;
• our ability to effectively compete with other medications for the treatment of moderate-to-severe acute pain in medically supervised settings,
including IV-opioids and any subsequently approved products;
•
•
effective management of, and compliance with, the DSUVIA Risk Evaluation and Mitigation Strategy, or REMS, program;
continued demonstration of an acceptable safety profile of DSUVIA; and
• our ability to obtain, maintain, enforce, and defend our intellectual property rights and claims.
In response to the COVID-19 pandemic, some hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not
caregivers or mission-critical and we have no visibility as to when these restrictions on access will be lifted for all of our customers. As a result, our
commercial and medical affairs teams’ educational and promotional efforts have been substantially reduced, and in some cases, stopped. As a result, we
expect our near-term sales volumes to be adversely impacted for as long as access to healthcare facilities by our commercial and medical affairs personnel
continues to be limited.
If we are unable to successfully commercialize DSUVIA, our business, financial condition, and results of operations will be materially harmed.
The commercial success of DSUVIA and Zalviso, if approved, in the United States, as well as DZUVEO and Zalviso in Europe, will depend upon the
acceptance of these products by the medical community, including physicians, nurses, patients, and pharmacy and therapeutics committees.
The degree of market acceptance of DSUVIA and Zalviso, if approved, in the United States, or DZUVEO and Zalviso in Europe, will depend on a number
of factors, including:
• demonstration of clinical safety and efficacy compared to other products;
•
•
•
•
the relative convenience, ease of administration and acceptance by physicians, patients and health care payers;
the use of DSUVIA for the management of moderate-to-severe acute pain by a healthcare professional for patient types that were not specifically
studied in our Phase 3 trials;
the use of Zalviso for the management of moderate-to-severe acute pain in the hospital setting for patient types that were not specifically studied in
our Phase 3 trials;
the prevalence and severity of any adverse events, or AEs, or serious adverse events, or SAEs;
• overcoming any perceptions of sufentanil as a potentially unsafe drug due to its high potency opioid status;
•
•
•
•
limitations or warnings contained in the U.S. Food and Drug Administration, or FDA, -approved label for DSUVIA, or the European Medicines
Agency, or EMA,-approved label for DZUVEO or Zalviso;
restrictions or limitations placed on DSUVIA due to the REMS program;
availability of alternative treatments;
existing capital investment by hospitals in IV PCA technology;
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• pricing and cost-effectiveness;
•
the effectiveness of our or any future collaborators’ sales and marketing strategies;
• our ability to obtain formulary approval; and,
• our ability to obtain and maintain sufficient third-party coverage and reimbursement.
If our approved products do not achieve an adequate level of acceptance by physicians, nurses, patients and pharmacy and therapeutics committees, we
may not generate sufficient revenue and become or remain profitable.
If we are unable to maintain or grow our sales and marketing capabilities or enter into agreements with third parties to market and sell our products,
we may be unable to generate sufficient product revenue.
In order to commercialize DSUVIA and Zalviso, if approved, in the United States, we must maintain or grow internal sales, marketing, distribution,
managerial and other capabilities or make arrangements with third parties to perform these services. We have entered into agreements with third parties for
the distribution of DSUVIA and plan to enter into such agreements for Zalviso, if approved, in the United States; however, if these third parties do not
perform as expected or there are delays in establishing such relationships for Zalviso, if approved, our ability to effectively distribute products would suffer.
We entered into a collaboration with Grünenthal for the commercialization of Zalviso in Europe and Australia and, during the three months ended June 30,
2020, Grünenthal terminated the collaboration, effective November 13, 2020. The terms of the Grünenthal Agreements were extended to May 2021 to
enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Territory
revert back to us in May 2021. We intend to enter into additional strategic partnerships with third parties to commercialize our products outside of the
United States, including a replacement license agreement for Zalviso in Europe. Per the terms of royalty monetization arrangement with PDL BioPharma,
Inc., or PDL, we are obligated to use commercially reasonable efforts to negotiate a replacement license agreement. Accordingly, even if we are able to
enter into a replacement license agreement, and that licensee is successful in commercializing Zalviso in Europe, we will receive only a portion of any
royalties until the capped amount owing to PDL is reached. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK Funding,
LLC, or SWK. The EC granted marketing approval of DZUVEO in June 2018. We have not yet entered into a collaboration agreement with a strategic
partner for the commercialization of DZUVEO in Europe, and there can be no assurance that we will successfully enter into such an agreement. We may
also consider the option to enter into strategic partnerships for DSUVIA, or Zalviso, if approved, in the United States. We face significant competition in
seeking appropriate strategic partners, and these strategic partnerships can be intricate and time consuming to negotiate and document.
We may not be able to negotiate future strategic partnerships on acceptable terms, or at all. We are unable to predict when, if ever, we will enter into any
strategic partnerships because of the numerous risks and uncertainties associated with establishing strategic partnerships. Our current or future
collaboration partners, if any, may not dedicate sufficient resources to the commercialization of Zalviso or DSUVIA/DZUVEO, or may otherwise fail in
their commercialization due to factors beyond our control. If we are unable to establish effective collaborations to enable the sale of our products to
healthcare professionals and in geographical regions that will not be covered by our own marketing and sales force, or if our potential future collaboration
partners do not successfully commercialize our products, our ability to generate revenues from product sales will be adversely affected.
If we are unable to maintain or grow adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be
able to generate sufficient product revenue and become profitable. We compete with many companies that currently have extensive and well-funded
marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to
compete successfully against these more established companies.
In March 2020, we reduced the size of our commercial team and, given our reduced workforce, we may experience difficulties in retaining our existing
employees and managing our operations, including our continued commercialization of DSUVIA.
In March 2020, we reduced the size of our commercial team to eliminate the overlap with the Tetraphase Pharmaceuticals, Inc. commercial team under our
co-promotion arrangement and reduce operating expenses. The restructuring resulted in the elimination of 30 positions, or approximately 33% of our
workforce. As of December 31, 2020, we had approximately 25 sales representatives, including those under the Promotion Agreement with La Jolla.
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We will need to retain and maintain our existing sales, managerial, operational, finance and other personnel and resources in order to continue the
commercialization of DSUVIA and manage our operations. Our current infrastructure may be inadequate to support our strategy and our workforce
reduction may be disruptive to our operations, may negatively affect our productivity, and constrain our commercialization activities. For example, our
workforce reduction could yield unanticipated consequences, such as attrition beyond planned staff reductions, negative impact on employee morale and
our corporate culture, or increase difficulties in our day-to-day operations and prevent us from successfully commercializing DSUVIA as rapidly as
planned. If we encounter such unanticipated consequences, we may have difficulty retaining and attracting personnel. In addition, the implementation of
any additional workforce or expense reduction programs may divert the efforts of our management team and other key employees, which could adversely
affect our business. Furthermore, we may not realize, in full or in part, the anticipated benefits, savings and improvements in our cost structure from our
cost reduction plan, due to unforeseen difficulties, delays or unexpected costs. If we are unable to realize the expected operational efficiencies and cost
savings from the cost reduction plan, our operating results and financial condition would be adversely affected.
Guidelines and recommendations published by government agencies, as well as non-governmental organizations, and existing laws and regulations
can reduce the use of DSUVIA, and Zalviso, if approved in the United States.
Government agencies and non-governmental organizations promulgate regulations and guidelines applicable to certain drug classes that may include
DSUVIA and Zalviso, if approved in the United States. Recommendations of government agencies or non-governmental organizations may relate to such
matters as maximum quantities dispensed to patients, dosage, route of administration, and use of concomitant therapies. Government agencies and non-
governmental organizations have offered commentary and guidelines on the use of opioid-containing products. We are uncertain how these activities and
guidelines may impact DSUVIA and our ability to gain marketing approval of Zalviso in the United States. Regulations or guidelines suggesting the
reduced use of certain drug classes that may include DSUVIA or Zalviso, or the use of competitive or alternative products as the standard-of-care to be
followed by patients and healthcare providers, could result in decreased use of DSUVIA or Zalviso, if approved, or negatively impact our ability to gain
market acceptance and market share. The U.S. government and state legislatures have prioritized combatting the growing misuse and addiction to opioids
and opioid overdose deaths and have enacted legislation and regulations as well as other measures intended to fight the opioid epidemic. Addressing opioid
drug abuse is a priority for the current U.S. administration and the FDA and is part of a broader initiative led by the U.S. Department of Health and Human
Services, or HHS. Overall, there is greater scrutiny of entities involved in the manufacture, sale and distribution of opioids. These initiatives, existing laws
and regulations, and any negative publicity related to opioids may have a material impact on our business and our ability to manufacture opioid products.
Governmental investigations, inquiries, and regulatory actions and lawsuits brought against us by government agencies and private parties with respect
to our commercialization of opioids could adversely affect our business, financial condition, results of operations and cash flows.
As a result of greater public awareness of the public health issue of opioid abuse, there has been increased scrutiny of, and investigation into, the
commercial practices of opioid manufacturers by state and federal agencies. As a result of our manufacturing and commercial sale of DSUVIA in the
United States and Zalviso in Europe, we could become the subject of federal, state and foreign government investigations and enforcement actions, focused
on the misuse and abuse of opioid medications.
In addition, a significant number of lawsuits have been filed against opioid manufacturers, distributors, and others in the supply chain by cities, counties,
state Attorney's General and private persons seeking to hold them accountable for opioid misuse and abuse. The lawsuits assert a variety of claims,
including, but not limited to, public nuisance, negligence, civil conspiracy, fraud, violations of the Racketeer Influenced and Corrupt Organizations Act, or
RICO, or similar state laws, violations of state Controlled Substance Acts or state False Claims Acts, product liability, consumer fraud, unfair or deceptive
trade practices, false advertising, insurance fraud, unjust enrichment and other common law and statutory claims arising from defendants’ manufacturing,
distribution, marketing and promotion of opioids and seek restitution, damages, injunctive and other relief and attorneys’ fees and costs. The claims
generally are based on alleged misrepresentations and/or omissions in connection with the sale and marketing of prescription opioid medications and/or an
alleged failure to take adequate steps to prevent abuse and diversion. While DSUVIA is designed for use solely in certified medically supervised healthcare
settings and administered only by a healthcare professional in these settings, and is not distributed or available at retail pharmacies to patients by
prescription, we can provide no assurance that parties will not file lawsuits of this type against us in the future. In addition, current public perceptions of the
public health issue of opioid abuse may present challenges to favorable resolution of any potential claims. Accordingly, we cannot predict whether we may
become subject to these kinds of investigations and lawsuits in the future, and if we were to be named as a defendant in such actions, we cannot predict the
ultimate outcome. Any allegations against us may negatively affect our business in various ways, including through harm to our reputation.
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If we were required to defend ourselves in these matters, we would likely incur significant legal costs and could in the future be required to pay significant
amounts as a result of fines, penalties, settlements or judgments. It is unlikely that our current product liability insurance would fully cover these potential
liabilities, if at all. Moreover, we may be unable to maintain insurance in the future on acceptable terms or with adequate coverage against potential
liabilities or other losses. For more information about our product liability insurance and exclusions therefrom, please see the risk factor entitled “We face
potential product liability claims, and, if such claims are successful, we may incur substantial liability” elsewhere in this section. The resolution of one or
more of these matters could have a material adverse effect on our business, financial condition, results of operations and cash flows.
Furthermore, in the current climate, stories regarding prescription drug abuse and the diversion of opioids and other controlled substances are frequently in
the media or advocated by public interest groups. Unfavorable publicity regarding the use or misuse of opioid drugs, the limitations of abuse-deterrent
formulations, the ability of drug abusers to discover previously unknown ways to abuse opioid products, public inquiries and investigations into
prescription drug abuse, litigation, or regulatory activity regarding sales, marketing, distribution or storage of opioids could have a material adverse effect
on our reputation and impact on the results of litigation.
Finally, various government entities, including Congress, state legislatures or other policy-making bodies, or public interest groups have in the past and
may in the future hold hearings, conduct investigations and/or issue reports calling attention to the opioid crisis, and may mention or criticize the perceived
role of manufacturers, including us, in the opioid crisis. Similarly, press organizations have and likely will continue to report on these issues, and such
reporting may result in adverse publicity for us, resulting in reputational harm.
A key part of our business strategy is to establish collaborative relationships to commercialize and fund development and approval of our products,
particularly outside of the United States. We may not succeed in establishing and maintaining collaborative relationships, which may significantly limit
our ability to develop and commercialize our products successfully, if at all.
We will need to establish and maintain successful collaborative relationships to obtain international sales, marketing and distribution capabilities for our
products. The process of establishing and maintaining collaborative relationships is difficult, time-consuming and involves significant uncertainty. For
example:
• our partners may seek to renegotiate or terminate their relationships with us due to unsatisfactory clinical or regulatory results, manufacturing
issues, a change in business strategy, a change of control or other reasons;
• our contracts for collaborative arrangements are or may be terminable at will on written notice and may otherwise expire or terminate, and we may
not have alternatives available to achieve the potential for our products in those territories or markets;
• our partners may choose to pursue alternative technologies, including those of our competitors;
• we may have disputes with a partner that could lead to litigation or arbitration, including in connection with any contractual force majeure notices
tied to the COVID-19 pandemic;
• we have limited control over the decisions of our partners, and they may change the priority of our programs in a manner that would result in
termination of the agreement or add significant delays to the partnered program;
• our ability to generate future payments and royalties from our partners depends upon the abilities of our partners to establish the safety and efficacy
of our drugs, maintain regulatory approvals and our ability to successfully manufacture and achieve market acceptance of our products;
• we or our partners may fail to properly initiate, maintain or defend our intellectual property rights, where applicable, or a party may use our
proprietary information in such a way as to invite litigation that could jeopardize or potentially invalidate our proprietary information or expose us
to potential liability;
• our partners may not devote sufficient capital or resources towards our products; and
• our partners may not comply with applicable government regulatory requirements necessary to successfully market and sell our products.
If any collaborator fails to fulfill its responsibilities in a timely manner, or at all, any research, clinical development, manufacturing or commercialization
efforts pursuant to that collaboration could be delayed or terminated, or it may be necessary for us to assume responsibility for expenses or activities that
would otherwise have been the responsibility of our collaborator. For example, Grünenthal has terminated the collaboration agreement for the
commercialization of Zalviso in Europe. The rights to market and sell Zalviso in the Territory revert back to us in May 2021. We have a continuing
obligation, through the term of the Royalty Monetization with PDL, to use commercially reasonable efforts to negotiate a replacement license agreement,
or New Arrangement. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK. If we are unable to establish and maintain
collaborative relationships on acceptable terms or to successfully and timely transition terminated collaborative agreements, including entering into a New
Arrangement for Zalviso in Europe, we may have to undertake development and commercialization activities at our own expense or find alternative sources
of capital.
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Approval of Zalviso and DZUVEO in Europe has resulted in a variety of risks associated with international operations that could materially adversely
affect our business.
Our collaboration with Grünenthal for Zalviso required us to supply product to support the European commercialization of Zalviso and it is possible that
any New Arrangement would also include such a requirement. In addition, with the June 2018 approval of DZUVEO in Europe, we intend to enter into
agreements with third parties to market DZUVEO in Europe, which may also require us to supply product to those third parties. We may be subject to
additional risks related to entering into international business relationships, including:
• multiple, conflicting, and changing laws and regulations such as privacy and data regulations, transparency regulations, tax laws, export and import
restrictions, employment laws, regulatory requirements, including for drug approvals, and other governmental approvals, permits, and licenses;
• EMA “sunset clause” requirements, which apply to DZUVEO, providing that the marketing authorization of a medicine will cease to be valid if it
is not placed on the market within three years of the authorization being granted (i.e., by June of 2021) or if it is removed from the market for three
consecutive years; however, the European Commission has extended this date to March 1, 2022 for DZUVEO;
•
reduced protection for intellectual property rights;
• unexpected changes in tariffs, trade barriers and regulatory requirements;
• different payer reimbursement regimes, governmental payers, patient self-pay systems and price controls;
•
economic weakness, including inflation, or political instability in particular foreign economies and markets;
• production shortages resulting from any events affecting raw material supply or manufacturing capabilities abroad; and
• business interruptions resulting from pandemics, geopolitical actions, including war and terrorism, or natural disasters including earthquakes,
typhoons, floods and fires.
Any of these factors could have a material adverse effect on our business.
If we, or current and potential partners, are unable to compete effectively, our products may not reach their commercial potential.
The U.S. biotechnology and pharmaceutical industries are characterized by intense competition and cost pressure. DSUVIA competes, and Zalviso, if
approved in the U.S., will compete, with a number of existing and future pharmaceuticals and drug delivery devices developed, manufactured and marketed
by others. In particular, DSUVIA may compete with a wide variety of products and product candidates including (i) injectable opioid products, such as
morphine, fentanyl, hydromorphone and meperidine; (ii) oral opioids such as oxycodone and hydrocodone; (iii) generic injectable local anesthetics, such as
bupivacaine or branded formulations thereof; (iv) non-steroidal anti-inflammatory drugs, or NSAIDS, including ketorolac in intranasal or generic IV form,
and IV meloxicam; and (v) transmucosal fentanyl products. Zalviso, if approved in the U.S., may compete with a number of opioid-based treatment
options, including IV PCA pumps, oral PCA devices, and transdermal opioid PCAs.
Key competitive factors affecting the commercial success of our approved products are likely to be efficacy, safety profile, reliability, convenience of
dosing, price and reimbursement. Many of our competitors and potential competitors have substantially greater financial, technical and human resources
than we do and significantly greater experience in the discovery and development of drug candidates, obtaining FDA and other regulatory approval of
products, and the commercialization of those products. Accordingly, our competitors may be more successful than we are in obtaining FDA approval for
drugs and achieving widespread market acceptance. Our competitors’ drugs or drug delivery systems may be more effective, have fewer adverse effects, be
less expensive to develop and manufacture, or be more effectively marketed and sold than any product we may seek to commercialize. This may render our
products obsolete or non-competitive. We anticipate that we will face intense and increasing competition as new drugs enter the market, additional
technologies become available, and competitors establish collaborative or licensing relationships, which may adversely affect our competitive position.
These and other competitive risks may materially adversely affect our ability to attain or sustain profitable operations.
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Hospital or other health care facility formulary approvals for DSUVIA or Zalviso, if approved, in the United States may not be achieved, or could be
subject to certain restrictions, which could make it difficult for us to sell our products.
Obtaining hospital or other health care facility formulary approvals can be an expensive and time-consuming process. We cannot be certain if and when we
will obtain formulary approvals to allow us to sell our products into our target markets. In particular, the restrictions on our commercial and medical affairs
teams’ access to hospitals and other health care facilities has adversely impacted the number of formulary approvals we anticipated achieving in 2020, and
for as long as these restrictions remain in place, or new restrictions are implemented, we may have limited visibility or difficulties in obtaining these
formulary approvals. Failure to obtain timely formulary approval will limit our commercial success. If we are successful in obtaining formulary approvals,
we may need to complete evaluation programs whereby DSUVIA, or Zalviso, if approved, is used on a limited basis for certain patient types. The
evaluation period may last several months and there can be no assurance that use during the evaluation period will lead to formulary approvals of DSUVIA,
or Zalviso, if approved. Further, even successful formulary approvals may be subject to certain restrictions based on patient type or hospital protocol.
Failure to obtain timely formulary approvals for DSUVIA, or Zalviso, if approved, would materially adversely affect our ability to attain or sustain
profitable operations.
Coverage and adequate reimbursement may not be available for DSUVIA or Zalviso, if approved, in the United States, or DZUVEO or Zalviso in
Europe, which could make it difficult for us, or our partners, to sell our products profitably.
Our ability to commercialize DSUVIA or Zalviso, if approved, in the United States, and any future collaboration partner’s ability to commercialize
DZUVEO or Zalviso in Europe successfully will depend, in part, on the extent to which coverage and adequate reimbursement will be available from
government payer programs at the federal and state levels, authorities, including Medicare and Medicaid, private health insurers, managed care plans and
other third-party payers.
No uniform policy requirement for coverage and reimbursement for drug products exists among third-party payers in the United States or Europe.
Therefore, coverage and reimbursement can differ significantly from payer to payer. As a result, the coverage determination process is often a time-
consuming and costly process that will require us to provide scientific and clinical support for the use of our products to each payer separately, with no
assurance that coverage and adequate reimbursement will be applied consistently or obtained in the first instance. Our inability to promptly obtain and
sufficiently maintain coverage and adequate reimbursement rates from third party payers could significantly harm our operating results, our ability to raise
capital needed to commercialize our approved drugs and our overall financial condition.
A primary trend in the U.S. healthcare industry and elsewhere is cost containment. Government authorities and other third-party payers have attempted to
control costs by limiting coverage and the amount of reimbursement for particular medical products. There have been a number of legislative and
regulatory proposals to change the healthcare system in the United States and in some foreign jurisdictions that could affect our ability to sell our products
profitably. These legislative and/or regulatory changes may negatively impact the reimbursement for our products, following approval. The availability of
numerous generic pain medications may also substantially reduce the likelihood of reimbursement for DSUVIA or Zalviso, if approved, in the United
States, and DSUVIA/DZUVEO and Zalviso in Europe and elsewhere. The application of user fees to generic drug products may expedite the approval of
additional pain medication generic drugs. We expect to experience pricing pressures in connection with our sales of DSUVIA and Zalviso, if approved, in
the United States, European sales of Zalviso, and future product sales of DZUVEO, due to the trend toward managed healthcare, the increasing influence of
health maintenance organizations and additional legislative changes. If we fail to successfully secure and maintain reimbursement coverage for our
products or are significantly delayed in doing so, we will have difficulty achieving market acceptance of our products and our business will be harmed.
Furthermore, market acceptance and sales of our products will depend on reimbursement policies and may be affected by future healthcare reform
measures. Government authorities and third-party payers, such as private health insurers, hospitals and health maintenance organizations, decide which
drugs they will pay for and establish reimbursement levels. We cannot be sure that reimbursement will be available for DSUVIA or Zalviso, if approved, in
the United States, or DZUVEO or Zalviso in Europe. Also, reimbursement amounts may reduce the demand for, or the price of, our products. For example,
we anticipate we may need comparator studies of DZUVEO in Europe to ensure premium reimbursement in certain countries. If reimbursement is not
available, or is available only to limited levels, we may not be able to successfully commercialize DSUVIA or Zalviso, if approved, in the United States, or
DZUVEO or Zalviso in Europe.
Additionally, the regulations that govern marketing approvals, pricing, coverage and reimbursement for new drugs vary widely from country to country.
Current and future legislation may significantly change the approval requirements in ways that could involve additional costs and cause delays in obtaining
approvals. Some countries require approval of the sale price of a product before it can be marketed. In many countries, the pricing review period begins
after marketing or product licensing approval is granted. In some foreign markets, prescription pharmaceutical pricing remains subject to continuing
governmental control even after initial approval is granted. As a result, we might obtain marketing approval for a product in a particular country, but then
be subject to price regulations that delay commercial launch of the product, possibly for lengthy time periods, and negatively impact the revenues able to be
generated from the sale of the product in that country. For example, separate pricing and reimbursement approvals may impact any future collaboration
partners’ ability to market and successfully commercialize our products in the 27 member states of the European Union. Adverse pricing limitations may
hinder our ability to recoup our investment in DSUVIA in the United States, or Zalviso, even after obtaining FDA marketing approval.
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The FDA and other regulatory agencies actively enforce the laws and regulations prohibiting the promotion of off-label uses.
If we are found to have improperly promoted off-label uses of our products, including DSUVIA or Zalviso, if approved, in the United States, we may
become subject to significant liability. Such enforcement has become more common in the industry. The FDA and other regulatory agencies strictly
regulate the promotional claims that may be made about prescription drug products. In particular, a product may not be promoted for uses that are not
approved by the FDA or such other regulatory agencies as reflected in the product’s approved labeling. While we have received marketing approval for
DSUVIA for our proposed indication, physicians may nevertheless use our products for their patients in a manner that is inconsistent with the approved
label, if the physicians personally believe in their professional medical judgment it could be used in such manner. However, if the FDA determines that our
promotional materials or training constitutes promotion of an off-label use, it could request that we modify our training or promotional materials or subject
us to regulatory or enforcement actions, including the issuance of an untitled letter, a warning letter, injunction, seizure, civil fine or criminal penalties and
a requirement for corrective advertising, including Dear Doctor letters. It is also possible that other federal, state or foreign enforcement authorities might
take action if they consider our promotional or training materials to constitute promotion of an off-label use, which could result in significant civil, criminal
and/or administrative penalties, damages, fines, disgorgement, individual imprisonment, exclusion from government-funded healthcare programs, such as
Medicare and Medicaid, contractual damages, reputational harm, increased losses and diminished profits and the curtailment or restructuring of our
operations, any of which could adversely affect our ability to operate our business and our financial results. The FDA or other enforcement authorities
could also request that we enter into a consent decree or a corporate integrity agreement or seek a permanent injunction against us under which specified
promotional conduct is monitored, changed or curtailed. If we cannot successfully manage the promotion of DSUVIA or Zalviso, if approved, in the United
States, we could become subject to significant liability, which would materially adversely affect our business and financial condition.
If we are unable to establish and maintain relationships with group purchasing organizations any future revenues or future profitability could be
jeopardized.
Many end-users of pharmaceutical products have relationships with group purchasing organizations, or GPOs, whereby such GPOs provide such end-users
access to a broad range of pharmaceutical products from multiple suppliers at competitive prices and, in certain cases, exercise considerable influence over
the drug purchasing decisions of such end-users. Hospitals and other end-users contract with the GPO of their choice for their purchasing needs. We expect
to derive revenue from end-user customers that are members of GPOs for DSUVIA and Zalviso, if approved. Establishing and maintaining strong
relationships with these GPOs will require us to be a reliable supplier, remain price competitive and comply with FDA regulations. The GPOs with whom
we have relationships may have relationships with manufacturers that sell competing products, and such GPOs may earn higher margins from these
products or combinations of competing products or may prefer products other than ours for other reasons. If we are unable to establish or maintain our
GPO relationships, sales of DSUVIA and Zalviso, if approved, and related revenues could be negatively impacted.
We intend to rely on a limited number of distributors and pharmaceutical wholesalers to distribute DSUVIA and Zalviso, if approved, in the United
States.
We intend to rely primarily upon distributors and pharmaceutical wholesalers in connection with the distribution of DSUVIA and Zalviso, if approved, in
the United States. As part of the DSUVIA REMS program, we monitor distribution and audit wholesalers’ data and will monitor such data from other
distributors. If our distributors and wholesalers do not comply with the DSUVIA REMS requirements, or if we are unable to establish or maintain our
business relationships with these distributors and pharmaceutical wholesalers on commercially acceptable terms, or if our distributors and wholesalers are
unable to distribute our drugs for regulatory, compliance or any other reason, it could have a material adverse effect on our sales and may prevent us from
achieving profitability.
Risks Related to Clinical Development and Regulatory Approval
Existing and future legislation may increase the difficulty and cost for us to commercialize our products and affect the prices we may obtain.
In the United States and some foreign jurisdictions, the legislative landscape continues to evolve, including changes to the regulation of opioid-containing
products. There have been a number of legislative and regulatory changes and proposed changes regarding healthcare systems that could prevent or delay
marketing approval of Zalviso outside of Europe. These changes will restrict or regulate post-approval activities for DSUVIA, DZUVEO and Zalviso, and
affect our ability to profitably sell any products for which we obtain marketing approval. For example, in February 2016, the FDA announced a
comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities. As part of this plan,
the FDA announced that it intended to review product and labeling decisions and re-examine the risk-benefit paradigm for opioids. In June 2019, the FDA
issued draft guidance related to a new benefit/risk framework for new opioid analgesic products, which proposes that the new product candidate show some
benefit over an existing product. In September 2019, the FDA held a public hearing to receive stakeholder input on the approval process for new opioids. In
January 2020, FDA’s Anesthetic and Analgesic Drug Products Advisory Committee recommended against the approval of a new opioid analgesic,
oxycodegol, the NDA for which was subsequently withdrawn by its sponsor. The timing of the resubmission of the Zalviso NDA is dependent upon the
finalization of the FDA’s new opioid approval guidelines and process.
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In the European Union, or EU, the pricing of prescription drugs is subject to government control. The EU also provides options for its member states to
restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control the prices of medicinal
products for human use. In addition, the EMA has a “sunset clause” which provides that the marketing authorization of a medicine will cease to be valid if
it is not placed on the market within three years of the authorization being granted or if it is removed from the market for three consecutive years; however,
the European Commission has extended this date to March 1, 2022 for DZUVEO.
In the United States, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, or
collectively, the Affordable Care Act was enacted in an effort to, among other things, broaden access to health insurance, reduce or constrain the growth of
healthcare spending, enhance remedies against fraud and abuse, impose new taxes and fees on the health industry and impose additional health policy
reforms. Aspects of the Affordable Care Act that may impact our business include:
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•
•
•
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extension of manufacturers’ Medicaid rebate liability to covered drugs dispensed to individuals who are enrolled in Medicaid managed care
organizations;
expansion of the entities eligible for discounts under the Public Health Service pharmaceutical pricing program;
expansion of eligibility criteria for Medicaid programs, thereby potentially increasing manufacturers’ Medicaid rebate liability;
expansion of healthcare fraud and abuse laws, including the federal False Claims Act and the federal Anti-Kickback Statute, new government
investigative powers and enhanced penalties for non-compliance; and
a Patient-Centered Outcomes Research Institute to oversee, identify priorities in, and conduct comparative clinical effectiveness research, along
with funding for such research.
The Affordable Care Act continues to substantially change health care financing and delivery by both governmental and private insurers, which may
increase our regulatory burdens and operating costs.
There remain judicial and Congressional challenges to certain aspects of the Affordable Care Act. While Congress has not passed comprehensive repeal
legislation, several bills affecting the implementation of certain taxes under the Affordable Care Act have been signed into law. The Tax Cuts and Jobs Act
of 2017 includes a provision that repealed, effective January 1, 2019, the tax-based shared responsibility payment imposed by the Affordable Care Act on
certain individuals who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual mandate”.
Additionally, the 2020 federal spending package permanently eliminated, effective January 1, 2020, the Affordable Care Act’s mandated “Cadillac” tax on
high-cost employer-sponsored health coverage and medical device tax, and effective January 1, 2021, also eliminated the health insurer tax. In December
2018, the Centers for Medicare & Medicaid Services, or CMS, published a final rule, effective in 2020, permitting further collections and payments to and
from certain Affordable Care Act qualified health plans and health insurance issuers under the Affordable Care Act risk adjustment program in response to
the outcome of federal district court litigation regarding the method CMS uses to determine this risk adjustment. Further, the Bipartisan Budget Act of
2018, or the BBA, among other things, amended the Affordable Care Act, effective January 1, 2019, to increase from 50% to 70% the point-of-sale
discount that is owed by pharmaceutical manufacturers who participate in Medicare Part D and to close the coverage gap in most Medicare drug plans,
commonly referred to as the “donut hole”. On December 14, 2018, a Texas U.S. District Court Judge ruled that the Affordable Care Act is unconstitutional
in its entirety because the “individual mandate” was repealed by Congress as part of the Tax Cuts and Jobs Act of 2017. Additionally, on December 18,
2019, the U.S. Court of Appeals for the 5th Circuit upheld the District Court ruling that the individual mandate was unconstitutional and remanded the case
back to the District Court to determine whether the remaining provisions of the Affordable Care Act are invalid as well. The U.S. Supreme Court is
currently reviewing this case, but it is unknown when a decision will be reached. Although the U.S. Supreme Court has not yet ruled on the
constitutionality of the Affordable Care Act, on January 28, 2021, President Biden issued an executive order to initiate a special enrollment period from
February 15, 2021 through May 15, 2021 for purposes of obtaining health insurance coverage through the Affordable Care Act marketplace. The executive
order also instructs certain governmental agencies to review and reconsider their existing policies and rules that limit access to healthcare, including among
others, reexamining Medicaid demonstration projects and waiver programs that include work requirements, and policies that create unnecessary barriers to
obtaining access to health insurance coverage through Medicaid or the Affordable Care Act. It is unclear how the Supreme Court ruling, other such
litigation and the healthcare reform measures of the Biden administration will impact the Affordable Care Act. We expect that the Affordable Care Act, as
currently enacted or as it may be amended or repealed in the future, and other healthcare reform measures that may be adopted in the future, could have a
material adverse effect on our industry generally and on our ability to successfully commercialize our products. We cannot predict the likelihood, nature or
extent of government regulation that may arise from future legislation or administrative action, either in the United States or abroad. If we or our
collaborators are slow or unable to adapt to changes in existing requirements or the adoption of new requirements or policies, or if we or our collaborators
are not able to maintain regulatory compliance, our products may lose regulatory approval and we may not achieve or sustain profitability, which would
adversely affect our business.
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In addition, other legislative changes have been proposed and adopted in the United States since the Affordable Care Act was enacted. Aggregate
reductions of Medicare payments to providers of 2% per fiscal year went into effect on April 1, 2013 and will stay in effect through 2030 unless
Congressional action is taken. However, COVID-19 support legislation suspended the 2% Medicare sequester from May 1, 2020 through March 31, 2021,
and extended the sequester by one year, through 2030. The American Taxpayer Relief Act further reduced Medicare payments to several providers,
including hospitals.
Moreover, the Drug Supply Chain Security Act of 2013 imposes additional obligations on manufacturers of pharmaceutical products, among others, related
to product tracking and tracing. Among the requirements of this legislation, manufacturers are required to provide certain information regarding the drug
product to individuals and entities to which product ownership is transferred, label drug product with a product identifier, and keep certain records
regarding the drug product.
In the United States, there has been increasing legislative and enforcement interest with respect to specialty drug pricing practices. Specifically, there have
been several recent U.S. Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more
transparency to drug pricing and reform government program reimbursement methodologies for drugs. At the federal level, the Trump administration’s
budget proposal for fiscal year 2021 included a $135 billion allowance to support legislative proposals seeking to reduce drug prices, increase competition,
lower out-of-pocket drug costs for patients, and increase patient access to lower-cost generic and biosimilar drugs. On March 10, 2020, the Trump
administration sent “principles” for drug pricing to Congress, calling for legislation that would, among other things, cap Medicare Part D beneficiary out-
of-pocket pharmacy expenses, provide an option to cap Medicare Part D beneficiary monthly out-of-pocket expenses, and place limits on pharmaceutical
price increases. Additionally, the Trump Administration previously released a “Blueprint” to lower drug prices and reduce out of pocket costs of drugs that
contained proposals to increase manufacturer competition, increase the negotiating power of certain federal healthcare programs, incentivize manufacturers
to lower the list price of their products and reduce the out of pocket costs of drug products paid by consumers. On July 24, 2020 and September 13, 2020,
President Trump announced several executive orders related to prescription drug pricing that attempt to implement several of the administration’s proposals
On November 20, 2020, HHS finalized a regulation removing safe harbor protection for price reductions from pharmaceutical manufacturers to plan
sponsors under Part D, either directly or through pharmacy benefit managers, unless the price reduction is required by law. The rule also creates a new safe
harbor for price reductions reflected at the point-of-sale, as well as a safe harbor for certain fixed fee arrangements between pharmacy benefit managers and
manufacturers, the implementation of which has also been delayed pending review by the Biden administration until March 22, 2021. Further, on
November 20, 2020, CMS issued an interim final rule implementing President Trump’s Most Favored Nation executive order, which would tie Medicare
Part B payments for certain physician-administered drugs to the lowest price paid in other economically advanced countries, effective January 1, 2021. On
December 28, 2020, the U.S. District Court in Northern California issued a nationwide preliminary injunction against implementation of the interim final
rule. However, it is unclear whether the Biden administration will work to reverse these measures or pursue similar policy initiatives. At the state level,
legislatures are increasingly passing legislation and implementing regulations designed to control pharmaceutical and biological product pricing, including
price or patient reimbursement constraints, discounts, restrictions on certain product access and marketing cost disclosure and transparency measures, and,
in some cases, measures designed to encourage importation from other countries and bulk purchasing. Furthermore, even after initial price and
reimbursement approvals, reductions in prices and changes in reimbursement levels can be triggered by multiple factors, including reference pricing
systems and publication of discounts by third party payers or authorities in other countries. In Europe, prices can be reduced further by parallel distribution
and parallel trade, i.e. arbitrage between low-priced and high-priced countries. If any of these events occur, revenue from sales of Zalviso and DZUVEO in
Europe would be negatively affected.
Legislative and regulatory proposals have been made to expand post-approval requirements and further restrict sales and promotional activities for
pharmaceutical products. We are not sure whether additional legislative changes will be enacted, or whether the FDA regulations, guidance or
interpretations will be changed, or what the impact of such changes on the marketing approvals of our products, if any, may be.
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We expect that additional healthcare reform measures will be adopted within and outside the United States in the future, any of which could negatively
impact our business. For instance, it is possible that additional governmental action is taken in response to the COVID-19 pandemic. The continuing efforts
of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare may
adversely affect the demand for any drug products for which we have obtained or may obtain regulatory approval, our ability to set a price that we believe
is fair for our products, our ability to obtain coverage and reimbursement approval for a product, our ability to generate revenues and achieve or maintain
profitability, and the level of taxes that we are required to pay.
We may experience market resistance, delays or rejections based upon additional government regulation from future legislation or administrative
action, or changes in regulatory agency policy regarding opioids generally, and sufentanil specifically.
In February 2016, the FDA announced a comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American
families and communities. As part of this plan, the FDA announced that it intended to review product and labeling decisions and re-examine the risk-
benefit paradigm for opioids. In June 2019, the FDA issued draft guidance related to a new benefit/risk framework for new opioid analgesic products,
which proposes that the new product candidate show some benefit over an existing product. In September 2019, the FDA held a public hearing to receive
stakeholder input on the approval process for new opioids. The timing of the resubmission of the Zalviso NDA is dependent upon the finalization of the
FDA’s new opioid approval guidelines and process.
In May 2017, an Opioid Policy Steering Committee was established to address and advise regulators on opioid use. The Committee was charged with three
initial questions: (i) should the FDA require mandatory education for healthcare professionals, or HCPs, who prescribe opioids; (ii) should the FDA take
steps to ensure the number of prescribed opioid doses is more closely tailored to the medical indication; and (iii) is the FDA properly considering the risk
of abuse and misuse of opioids during its drug review process. Zalviso has not been designed with an abuse-deterrent formulation and is not tamper-
resistant. As a result, Zalviso has not undergone testing for tamper-resistance or abuse deterrence.
The FDA can delay, limit or deny marketing approval for many reasons, including:
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•
•
a product candidate may not be considered safe or effective;
the manufacturing processes or facilities we have selected may not meet the applicable requirements; and,
changes in their approval policies or adoption of new regulations may require additional work on our part.
Part of the regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations and
guidelines. The regulatory agency may delay, limit or deny marketing approval of our product candidate, Zalviso, as a result of such inspections. We, our
contract manufacturers, and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections could
impact our ability to obtain FDA approval for Zalviso and, if approved, our ability to launch and successfully commercialize Zalviso in the United States.
In addition, results of FDA inspections could impact our ability to maintain FDA approval of DSUVIA, and our ability to expand and sustain commercial
sales of DSUVIA in the United States.
Any delay in, or failure to receive or maintain, approval for Zalviso in the United States could prevent us from generating meaningful revenues or
achieving profitability. Zalviso may not be approved even if we believe it has achieved its endpoints in clinical trials. Regulatory agencies, including the
FDA, or their advisors, may disagree with our trial design and our interpretations of data from preclinical studies and clinical trials. Regulatory agencies
may change requirements for approval even after a clinical trial design has been approved. The FDA exercises significant discretion over the regulation of
combination products, including the discretion to require separate marketing applications for the drug and device components in a combination product.
Zalviso is being regulated as a drug product under the NDA process administered by the FDA. The FDA could in the future require additional regulation of
Zalviso, or DSUVIA, under the medical device provisions of the Federal Food, Drug and Cosmetic Act, or FDCA. We must comply with the Quality
Systems Regulation, or QSR, which sets forth the FDA’s current good manufacturing practice, or cGMP, requirements for medical devices, and other
applicable government regulations and corresponding foreign standards for drug cGMPs. If we fail to comply with these regulations, it could have a
material adverse effect on our business and financial condition.
Regulatory agencies also may approve a product candidate for fewer or more limited indications than requested or may grant approval subject to the
performance of post-marketing trials. For example, DSUVIA is subject to a deferred post-marketing requirement for study in the pediatric population ages
6-17 years. As required in the DSUVIA FDA approval letter, a final protocol for this trial was submitted to the FDA in August 2020, in conjunction with a
request to defer initiation of pediatric studies until additional post-market safety data is obtained in adult patients using DSUVIA. In addition, regulatory
agencies may not approve the labeling claims that are necessary or desirable for the successful commercialization of our product candidates. For example,
we intend to seek approval of Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting; however, our clinical
trial data was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients
only, which would reduce the size of the commercial opportunity.
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The success of Zalviso relies, in part, on obtaining regulatory approval in the United States.
The success of Zalviso relies, in part, upon our ability to develop and receive regulatory approval of this product candidate in the United States for the
management of moderate-to-severe acute pain in adult patients in the hospital setting. Our Phase 3 program for Zalviso initially consisted of three Phase 3
clinical trials. We reported positive top-line data from each of these trials and submitted an NDA for Zalviso to the FDA in September 2013, which the
FDA then accepted for filing in December 2013. In July 2014, the FDA issued a Complete Response Letter, or CRL, for our NDA for Zalviso, or the
Zalviso CRL. The Zalviso CRL contained requests for additional information on the Zalviso System to ensure proper use of the device. The requests
include submission of data demonstrating a reduction in the incidence of device errors, changes to address inadvertent dosing, among other items, and
submission of additional data to support the shelf life of the product. Furthermore, in March 2015, we received correspondence from the FDA stating that
in addition to the bench testing and two Human Factors studies we had performed in response to the issues identified in the Zalviso CRL, a clinical trial
was needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. Based on the results of our Type C meeting with the FDA in
September 2015, we completed the protocol review with the FDA and initiated this study, IAP312, in September 2016.
IAP312 was a Phase 3 study in post-operative patients designed to evaluate the effectiveness of changes made to the functionality and usability of the
Zalviso device and to take into account comments from the FDA on the study protocol. The IAP312 study was designed to rule out a 5% device failure
rate. The study design required a minimum of 315 patients. In the IAP312 study, sites proactively looked for tablets that were dispensed by the patient but
failed to be placed under the tongue, known as dropped tablets. The FDA refers to dropped tablets as inadvertent dispensing. Correspondence from the
FDA suggests that they may include the rate of inadvertent dispensing along with the device failures to calculate a total error rate. The IAP312 study
evaluated all incidents of misplaced tablets; however, per the protocol, the error rate calculation does not include the rate of inadvertent dispensing. If the
FDA includes the rate of inadvertent dispensing along with the device failures to calculate a total error rate, the resulting error rate may be unacceptable to
the FDA. Further, the correspondence from the FDA suggests that we may need to modify the REMS program for Zalviso to address dropped tablets. The
IAP312 results will supplement the three Phase 3 trials already completed in the Zalviso NDA resubmission. The timing of the resubmission of the Zalviso
NDA is dependent upon the finalization of the FDA’s new opioid approval guidelines and process.
There is no guarantee that the additional work we performed related to Zalviso, including the IAP312 trial, will result in our successfully obtaining FDA
approval of Zalviso in a timely fashion, if at all. Although we believe the IAP312 study met safety, satisfaction and device usability expectations, there is
no guarantee the IAP312 trial results will address the issues raised by the FDA. For example, the FDA may include the rate of inadvertent dispensing along
with the device failures to calculate a total error rate and the resulting error rate may be unacceptable to the FDA, or the FDA may still have concerns
regarding the performance of the device, inadvertent dosing (dropped tablets), or other issues. At any future point in time, the FDA could require us to
complete further clinical, Human Factors, pharmaceutical, reprocessing or other studies, which could delay or preclude any NDA resubmission or approval
of the NDA and could require us to obtain significant additional funding. We may not be able to identify appropriate remediations to issues that the FDA
may raise, and we may not have sufficient time or financial resources to conduct future activities to remediate issues raised by the FDA. We intend to seek
a label indication for Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting. However, our clinical trial data
was generated exclusively from the post-operative segment of this population, and the FDA may restrict any approval to post-operative patients only, which
would reduce our commercial opportunity.
Upon resubmission of the Zalviso NDA, the FDA may hold an advisory committee meeting to obtain committee input on the safety and efficacy of Zalviso.
Typically, advisory committees will provide responses to specific questions asked by the FDA, including the committee’s view on the approvability of the
drug under review. Advisory committee decisions are not binding, but an adverse decision at the advisory committee may have a negative impact on the
regulatory review of Zalviso. Additionally, we may choose to engage in the dispute resolution process with the FDA.
Our proposed trade name of Zalviso has been approved by the EMA and is currently being used in Europe. It has also been conditionally approved by the
FDA, which must approve all drug trade names to avoid medication errors and misbranding. However, the FDA may withdraw this approval in which case
any brand recognition or goodwill that we establish with the name Zalviso prior to commercialization may be worthless.
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Any delay in approval by the FDA of the Zalviso NDA, once it is resubmitted, may negatively impact our stock price and harm our business operations.
Any delay in obtaining, or inability to obtain, regulatory approval would prevent us from commercializing Zalviso in the United States, generating
revenues and potentially achieving profitability. If any of these events occur, we may be forced to delay or abandon our development efforts for Zalviso,
which would have a material adverse effect on our business.
Positive clinical results obtained to date for Zalviso may be disputed in FDA review, do not guarantee regulatory approval and may not be obtained
from future clinical trials.
We have reported positive top-line data from each of our four Zalviso Phase 3 clinical trials completed to date, as well as our Phase 2 clinical trials for
Zalviso. However, even if we believe that the data obtained from clinical trials is positive, the FDA has, and in the future could, determine that the data
from our trials was negative or inconclusive or could reach a different conclusion than we did on that same data. Negative or inconclusive results of a
clinical trial or difference of opinion could cause the FDA to require us to repeat the trial or conduct additional clinical trials prior to obtaining approval for
commercialization, and there is no guarantee that additional trials would achieve positive results or that the FDA will agree with our interpretation of the
results. If the FDA were to require any additional clinical trials for Zalviso, our development efforts would be further delayed, which would have a material
adverse effect on our business. Any such determination by the FDA would delay the timing of our commercialization plan for Zalviso and adversely affect
our business operations.
Delays in clinical trials are common and have many causes, and any delay could result in increased costs to us and jeopardize or delay our ability to
obtain regulatory approval and commence product sales.
We have experienced and may in the future experience delays in clinical trials of our product candidates. While we have completed four Phase 3 clinical
trials and several Phase 2 clinical trials for Zalviso, future clinical trials may not begin on time, have an effective design, enroll a sufficient number of
patients or be completed on schedule, if at all. For example, we postponed the start of IAP312, originally planned for the first quarter of 2016, to September
2016. The postponement was due to a delay in the receipt and testing of final clinical supplies for this trial. As a result, the development timeline for
Zalviso was further extended.
Our post-approval clinical trials for DSUVIA, or any future FDA-required clinical trials for Zalviso, could be delayed for a variety of reasons, including:
•
inability to raise funding necessary to initiate or continue a trial;
• delays in obtaining regulatory approval to commence a trial;
• delays in reaching agreement with the FDA on final trial design;
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imposition of a clinical hold by the FDA, Institutional Review Board, or IRB, or other regulatory authorities;
• delays in reaching agreement on acceptable terms with prospective contract research organizations, or CROs, and clinical trial sites;
• delays in obtaining required IRB approval at each site;
• delays in recruiting suitable patients to participate in a trial;
• delays in the testing, validation, manufacture and delivery of the tablets and device components of DSUVIA or Zalviso;
• delays in having patients complete participation in a trial or return for post-treatment follow-up;
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clinical sites dropping out of a trial to the detriment of enrollment or being delayed in entering data to allow for clinical trial database closure;
time required to add new clinical sites; or
• delays by our contract manufacturers to produce and deliver sufficient supply of clinical trial materials.
If any future FDA-required clinical trials are delayed for any reason, our development costs may increase, our approval process for Zalviso could be
delayed, our ability to commercialize and commence sales of Zalviso could be materially harmed, and our ability to maintain FDA approval of DSUVIA
could be jeopardized, which could have a material adverse effect on our business.
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Zalviso may cause adverse effects or have other properties that could delay or prevent regulatory approval or limit the scope of any approved label or
market acceptance. DSUVIA may cause adverse effects or have other properties that could limit market acceptance.
Adverse events, or AEs, caused by Zalviso could cause us, other reviewing entities, clinical trial sites or regulatory authorities to interrupt, delay or halt any
future FDA-required clinical trials and could result in the denial of regulatory approval. Phase 2 clinical trials we conducted with Zalviso did generate some
AEs, but no significant adverse events, or SAEs, related to the trial drug. In our Phase 3 active-comparator clinical trial (IAP309), 8% of Zalviso-treated
patients dropped out of the trial prematurely due to an AE (11% in the IV patient-controlled morphine group), and we observed three serious adverse
events, or SAEs, that were assessed as possibly or probably related to study drug (one- respiratory depression in the Zalviso group and two- abdominal
distension and ileus in the IV patient-controlled morphine group). In our Phase 3, double-blind, placebo-controlled, abdominal surgery trial (IAP310), 6%
of Zalviso-treated patients dropped out of the trial prematurely due to an AE (9% in placebo group). There were no SAEs determined to be related to study
drug. In our Phase 3, double-blind, placebo-controlled, orthopedic surgery trial (IAP311), 7% of Zalviso-treated patients dropped out of the trial
prematurely due to an AE (7% in placebo group). Four patients (three in the Zalviso group and one in the placebo group) experienced an SAE considered
possibly or probably related to the trial drug by the investigator. The SAEs possibly or probably attributed to Zalviso were severe oxygen saturation
decrease, sinus tachycardia and confusional state. In our Phase 3 multicenter, open-label study of Zalviso (IAP312), 3% of patients dropped out
prematurely due to an AE. Five patients experienced SAEs in the IAP312 study and none of these were considered possibly or probably related to the study
drug by the investigator.
In our Phase 2 DSUVIA placebo-controlled bunionectomy study (SAP202), two patients in the DSUVIA 30 mcg group (5%) discontinued treatment due to
an AE, one unrelated to study drug and the other probably related to study drug. There were no SAEs deemed related to study drug. In our Phase 3 placebo-
controlled abdominal surgery study (SAP301), one DSUVIA-treated patient (1%) dropped out of the trial prematurely due to an AE (4% in placebo group).
There were two SAEs determined to be related to study drug in the placebo-treated group and no related SAEs in the DSUVIA group. In our Phase 3 open-
label, single-arm emergency room study (SAP302), no DSUVIA-treated patients dropped out of the trial prematurely due to an AE. One patient had an
SAE - angina pectoris - possibly related to study drug. In our post-operative study in patients aged 40 years or older (SAP303), 3% of DSUVIA-treated
patients dropped out of the trial prematurely due to an AE. There were no SAEs deemed related to study drug.
If DSUVIA or, if approved, Zalviso cause serious or unexpected side effects after receiving marketing approval, a number of potentially significant
negative consequences could result, including:
regulatory authorities may withdraw their approval of the product or impose restrictions on its distribution in the form of a modified REMS
program;
regulatory authorities may require the addition of labeling statements, such as warnings or contraindications;
•
•
• we may be required to change the way the product is administered or conduct additional clinical trials;
• we could be sued and held liable for harm caused to patients; or,
• our reputation may suffer.
Any of these events could prevent us from achieving or maintaining market acceptance of DSUVIA or, if approved, Zalviso, and could substantially
increase the costs of commercializing our products.
Additional time may be required to obtain U.S. regulatory approval for Zalviso because it is a drug/device combination product candidate.
DSUVIA and Zalviso are combination products with both drug and device components. The FDA requires both the drug and device components of
combination product candidates to be reviewed as part of an NDA submission. There are very few examples of the FDA approval process for drug/device
combination products such as DSUVIA and Zalviso. As a result, we experienced delays in the development and commercialization of DSUVIA, and may
experience future delays in the development and commercialization of Zalviso, due to regulatory uncertainties in the product development and approval
process, in particular as it relates to a drug/device combination product approval under an NDA.
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The process for obtaining approval of an NDA is time consuming, subject to unanticipated delays and costs, and requires the commitment of
substantial resources.
If the FDA determines that any of the clinical work submitted, including the clinical trials, Human Factors studies and bench testing submitted for a
product candidate in support of an NDA were not conducted in full compliance with the applicable protocols for these trials, studies and testing as well as
with applicable regulations and standards, or if the FDA does not agree with our interpretation of the results of such trials, studies and testing, the FDA may
reject the data and results. The FDA may audit some or all of our clinical trial sites to determine the integrity of our clinical data. The FDA may audit some
or all of our Human Factors study sites to determine the integrity of our data and may audit the data and results of bench testing. Any rejection of any of
our data would negatively impact our ability to obtain marketing authorization for our product candidate, Zalviso, and would have a material adverse effect
on our business and financial condition. In addition, an NDA may not be approved, or approval may be delayed, as a result of changes in FDA policies for
drug approval during the review period. For example, although many products have been approved by the FDA in recent years under Section 505(b)(2) of
the FDCA, objections have been raised to the FDA’s interpretation of Section 505(b)(2). If challenges to the FDA’s interpretation of Section 505(b) (2) are
successful, the FDA may be required to change its interpretation, which could delay or prevent the approval of such an NDA. More generally, the FDA’s
comprehensive action plan to take concrete steps towards reducing the impact of opioid abuse on American families and communities may result in delays
and challenges in obtaining NDA approval. Any significant delay in the acceptance, review or approval of an NDA that we have submitted would have a
material adverse effect on our business and financial condition and would require us to obtain significant additional funding.
Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso in the United States, we and our
collaborators face extensive regulatory requirements, and our products may face future development and regulatory difficulties.
Although we have obtained regulatory approval for DSUVIA, and even if we obtain regulatory approval for Zalviso in the United States, the FDA may
impose significant restrictions on the indicated uses or marketing of our products or impose ongoing requirements for potentially costly post-approval trials
or post-market surveillance. For example, DSUVIA is subject to a deferred post-marketing requirement for study in the pediatric population ages 6-17
years. A final protocol for this trial was submitted to the FDA in August 2020, in conjunction with a request to defer initiation of pediatric studies until
additional post-market safety data is obtained in adult patients using DSUVIA. Additionally, the labeling approved for DSUVIA includes restrictions on
use due to the opioid nature of sufentanil. If approved, the labeling for Zalviso will likely include similar restrictions on use.
DSUVIA in the United States is also subject to ongoing FDA requirements governing the labeling, packaging, storage, distribution, safety surveillance,
advertising, promotion, record-keeping and reporting of safety and other post-market information. The holder of an approved NDA is obligated to monitor
and report AEs and any failure of a product to meet the specifications in the NDA. The holder of an approved NDA must also submit new or supplemental
applications and obtain FDA approval for certain changes to the approved product, product labeling or manufacturing process.
Advertising and promotional materials must comply with FDA rules concerning the advertising and promotion of DSUVIA and are subject to FDA review,
in addition to other potentially applicable federal and state laws. Failure to comply with these regulations can result in the receipt of warning letters and
further liability if off-label promotion is involved. For example, on February 11, 2021, we received a warning letter from the Office of Prescription Drug
Promotion, or OPDP, of the FDA relating to a banner advertisement we submitted to the OPDP on December 6, 2019 and a tabletop display we submitted
on February 28, 2020, and resubmitted to the OPDP at its request on September 23, 2020. We submitted the materials to the OPDP pursuant to the FDA
requirement that sponsors submit all promotional materials to the FDA at the time of their initial dissemination or publication. The FDA’s concerns
identified in the letter include its view that the promotional material makes misleading claims and representations about the risks and efficacy of
DSUVIA because the material does not reveal facts that are material in light of the representations made. As a result, we conducted a review of our
marketing materials to identify any potential revisions in light of the letter. We responded to the FDA within the timeframe requested in the letter and
sought guidance and clarification from the FDA on the concerns raised in the letter. We cannot give any assurances, however, that the FDA will be satisfied
with our response to the letter or that such response will resolve the issues identified in the letter. If approved, Zalviso will be subject to these same
requirements.
We must also register and obtain various state prescription drug distribution licenses and controlled substance permits, and any delay or failure to obtain or
maintain these licenses or permits may limit our market and materially impact our business. In certain states we cannot apply for a license until a drug is
approved by the FDA. The state licensing process may take several months which would delay commercialization in those states. In addition,
manufacturers of drug products and their facilities are subject to payment of user fees and continual review and periodic inspections by the FDA and other
regulatory authorities for compliance with cGMPs and adherence to commitments made in the NDA. If we, or a regulatory agency, discover previously
unknown problems with a product, such as AEs of unanticipated severity or frequency, or problems with the facilities where the product is manufactured, a
regulatory agency may impose restrictions relative to that product or the manufacturing facilities, including requiring recall or withdrawal of the product
from the market or suspension of manufacturing.
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If we fail to comply with applicable regulatory requirements following approval of our products, a regulatory agency may:
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issue a warning letter asserting that we are in violation of the law;
seek an injunction or impose civil or criminal penalties or monetary fines;
suspend or withdraw regulatory approval;
suspend any ongoing clinical trials;
refuse to approve a pending NDA or supplements to an NDA submitted by us;
seize product; or
refuse to allow us to enter into supply contracts, including government contracts.
Any government investigation of alleged violations of law could require us to expend significant time and resources in response and could generate
negative publicity. The occurrence of any event or penalty described above may inhibit our ability to commercialize DSUVIA, or, if approved, Zalviso, and
generate revenues.
Except for Zalviso and DZUVEO, which are both approved in Europe, we may never obtain additional regulatory approvals for our products and
product candidates outside of the United States, which would limit our ability to realize their full market potential.
In order to market any products outside of the United States, we or our commercial partners, must establish and comply with numerous and varying
regulatory requirements of other countries regarding safety and efficacy. On September 22, 2015, we announced that the EC had granted marketing
approval for Grünenthal’s MAA for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. In April 2016,
Grünenthal completed the first commercial sale of Zalviso. Grünenthal terminated the collaboration, effective November 13, 2020. The terms of the
Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal
Agreements. The rights to market and sell Zalviso in the Territory revert back to us in May 2021. We have not yet negotiated a New Arrangement and there
can be no assurance that we will successfully enter into a New Arrangement. In June 2018, we announced that the EC had granted marketing approval of
DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. We have not yet entered into a collaboration
agreement with a strategic partner for the commercialization of DZUVEO in Europe and there can be no assurance that we will successfully enter into such
an agreement.
Part of the foreign regulatory approval process includes compliance inspections of manufacturing facilities to ensure adherence to applicable regulations
and guidelines. The foreign regulatory agency may delay, limit or deny marketing approval as a result of such inspections. We, our contract manufacturers,
and their vendors, are all subject to preapproval and post-approval inspections at any time. The results of these inspections could impact our ability to
obtain regulatory approval of DSUVIA and Zalviso in countries outside of the United States and Europe, or our ability to launch and successfully
commercialize these products, once approved. In addition, results of EMA inspections could impact our ability to maintain EC approval of Zalviso and
DZUVEO, and any future collaboration partner’s ability to expand and sustain commercial sales of Zalviso or DZUVEO in Europe.
Outside of Europe, clinical trials conducted in one country may not be accepted by regulatory authorities in other countries, and regulatory approval in one
country does not mean that regulatory approval will be obtained in any other country. Approval processes vary among countries and can involve additional
product testing and validation and additional administrative review periods. Seeking foreign regulatory approval could result in difficulties and costs for us
and require additional non-clinical trials or clinical trials, which could be costly and time consuming. Regulatory requirements can vary widely from
country-to-country and could delay or prevent the introduction of our products in those countries. Our current clinical trial data may not be sufficient to
support marketing approval or premium reimbursement in all territories. For example, we anticipate we may need comparator studies for DZUVEO in
Europe to ensure premium reimbursement in certain countries. While we have obtained approval of DZUVEO in Europe, even if we are successful in
entering into a collaboration agreement with a commercial partner, we will be substantially dependent on that commercial partner to comply with
regulatory requirements. If we, or our commercial partners, fail to comply with regulatory requirements in international markets or to obtain and maintain
required approvals, or if regulatory approvals in international markets are delayed, our target market will be reduced and our ability to realize the full
market potential of our products will be harmed.
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DSUVIA requires, and, if approved, Zalviso will require, a REMS program.
DSUVIA was approved in the United States with a REMS program. If Zalviso is approved in the United States, it will also require a REMS program. The
DSUVIA REMS program includes restrictions on product distribution and use only in certified medically supervised settings. Before DSUVIA is
distributed, an authorized representative from each medically supervised setting must sign an attestation that they have the ability to manage acute opioid
overdose and will train all relevant staff on administration of DSUVIA, including the importance of only dispensing the product in a medically supervised
setting. Therefore, REMS-certification is a key gating item to generating product revenues for DSUVIA. In addition, the REMS program for DSUVIA may
significantly increase our costs to commercialize this product. While we have received pre-clearance from the FDA regarding certain aspects of the
proposed required REMS program for Zalviso, we cannot predict the final REMS program to be required as part of any FDA approval of Zalviso.
Depending on the extent of the REMS requirements, any U.S. launch may be delayed, the costs to commercialize Zalviso may increase substantially and
the potential commercial market could be restricted. Furthermore, risks of sufentanil that are not adequately addressed through the proposed REMS
program for Zalviso may also prevent or delay its approval for commercialization.
Risks Related to Our Financial Condition and Need for Additional Capital
We have incurred significant losses since our inception, anticipate that we will continue to incur significant losses in 2021 and may continue to incur
losses in the future.
We have incurred significant net losses in each year since our inception in July 2005, and as of December 31, 2020, we had an accumulated deficit of
$438.5 million.
We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. To date,
we have financed our operations primarily through the issuance of equity securities, borrowings, payments from our commercial partner, Grünenthal,
monetization of certain future royalties and commercial sales milestones from the European sales of Zalviso by Grünenthal, funding from the Department
of Defense, or DoD, and more recently with revenues from sales of DSUVIA since the commercial launch in the first quarter of 2019. The size of our
future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. We expect to continue to incur substantial
expenses as we support commercialization activities for DSUVIA and conduct research and development activities, including the FDA regulatory review of
the Zalviso NDA, once resubmitted. Grünenthal’s sales of Zalviso in Europe have historically been small. If DSUVIA is not successfully commercialized
in the U.S., or if Zalviso is not successfully developed or commercialized in the U.S., or if revenues are insufficient following marketing approval, we will
not achieve profitability and our business may fail. Our success is also dependent on current and future collaborations to market our products outside of the
United States, which may not materialize or prove to be successful.
We have not yet generated significant product revenue and may never be profitable.
Our ability to generate revenue from commercial sales and achieve profitability depends on our ability, alone or with collaborators, to successfully
complete the development of, obtain the necessary regulatory approvals for, and commercialize our products. Although we received FDA approval of
DSUVIA and began the commercial launch of DSUVIA in the United States, we may never generate enough revenues from sales of DSUVIA, or Zalviso,
if approved, in the United States to become profitable. Although the EC granted marketing approval of DZUVEO in June 2018, we have not yet entered
into a collaboration agreement with a strategic partner to commercialize DZUVEO in Europe and there can be no assurance that we will successfully enter
into such an agreement. While we had a collaboration agreement with Grünenthal for commercialization of Zalviso in Europe and Australia it has been
terminated, and Grünenthal was unable to achieve a level of commercial sales of Zalviso for which we were able to receive sales milestone payments. The
rights to market and sell Zalviso in the Territory revert back to us in May 2021.
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In September 2015, we consummated a monetization transaction with PDL pursuant to which we sold to PDL for $65.0 million 75% of the European
royalties from sales of Zalviso and 80% of the first four commercial milestones under the Amended License Agreement, subject to a capped amount,
referred to as the Royalty Monetization. On August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK. As mentioned above,
Grünenthal has terminated the Amended License Agreement and the rights will revert back to us in May 2021. Per the terms of the Royalty Monetization,
we are obligated to use commercially reasonable efforts to negotiate a replacement license agreement. Accordingly, even if we are able to enter into a
replacement license agreement, and that licensee is successful in commercializing Zalviso in Europe, we will receive only a portion of any royalties until
the capped amount owing under the Royalty Monetization is reached. We do not anticipate generating significant near-term revenues from DSUVIA or
Zalviso, if approved, in the United States. Our ability to generate future revenues from product sales depends heavily on our success in:
• maintaining regulatory approval for DSUVIA and obtaining and maintaining regulatory approval for Zalviso in the United States; and
•
launching and commercializing DSUVIA and Zalviso, if approved, in the United States by building, internally or through collaborations, an
institutionally focused sales force, and launching and commercializing DZUVEO and Zalviso internationally by entering into collaborations, which
may require additional funding.
Because of the numerous risks and uncertainties associated with launching a commercial pharmaceutical product, pharmaceutical product development and
the regulatory environment, we are unable to predict the timing or amount of increased expenses, or when, or if, we will be able to achieve or maintain
profitability. Our expenses could increase beyond expectations if we are delayed in receiving regulatory approval for Zalviso in the United States, or if we
are required by the FDA to complete activities in addition to those we currently anticipate or have already completed.
We anticipate continuing to incur significant costs associated with commercializing DSUVIA in the United States. Even if we are able to generate revenues
from the sale of DSUVIA or Zalviso, if approved, in the United States, we may not become profitable and may need to obtain additional funding to
continue operations.
Future sales of DSUVIA to the DoD are not predictable, may occur on an irregular basis and may not meet our expectations due to various U.S.
government-related factors that are beyond our control and into which we have little to no visibility, including the timing and extent of future U.S.
military deployments. If DoD spending on DSUVIA does not meet our expectations, it could adversely affect our expected results of operations,
financial condition and liquidity.
In April 2020, DSUVIA achieved Milestone C approval by the DoD, a decision that clears the path for the DoD to begin placing orders for DSUVIA. In
September 2020, we announced that DSUVIA was added to the DoD Joint Deployment Formulary, a core list of pharmaceutical products that are
designated for deploying military units across all service branches. Future sales of DSUVIA to the DoD are not predictable, may occur on an irregular
basis, and may not meet our expectations due to various U.S. government-related factors that are beyond our control and into which we have little to no
visibility, including the timing and extent of future U.S. military deployments. Even if we do generate revenue from such sales, we may never generate
revenue that is significant or predictable, which could impair our value and our ability to raise capital, expand our business or continue our operations. The
placement of new orders by the DoD is, among other things, contingent upon overall U.S. government policies, budget and appropriation decisions and
processes which are driven by numerous factors, including geo-political events, deployment of military units, macroeconomic conditions, and the ability of
the U.S. government to enact relevant legislation, such as appropriations bills and accords on the debt ceiling. Our expectations about the timing and size of
initial stocking orders for U.S. Army sets, kits and outfits, or SKOs, and other orders by the DoD are based on our understanding of troop deployment
schedules. If DoD spending on DSUVIA does not meet our expectations, this could have a material adverse effect on our expected results of operations,
financial condition and liquidity.
We have been substantially dependent on our commercial partner, Grünenthal, to successfully commercialize Zalviso in Europe and they have
terminated their collaboration agreement with us.
Under our agreements with Grünenthal, we granted Grünenthal rights to commercialize Zalviso in the Territory for human use in pain treatment within, or
dispensed by, hospitals, hospices, nursing homes and other medically supervised settings. In September 2015, the EC granted marketing approval for
Grünenthal’s MAA for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients, and Grünenthal began its European
launch of Zalviso with the first commercial sale occurring in April 2016. Grünenthal terminated the collaboration, effective November 13, 2020. The terms
of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal
Agreements. The rights to market and sell Zalviso in the Territory revert back to us in May 2021.
During the pilot and launch phases in the various European countries, Grünenthal reported certain issues from HCPs with the initial set up of the Zalviso
controllers before being given to patients for use. To address the issues, we have assisted Grünenthal with implementing additional training for HCPs and
we have revised the controller software. Controllers with the revised software, which were delivered in December 2016, have undergone extensive bench
testing and we believe we have successfully addressed the issues as presented. Additional devices were delivered beginning in early 2017. Controllers with
the U.S. version of the revised software were also used in the IAP312 clinical study that was initiated in September 2016. There can be no assurance that
the issues identified in the initial pilot and launch phases by Grünenthal will not have a material adverse impact on the current and future sales of Zalviso in
Europe. Further, if new issues occur, there may be a material adverse impact on the future sales of Zalviso in Europe which may have a negative impact on
future revenues received and recognized by us.
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We have not realized the expected benefits from our collaboration with Grünenthal, and may not realize the expected benefits from any New Arrangement,
due to a number of important factors, including:
• The timing and amount of any payments we may receive under our agreements will depend on, among other things, the efforts, allocation of
resources, and successful commercialization of Zalviso by Grünenthal and any future collaboration partner in Europe;
• Grünenthal changed the focus of its commercialization efforts to pursue higher-priority programs and any future collaboration partner may do the
same;
• Grünenthal will stop its commercialization efforts in countries where it currently has the sole right to commercialize Zalviso requiring us to find
another collaboration partner for Zalviso in Europe; and
• Grünenthal has terminated its agreements with us, and any future collaboration partner may also terminate any future agreement with us, adversely
affecting our potential revenue from Zalviso;
Any failures in commercialization of Zalviso outside the United States could have a material adverse impact on our business, including an adverse impact
on the commercialization of DSUVIA or the development of Zalviso in the United States, if related to issues underlying the sufentanil sublingual tablet
technology, safety or efficacy. Additionally, we agreed to certain representations and covenants relating to the Amended Agreements under our agreements
with PDL, and, if we breach those representations or covenants, we may become subject to indemnification claims by PDL and liable to PDL for its
indemnifiable losses relating to such breaches. The amount of such losses could be material and could have a material adverse impact on our business. On
August 31, 2020, PDL announced it sold its royalty interest for Zalviso to SWK.
We have not yet entered into a collaboration agreement with a strategic partner for the commercialization of DZUVEO in Europe.
In June 2018, the EC granted marketing approval for DZUVEO but we have not yet entered into a collaboration agreement with a strategic partner to
commercialize DZUVEO in Europe. If we are unable to enter into such an agreement, we may never generate revenues from sales of DZUVEO. If we are
successful in identifying a commercial partner and entering into a collaboration agreement, we will be substantially dependent on this partner to
successfully commercialize DZUVEO in Europe. Any failures in the commercialization of DZUVEO in Europe could have a significant adverse impact on
our revenues and operating results.
Any future collaboration agreement for DZUVEO will likely require us to support the manufacturing and supply of the product in Europe for our
commercial partner. In addition, we anticipate we may need comparator studies in Europe to ensure premium reimbursement in certain countries. Our
inability to profitably manufacture and supply DZUVEO to any future commercial partner, or to successfully complete these additional comparator studies
and obtain premium reimbursement in certain countries, may prevent, limit or delay commercialization and any associated future revenues from DZUVEO
in Europe.
We have limited experience commercializing DSUVIA, which may make it difficult to predict our future performance or evaluate our business and
prospects.
Since inception, our operations have been primarily focused on developing our technology and undertaking pharmaceutical development and clinical trials
for DSUVIA and Zalviso, understanding the market potential for DSUVIA and Zalviso, and preparing for the commercialization of DSUVIA and the
potential commercialization of Zalviso in the United States. We launched commercialization efforts for DSUVIA in February 2019. As a result of our
limited commercialization experience, any predictions that are made about our future performance, or viability, or evaluation of our business and prospects,
may not be accurate.
We will require additional capital and may be unable to raise capital, which would force us to delay, reduce or eliminate our commercialization efforts
and product development programs and could cause us to cease operations.
Launch of a commercial pharmaceutical product and pharmaceutical development activities can be time consuming and costly. We expect to incur
significant expenditures in connection with our ongoing activities including the commercial launch of DSUVIA in the United States and support for FDA
regulatory review of the Zalviso NDA, once resubmitted. While we believe we have sufficient capital resources to continue planned operations for at least
the next twelve months, we will need additional capital to pursue full commercialization of DSUVIA and Zalviso, if approved.
Clinical trials, regulatory reviews, and the launch of commercial product are expensive activities. In addition, commercialization costs for DSUVIA and
Zalviso, if approved, in the United States may be significantly higher than estimated as a result of technical difficulties or otherwise. Revenues may be
lower than expected and costs to produce such revenues may exceed those revenues. We will need to seek additional capital to continue operations. Such
capital demands could be substantial. In the future, we may seek to sell additional equity securities, including under the Sales Agreement with Cantor, and
debt securities, monetize or securitize certain assets including future royalty streams and milestones, refinance our loan agreement, obtain a revolving credit
facility, enter into product development, license or distribution agreements with third parties, or divest DSUVIA, DZUVEO or Zalviso. Such arrangements
may not be available on favorable terms, if at all.
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Future events and circumstances, including those beyond our control, may cause us to consume capital more rapidly than we currently anticipate.
Furthermore, any product development, licensing, distribution or sale agreements that we enter into may require us to relinquish valuable rights. We may
not be able to obtain sufficient additional funding or enter into a strategic transaction in a timely manner. If adequate funds are not available, we would be
required to reduce our workforce, reduce the scope of, or cease, the commercial launch of DSUVIA, or the development of Zalviso in advance of the date
on which we exhaust our cash resources to ensure that we have sufficient capital to meet our obligations and continue on a path designed to preserve
stockholder value.
Securing additional financing may divert our management from our day-to-day activities, which may adversely affect our ability to commercialize
DSUVIA or develop Zalviso. In addition, we cannot guarantee that future financing will be available in sufficient amounts or on terms acceptable to us, if
at all. If we are unable to raise additional capital when required or on acceptable terms, we may be required to:
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significantly scale back or discontinue the commercialization of DSUVIA, or the development of Zalviso;
seek additional corporate partners for Zalviso on terms that might be less favorable than might otherwise be available;
seek corporate partners for DSUVIA/DZUVEO on terms that might be less favorable than might otherwise be available; or
relinquish, or license on unfavorable terms, our rights to technologies or products that we otherwise would seek to develop or commercialize
ourselves.
To fund our operations, we may sell additional equity securities, which may result in dilution to our stockholders, or debt securities, which may impose
restrictions on our business.
We expect that significant additional capital will be needed in the future to continue our planned operations. In order to raise additional funds to support our
operations, we may sell additional equity securities, including under the Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with
Cantor Fitzgerald & Co., or Cantor, as agent. We may sell common stock, convertible securities, or other equity securities in one or more transactions at
prices and in a manner we determine from time to time. Selling additional equity securities may result in dilution to our existing stockholders and new
investors may be materially diluted by subsequent sales. Incurring additional indebtedness, including through the sale of debt securities, would result in
increased fixed payment obligations and could also result in additional restrictive covenants, such as limitations on our ability to incur additional debt,
limitations on our ability to acquire, sell or license intellectual property rights and other operating restrictions, such as minimum cash balances, that could
adversely impact our ability to conduct our business. Sales of equity or debt securities may also provide new investors with rights superior to our existing
stockholders. If we are unable to expand our operations or otherwise capitalize on our business opportunities, our business, financial condition and results
of operations could be materially adversely affected, and we may not be able to meet our debt service obligations.
In addition, worsening economic conditions and other adverse effects or developments relating to the ongoing COVID-19 pandemic may negatively affect
the market price of our stock, regardless of our actual operating performance. The market price for our common stock is likely to continue to be volatile,
particularly due to the ongoing COVID-19 pandemic, and subject to significant price and volume fluctuations in response to market, industry and other
factors. If additional funding is not available on favorable terms, if at all, due to these factors, we may not be able to obtain sufficient additional funding to
support our operations.
The terms of our loan agreement with Oxford may restrict our current and future operations, particularly our ability to respond to changes in business
or to take certain actions, including to pay dividends to our stockholders.
On May 30, 2019, we entered into the Loan Agreement with Oxford Finance LLC, or Oxford, a Delaware limited liability company, as the Lender. The
Loan Agreement contains, and any future indebtedness we incur will likely contain, a number of restrictive covenants that impose operating restrictions,
including restrictions on our ability to engage in acts that may be in our best long-term interests. The Loan Agreement includes covenants that, among other
things, restrict our ability to (i) declare dividends or redeem or repurchase equity interests; (ii) incur additional liens; (iii) make loans and investments; (iv)
incur additional indebtedness; (v) engage in mergers, acquisitions, and asset sales; (vi) transact with affiliates; (vii) undergo a change in control; (viii) add
or change business locations; and (ix) engage in businesses that are not related to our existing business. The Loan Agreement also requires that we at all
times maintain unrestricted cash of not less than $5.0 million.
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A breach of any of these covenants could result in an event of default under the Loan Agreement. Upon the occurrence of such an event of default, a default
interest rate of an additional 5% may be applied to the outstanding loan balances and all outstanding obligations under the Loan Agreement can be declared
to be immediately due and payable If our indebtedness is accelerated, we cannot assure you that we will have sufficient assets to repay the indebtedness.
The restrictions and covenants in the Loan Agreement and any future financing agreements may adversely affect our ability to finance future operations or
capital needs or to engage in other business activities.
We might be unable to service our existing debt due to a lack of cash flow and might be subject to default.
As of December 31, 2020, we had approximately $21.0 million of accrued debt under the Loan Agreement. The Loan Agreement has a scheduled maturity
date of June 1, 2023 and is secured by a first priority security interest in substantially all of our assets, with the exception of our intellectual property and
those assets sold under the Royalty Monetization, where the security interest is limited to proceeds of intellectual property if it is licensed or sold.
If we do not make the required payments when due, either at maturity, or at applicable installment payment dates, or if we breach the agreement or become
insolvent, the Lender could elect to declare all amounts outstanding, together with accrued and unpaid interest, and other payments, to be immediately due
and payable. Additional capital may not be available on terms acceptable to us, or at all. Even if we were able to repay the full amount in cash, any such
repayment could leave us with little or no working capital for our business. If we are unable to repay those amounts, the Lender will have a first claim on
our assets pledged under the Loan Agreement. If the lender should attempt to foreclose on the collateral, it is unlikely that there would be any assets
remaining after repayment in full of such secured indebtedness. Any default under the Loan Agreement and resulting foreclosure would have a material
adverse effect on our financial condition and our ability to continue our operations.
Risks Related to Our Reliance on Third Parties
We rely on third party manufacturers to produce commercial supplies of DSUVIA in the United States, commercial supplies of Zalviso in Europe, and
clinical supplies of Zalviso in the United States. The failure of third party manufacturers to provide us with adequate commercial and clinical supplies
could result in a material adverse effect on our business.
Third party manufacturers produce commercial and clinical supplies of our products and product candidates. Reliance on third party manufacturers entails
many risks including:
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the inability to meet our product specifications and quality requirements consistently;
a delay or inability to procure or expand sufficient manufacturing capacity;
• manufacturing and product quality issues related to scale-up of manufacturing;
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costs and validation of new equipment and facilities required for scale-up;
a failure to maintain in good order our production and manufacturing equipment for our products;
a failure to comply with cGMP and similar foreign standards;
the inability to negotiate manufacturing or supply agreements with third parties under commercially reasonable terms;
termination or nonrenewal of manufacturing or supply agreements with third parties in a manner or at a time that is costly or damaging to us;
the reliance on a limited number of sources, and in some cases, single sources for product components, such that if we are unable to secure a
sufficient supply of these product components, we will be unable to manufacture and sell our products in a timely fashion, in sufficient quantities or
under acceptable terms;
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the lack of qualified backup suppliers for those components that are currently purchased from a sole or single source supplier;
• operations of our third-party manufacturers or suppliers could be disrupted by conditions unrelated to our business or operations, including the
bankruptcy of the manufacturer or supplier, or government orders related to the COVID-19 pandemic;
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carrier disruptions or increased costs that are beyond our control; and
the failure to deliver our products under specified storage conditions and in a timely manner.
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Any of these events could lead to stock outs, inability to successfully commercialize our products, clinical trial delays, or failure to obtain regulatory
approval. Some of these events could be the basis for FDA action, including injunction, recall, seizure, or total or partial suspension of production.
In addition, we have not yet entered into a collaboration agreement for the sale of DZUVEO in Europe, but we anticipate that any future collaboration
agreement will likely require us to manufacture and supply DZUVEO to our commercial partner. As mentioned above, we were obligated to manufacture
and supply Zalviso under the Amended Agreements with Grünenthal for use in Europe and their other licensed territories and may be required to do so
under any New Arrangement. If we are unable to establish a reliable commercial supply of Zalviso for Europe, we may be unable to satisfy our obligations
under any New Arrangement in a timely manner or at all, and we may, as a result, be in breach of any New Arrangement. If any such breach, or other
breach, were to be material and remain uncured, it could result in termination of the New Arrangement, which in turn could result in us being responsible
for indemnification of losses suffered by PDL under the Royalty Monetization. If any of these events were to occur, our business would be materially
adversely affected.
We rely on limited sources of supply for the active pharmaceutical ingredient, or API, of DSUVIA and Zalviso and any disruption in the chain of
supply may cause a delay in supplying DSUVIA and Zalviso.
Currently we only have one supplier qualified as a vendor for the manufacture of DSUVIA, known as DZUVEO in Europe, and Zalviso with the FDA and
EMA, respectively. If supply from the approved vendor is interrupted, there could be a significant disruption in commercial supply. For example, our API
provider for DSUVIA is changing its process for manufacturing our drug, which could impact our commercial supply of API for DSUVIA. This change in
process requires a regulatory submission to the FDA. The European Health Authority has approved the change in process for both DZUVEO and Zalviso in
the EU. In the U.S., a regulatory submission has been submitted to support the use of the API made with the new manufacturing process, but there is no
guarantee that the FDA will approve the submission. For example, in July 2019, we received notice from the FDA that a deficiency in the API
manufacturer’s drug master file, or DMF, will need to be addressed before the submission can be approved. The API manufacturer responded to the FDA’s
DMF deficiency notice for the new manufacturing process and we resubmitted the Supplemental NDA seeking approval of use of the new manufacturing
process API. Any alternate vendor would need to be qualified through an NDA supplement and/or an MAA variation which could result in delays. The
FDA or other regulatory agencies outside of the United States may also require additional trials if a new sufentanil supplier is relied upon for commercial
production.
Manufacture of sufentanil sublingual tablets requires specialized equipment and expertise.
Ethanol, which is used in the manufacturing process for our sufentanil sublingual tablets, is flammable, and sufentanil is a highly potent, Schedule II
controlled substance. These factors necessitate the use of specialized equipment and facilities for manufacture of sufentanil sublingual tablets. There are a
limited number of facilities that can accommodate our manufacturing process and we need to use dedicated equipment throughout development and
commercial manufacturing to avoid the possibility of cross-contamination. If our equipment breaks down or needs to be repaired or replaced, it may cause
significant disruption in clinical or commercial supply, which could result in delay in the process of obtaining approval for or sale of our products.
Furthermore, we are using one manufacturer to produce our sufentanil sublingual tablets. Any problems with our existing facility or equipment, including
ongoing expansion, may impair our ability to successfully commercialize DSUVIA or Zalviso, if approved, complete our clinical trials and increase our
cost.
Manufacturing issues may arise that could delay or increase costs related to commercialization, product development and regulatory approval.
We have relied, and will continue to rely, on contract manufacturers, component fabricators and third-party service providers to produce the necessary
DSUVIA single-dose applicator, or SDA, and Zalviso devices for the commercial marketplace. We currently outsource manufacturing and packaging of the
DSUVIA SDA and the controller, dispenser and cartridge components of the Zalviso device to third parties and intend to continue to do so. Some of these
component purchases were made and will continue to be made utilizing short-term purchase agreements and we may not be able to enter into long-term
agreements for commercial supply of DSUVIA, DZUVEO or Zalviso devices with each of the third-party manufacturers or may be unable to do so on
acceptable terms. In addition, we have encountered and may continue to encounter production issues with our current or future contract manufacturers and
other third party service providers, including the reliability of the production equipment, quality of the components produced, their inability to meet
demand or other unanticipated delays including scale-up and automating processes, which could adversely impact our ability to supply our customers with
DSUVIA, Zalviso and DZUVEO in Europe, and, if approved, Zalviso in the U.S. and any other foreign territories.
As we scale up manufacturing of DSUVIA and Zalviso, if approved, and conduct required stability testing, product, packaging, equipment and process-
related issues may require refinement or resolution. For example, as we scale up, we may identify significant issues which could result in failure to
maintain regulatory approval of DSUVIA, increased scrutiny by regulatory agencies, delays in clinical program and regulatory approval, increases in our
operating expenses, or failure to obtain approval for Zalviso in the United States.
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We have built out a suite within our CMO’s production facility in Cincinnati, Ohio that serves as a manufacturing facility for clinical and commercial
supplies of sufentanil sublingual tablets. Late stage development and manufacture of registration stability lots, which were utilized in clinical trials, were
manufactured at this location. While we produced a number of commercial lots to support Grünenthal’s launch in Europe, our experience is limited, which
impacted our ability to deliver commercial supplies to Grünenthal on a timely basis, and may in the future impact our ability to deliver commercial supplies
under any New Arrangement, if required, on a timely basis.
In January 2013, we entered into an agreement with a CMO to manufacture, supply, and provide certain validation and stability services with respect to
Zalviso for potential sales in the United States, Canada, Mexico and other countries, subject to agreement by the parties to any additional fees for such
other countries. On August 22, 2017, we entered into an amendment to this agreement to manufacture, supply, and provide certain validation and stability
services with respect to DSUVIA for sales in the United States, and potential sales in Canada and Mexico, and other countries. There is no guarantee that
our CMO’s services will be satisfactory or that they will continue to meet the strict regulatory guidelines of the FDA or other foreign regulatory agencies. If
our CMO cannot provide us with an adequate supply of sufentanil sublingual tablets, we may be required to pursue alternative sources of manufacturing
capacity. Switching or adding commercial manufacturing capability can involve substantial cost and require extensive management time and focus, as well
as additional regulatory filings which may result in significant delays. In addition, there is a natural transition period when a new manufacturing facility
commences work. As a result, delays may occur, which can materially impact our ability to meet our desired commercial timelines, thereby increasing our
costs and reducing our ability to generate revenue.
The facilities of any of our future manufacturers of sufentanil-containing sublingual tablets must be approved by the FDA or the relevant foreign regulatory
agency, such as the EMA, before commercial distribution from such manufacturers occurs. We do not fully control the manufacturing process of sufentanil
sublingual tablets and are completely dependent on these third-party manufacturing partners for compliance with the FDA or other foreign regulatory
agency’s requirements for manufacture. In addition, although our third-party manufacturers are well-established commercial manufacturers, we are
dependent on their continued adherence to cGMP manufacturing and acceptable changes to their process. If our manufacturers do not meet the FDA or
other foreign regulatory agency’s strict regulatory requirements, they will not be able to secure FDA or other foreign regulatory agency approval for their
manufacturing facilities. Although European inspectors have approved our tablet manufacturing site, our third-party manufacturing partner is responsible
for maintaining compliance with the relevant foreign regulatory agency’s requirements. If the FDA or the relevant foreign regulatory agency does not
approve these facilities for the commercial manufacture of sufentanil sublingual tablets, we will need to find alternative suppliers, which would result in
significant delays in obtaining FDA approval for Zalviso, and other foreign regulatory agency approval of DSUVIA/DZUVEO and Zalviso outside Europe.
These challenges may have a material adverse impact on our business, results of operations, financial condition and prospects.
We may not be able to establish additional sources of supply for sufentanil-containing sublingual tablets or device manufacture. Such suppliers are subject
to FDA and other foreign regulatory agency’s regulations requiring that materials be produced under cGMPs or Quality System Regulations, or QSR, or in
ISO 13485 accredited manufacturers, and subject to ongoing inspections by regulatory agencies. Failure by any of our suppliers to comply with applicable
regulations may result in delays and interruptions to our product supply while we seek to secure another supplier that meets all regulatory requirements. In
addition, if we are unable to establish a reliable commercial supply of Zalviso for Europe, we may be unable to satisfy our obligations under any New
Arrangement, if required, in a timely manner or at all, and we may, as a result, be in breach of any New Arrangement.
For DSUVIA, we currently package the finished goods under a manual process and would package finished goods of DZUVEO in the same manner. The
capacity and cost to package the finished goods under this manual process is not optimal to support successful future sales of DSUVIA and DZUVEO. We
have initiated the process to purchase an automated filling and packaging line to support increased capacity packaging for DSUVIA and DZUVEO. Despite
the delays due to the impact of COVID-19, we are projecting to complete the acquisition and installation of this line in the first half of 2021. There is no
assurance that we will be able to successfully purchase, install or validate the automated filling and packaging line for DSUVIA and DZUVEO. If we are
successful in the purchase, installation and validation of this equipment and process, there can be no assurance that we will be able to obtain the necessary
regulatory approvals to manufacture product on this line.
We rely on third parties to conduct, supervise and monitor our clinical trials, and if those third parties perform in an unsatisfactory manner, it may
harm our business.
We utilized contract research organizations, or CROs, for the conduct of the Phase 2 and 3 clinical trials of DSUVIA, as well as our Phase 3 clinical
program for Zalviso. We rely on CROs, as well as clinical trial sites, to ensure the proper and timely conduct of our clinical trials and document
preparation. While we have agreements governing their activities, we have limited influence over their actual performance. We have relied and plan to
continue to rely upon CROs to monitor and manage data for our post-approval clinical programs for DSUVIA and any FDA-required clinical programs for
Zalviso, as well as the execution of nonclinical and clinical trials. We control only certain aspects of our CROs’ activities. Nevertheless, we are responsible
for ensuring that each of our trials is conducted in accordance with the applicable protocol, legal, regulatory and scientific standards and our reliance on the
CROs does not relieve us of our regulatory responsibilities.
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We, and our CROs, are required to comply with the FDA’s current good clinical practices, or cGCPs, which are regulations and guidelines enforced by the
FDA for all product candidates in clinical development. The FDA enforces these cGCPs through periodic inspections of trial sponsors, principal
investigators and clinical trial sites. If we or our CROs fail to comply with applicable cGCPs, the clinical data generated in our clinical trials may be
deemed unreliable and the FDA may require us to perform additional clinical trials before approving our marketing applications. Upon inspection, the FDA
may determine that our clinical trials do not comply with cGCPs. Accordingly, if our CROs or clinical trial sites fail to comply with these regulations, we
may be required to repeat clinical trials, which would delay the regulatory process.
Our CROs are not our employees, and we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and nonclinical
programs. These CROs may also have relationships with other commercial entities, including our competitors, for whom they may also be conducting
clinical trials, or other drug development activities which could harm our competitive position. We face the risk of potential unauthorized disclosure or
misappropriation of our intellectual property by CROs, which may allow our potential competitors to access our proprietary technology. If our CROs do not
successfully carry out their contractual duties or obligations, fail to meet expected deadlines, or if the quality or accuracy of the clinical data they obtain is
compromised due to the failure to adhere to our clinical protocols or regulatory requirements, or for any other reasons, our clinical trials may be extended,
delayed or terminated, and we may not be able to obtain regulatory approval for, or successfully commercialize Zalviso. As a result, our financial results
and the commercial prospects for Zalviso, if approved, would be harmed, our costs could increase, and our ability to generate revenues could be delayed.
Risks Related to Our Business Operations and Industry
Failure to receive required quotas of controlled substances or comply with the Drug Enforcement Agency regulations, or the cost of compliance with
these regulations, may adversely affect our business.
Our sufentanil-based products are subject to extensive regulation by the DEA, due to their status as scheduled drugs. Sufentanil is classified as a Schedule
II controlled substance, considered to present a high risk of abuse. The manufacture, shipment, storage, sale and use of controlled substances are subject to
a high degree of regulation, including security, record-keeping and reporting obligations enforced by the DEA and also by comparable state agencies. In
addition, our contract manufacturers are required to maintain relevant licenses and registrations. This high degree of regulation can result in significant
compliance costs, which may have an adverse effect on the commercialization of DSUVIA and the development and commercialization of Zalviso, if
approved.
The DEA limits the availability and production of all Schedule II controlled substances, including sufentanil, through a quota system. The DEA requires
substantial evidence and documentation of expected legitimate medical and scientific needs before assigning quotas to manufacturers. Our contract
manufacturers apply for quotas on our behalf. We will need significantly greater amounts of sufentanil to successfully commercialize DSUVIA, to support
European commercialization of DZUVEO and Zalviso, and to commercialize Zalviso, if approved in the United States. Any delay by the DEA in
establishing the procurement quota, reduction in our quota for sufentanil, failure to increase our quota over time to meet anticipated increases in demand, or
refusal by the DEA to establish the procurement quota could delay or stop the commercial sale of our approved products or the clinical development of
Zalviso in the United States. This, in turn, could have a material adverse effect on our business, results of operations, financial condition and prospects.
Our relationships with clinical investigators, health care professionals, consultants, commercial partners, third-party payers, hospitals, and other
customers are subject to applicable anti-kickback, fraud and abuse and other healthcare laws, which could expose us to penalties.
Healthcare providers, including physicians, and others play a primary role in the recommendation and prescribing of any products for which we may obtain
marketing approval. Our business operations and arrangements with investigators, healthcare professionals, consultants, commercial partners, hospitals,
third-party payers and customers may expose us to broadly applicable fraud and abuse and other healthcare laws. These laws may constrain the business or
financial arrangements and relationships through which we research, market, sell and distribute the products for which we obtain marketing approval.
Applicable federal and state healthcare laws include, but are not limited to, the following:
•
the federal healthcare Anti-Kickback Statute, which prohibits, among other things, persons or entities from knowingly and willfully soliciting,
offering, receiving or paying any remuneration (including any kickback, bribe, or rebate), directly or indirectly, overtly or covertly, in cash or in
kind, to induce or reward either the referral of an individual for, or the purchase, lease, order or recommendation of, any good, facility, item or
service, for which payment may be made, in whole or in part, under federal healthcare programs such as Medicare and Medicaid;
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•
•
the federal civil and criminal false claims laws, which prohibit, among other things, individuals or entities from knowingly presenting, or causing to
be presented, to the federal government, claims for payment or approval that are false or fraudulent or from knowingly making a false statement to
improperly avoid, decrease or conceal an obligation to pay money to the federal government;
the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, which, among other things, imposes criminal liability for
knowingly and willfully executing, or attempting to execute, a scheme to defraud any healthcare benefit program or to obtain, by means of false or
fraudulent pretenses, representations, or promises, any of the money or property owned by, or under the custody or control of, any healthcare
benefit program, regardless of the payer (e.g., public or private) and knowingly or willfully falsifying, concealing, or covering up by any trick or
device a material fact or making any materially false statement in connection with the delivery of, or payment for, healthcare benefits, items or
services relating to healthcare matters;
• HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations,
which impose certain obligations, including mandatory contractual terms, on covered healthcare providers, health plans and clearinghouses, and
their respective business associates that perform services for them that involve the use, or disclosure of, individually identifiable health information,
as well as their covered subcontractors with respect to safeguarding the privacy, security and transmission of individually identifiable health
information;
•
•
•
•
foreign laws, regulations, standards and regulatory guidance which govern the collection, use, disclosure, retention, security and transfer of
personal data, including the European Union General Data Privacy Regulation, or GDPR, which introduces strict requirements for processing
personal data of individuals within the European Union;
the federal transparency law, enacted as part of the Affordable Care Act, and its implementing regulations, which requires certain manufacturers of
drugs, devices, biologicals and medical supplies to report annually to the CMS information related to payments and other transfers of value
provided to physicians, (defined to include, doctors, dentists, optometrists, podiatrists and chiropractors) and teaching hospitals, as well as
ownership and investment interests held by physicians and their immediate family members. Beginning in 2022, applicable manufacturers also will
be required to report such information regarding its payments and other transfers of value to physician assistants, nurse practitioners, clinical nurse
specialists, anesthesiologist assistants, certified registered nurse anesthetists and certified nurse midwives during the previous year;
analogous state laws that may apply to our business practices, including but not limited to, state laws that require pharmaceutical companies to
implement compliance programs and/or comply with the pharmaceutical industry’s voluntary compliance guidelines; state laws that impose
restrictions on pharmaceutical companies’ marketing practices and require manufacturers to track and file reports relating to pricing and marketing
information, which requires tracking and reporting gifts, compensation and other remuneration and items of value provided to healthcare
professionals and entities, state and local laws that require the registration of pharmaceutical sales representatives, and state laws governing the
privacy and security of health information in certain circumstances, many of which differ from each other in significant ways, with differing
effects; and,
the federal Foreign Corrupt Practices Act of 1977, United Kingdom Bribery Act 2010 and other similar anti-bribery laws in other jurisdictions
which generally prohibit companies and their intermediaries from providing money or anything of value to officials of foreign governments,
foreign political parties, or international organizations with the intent to obtain or retain business or seek a business advantage.
Recently, there has been a substantial increase in anti-bribery law enforcement activity by U.S. regulators, with more frequent and aggressive investigations
and enforcement proceedings by both the Department of Justice and the SEC. A determination that our operations or activities are not, or were not, in
compliance with United States or foreign laws or regulations could result in the imposition of substantial fines, interruptions of business, loss of supplier,
vendor or other third-party relationships, termination of necessary licenses and permits, and other legal or equitable sanctions. Other internal or government
investigations or legal or regulatory proceedings, including lawsuits brought by private litigants, may also follow as a consequence.
Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare laws involve substantial costs. It is possible that
governmental authorities will conclude that our business practices may not comply with current or future statutes, regulations, agency guidance or case law
involving applicable fraud and abuse or other healthcare laws. If our operations are found to be in violation of any of these or any other healthcare
regulatory laws or any other governmental regulations that may apply to us, we may be subject to significant civil, criminal and administrative penalties,
damages, fines, disgorgement, imprisonment, exclusion from government funded healthcare programs, such as Medicare and Medicaid, contractual
damages, reputational harm, increased losses and diminished profits, additional oversight and reporting obligations if we become subject to a corporate
integrity agreement or other agreement to resolve allegations of non-compliance with these laws, and the curtailment or restructuring of our operations any
of which could adversely affect our ability to operate our business and our financial results. Any action against us for violation of these laws, even if we
successfully defend against it, could cause us to incur significant legal expenses or divert our management’s attention from the operation of our business.
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In order to supply the Zalviso device to any future collaborator for commercial sales in Europe, we must maintain conformity of our quality system to
applicable ISO standards and must comply with applicable European laws and directives.
We underwent a Conformité Européenne approval process for the Zalviso device, more commonly known as a CE Mark approval process. We received CE
Mark approval in December 2014, which permits the commercial sale of the Zalviso device in Europe. In connection with the CE Mark approval, we were
also granted International Standards Organization, or ISO, 13485:2003 certification of our quality management system in November 2014. This is an
internationally recognized quality standard for medical devices. The CE Mark was originally issued by the British Standards Institution, or BSI, a Notified
Body, or NB, located in the United Kingdom, or U.K., or BSI-U.K. The CE Mark file and certification has been transferred to the Netherlands NB of BSI,
or BSI-NL, to mitigate the uncertainty with regards to Brexit. The ISO certification issued through BSI-U.K. was recently upgraded to the latest version of
the standard, ISO 13485:2016 through BSI-U.K. and remains in effect. BSI ISO 13485:2016 certification recognizes that consistent quality policies and
procedures are in place for the development, design and manufacturing of medical devices. The certification indicates that we have successfully
implemented a quality system that conforms to ISO 13485 standards for medical devices. Certification to this standard is one of the key regulatory
requirements for a CE Mark in the EU and European Economic Area (which includes the 27 EU member states as well as Norway, Iceland and
Liechtenstein), or EEA, as well as to meet equivalent requirements in other international markets. The certification applies to the Redwood City, California
location which designs, manufactures and distributes finished medical devices, and includes critical suppliers. If we fail to remain in compliance with
applicable European laws and directives, we would be unable to continue to affix the CE Mark to our Zalviso device, which would prevent any future
collaboration partner from selling these devices within the EU and EEA.
Significant disruptions of our information technology systems or data security incidents could result in significant financial, legal, regulatory, business
and reputational harm to us.
We are increasingly dependent on information technology systems and infrastructure, including mobile technologies, to operate our business. In the
ordinary course of our business, we collect, store, process and transmit large amounts of sensitive information, including intellectual property, proprietary
business information, personal information and other confidential information. It is critical that we do so in a secure manner to maintain the confidentiality,
integrity and availability of such sensitive information. We have also outsourced elements of our operations (including elements of our information
technology infrastructure) to third parties, and as a result, we manage a number of third-party vendors who may or could have access to our computer
networks or our confidential information. In addition, many of those third parties in turn subcontract or outsource some of their responsibilities to third
parties. While all information technology operations are inherently vulnerable to inadvertent or intentional security breaches, incidents, attacks and
exposures, the accessibility and distributed nature of our information technology systems, and the sensitive information stored on those systems, make such
systems potentially vulnerable to unintentional or malicious internal and external attacks on our technology environment. Potential vulnerabilities can be
exploited from inadvertent or intentional actions of our employees, third-party vendors, business partners, or by malicious third parties. Attacks of this
nature are increasing in their frequency, levels of persistence, sophistication and intensity, and are being conducted by sophisticated and organized groups
and individuals with a wide range of motives (including, but not limited to, industrial espionage) and expertise, including organized criminal groups,
“hacktivists,” nation states and others. In addition to the extraction of sensitive information, such attacks could include the deployment of harmful malware,
ransomware, denial-of-service attacks, social engineering and other means to affect service reliability and threaten the confidentiality, integrity and
availability of information. In addition, the prevalent use of mobile devices increases the risk of data security incidents.
Significant disruptions of our third-party vendors’ and/or business partners’ information technology systems or other similar data security incidents could
adversely affect our business operations and result in the loss, misappropriation, and/or unauthorized access, use or disclosure of, or the prevention of
access to, sensitive information, which could result in financial, legal, regulatory, business and reputational harm to us. In addition, information technology
system disruptions, whether from attacks on our technology environment or from computer viruses, natural disasters, terrorism, war and telecommunication
and electrical failures, could result in a material disruption of our development programs and our business operations. For example, the loss of clinical trial
data from completed or future clinical trials could result in delays in our regulatory approval efforts and significantly increase our costs to recover or
reproduce the data.
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There is no way of knowing with certainty whether we have experienced any data security incidents that have not been discovered. While we have no
reason to believe this to be the case, attackers have become very sophisticated in the way they conceal access to systems, and many companies that have
been attacked are not aware that they have been attacked. Any event that leads to unauthorized access, use or disclosure of personal information, including
but not limited to personal information regarding our patients or employees, could disrupt our business, harm our reputation, compel us to comply with
applicable federal and state breach notification laws and foreign law equivalents, subject us to time consuming, distracting and expensive litigation,
regulatory investigation and oversight, mandatory corrective action, require us to verify the correctness of database contents, or otherwise subject us to
liability under laws, regulations and contractual obligations, including those that protect the privacy and security of personal information. This could result
in increased costs to us, and result in significant legal and financial exposure and/or reputational harm. In addition, any failure or perceived failure by us or
our vendors or business partners to comply with our privacy, confidentiality or data security-related legal or other obligations to third parties, or any further
security incidents or other inappropriate access events that result in the unauthorized access, release or transfer of sensitive information, which could
include personally identifiable information, may result in governmental investigations, enforcement actions, regulatory fines, litigation, or public
statements against us by advocacy groups or others, and could cause third parties, including clinical sites, regulators or current and potential partners, to
lose trust in us or we could be subject to claims by third parties that we have breached our privacy- or confidentiality-related obligations, which could
materially and adversely affect our business and prospects. Moreover, data security incidents and other inappropriate access can be difficult to detect, and
any delay in identifying them may lead to increased harm of the type described above. While we have implemented security measures intended to protect
our information technology systems and infrastructure, there can be no assurance that such measures will successfully prevent service interruptions or
security incidents.
Business interruptions could delay our operations and sales efforts.
Our headquarters is located in the San Francisco Bay Area, near known earthquake fault zones and is vulnerable to significant damage from earthquakes.
Our contract manufacturers, suppliers, clinical trial sites and local and national transportation vendors are all subject to business interruptions due to
weather, outbreaks of pandemic diseases, natural disasters, or man-made incidents. We are also vulnerable to other types of natural disasters and other
events that could disrupt our operations. If any of these events occurred and prevented us or third parties on which we rely from using all or a significant
portion of our or their facilities, it may be difficult or, in certain cases, impossible for us to continue our business and operations for a substantial period of
time.
We do not carry insurance for earthquakes or other natural disasters, and we may not carry sufficient business interruption insurance to compensate us for
losses that may occur. Any losses or damages we incur could have a material adverse effect on our business operations.
Our future success depends on our ability to retain key executives and to attract, retain and motivate qualified personnel.
We are highly dependent on principal members of our executive team, the loss of whose services may adversely impact the achievement of our objectives.
While we have entered into offer letters with each of our executive officers, any of them could leave our employment at any time, as all of our employees
are “at will” employees. Recruiting and retaining qualified scientific, manufacturing, and commercial personnel will also be critical to our success. We may
not be able to attract and retain these personnel on acceptable terms given the competition among numerous pharmaceutical and biotechnology companies
for similar personnel. We also experience competition for the hiring of scientific and clinical personnel from universities and research institutions. There is
currently a shortage of skilled executives in our industry, which is likely to continue. As a result, competition for skilled personnel is intense and the
turnover rate can be high. In addition, failure to succeed in clinical trials, or delays in the regulatory approval process, may make it more challenging to
recruit and retain qualified personnel. The inability to recruit or loss of the services of any executive or key employee might impede the progress of our
research, development and commercialization objectives.
We may acquire companies, product candidates or products or engage in strategic transactions, which could divert our management’s attention and
cause us to incur various costs and expenses.
We may acquire or invest in companies, product candidates or products that we believe could complement or expand our business or otherwise offer
growth opportunities. The pursuit of potential acquisitions or investments may divert the attention of management and has caused, and in the future may
cause, us to incur various costs and expenses in identifying, investigating, and pursuing them, whether or not they are consummated. We may not be able to
identify desirable acquisitions or investments or be successful in completing or realizing anticipated benefits from such transactions. In addition, the
acquisition of product candidates and products is a highly competitive area, and many other companies are pursuing the same or similar product candidates
to those that we may consider attractive. Larger companies with more well-established and diverse revenue streams may have a competitive advantage over
us due to their size, financial resources and more extensive clinical development and commercialization capabilities.
49
In addition, we may receive inquiries relating to potential strategic transactions, including collaborations, licenses, and acquisitions. Such potential
transactions may divert the attention of management and may cause us to incur various costs and expenses in investigating and evaluating such
transactions, whether or not they are consummated.
We face potential product liability claims, and, if such claims are successful, we may incur substantial liability.
Commercial sales of DSUVIA and Zalviso expose us to the risk of product liability claims. Product liability claims might be brought against us by patients,
health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. If we cannot successfully defend
against product liability claims, we could incur substantial liability and costs. In addition, regardless of merit or eventual outcome, product liability claims
may result in:
•
•
impairment of our business reputation;
costs due to related litigation;
• distraction of management’s attention from our primary business;
•
•
substantial monetary awards to patients or other claimants;
the inability to commercialize our products; and,
• decreased demand for our products.
Our current product liability insurance coverage may not be sufficient to reimburse us for any expenses or losses we may suffer. In addition, our current
product liability insurance contains an exclusion related to any claims related to our products from a governmental body, or payer, or those claims arising
from a multi-plaintiff action for bodily injury or property damage. Multi-plaintiff claims caused by product defects are covered. This exclusion does not
apply to any bodily injury claim related to our products made by an individual. On occasion, large judgments have been awarded in class action lawsuits
based on drugs that had unanticipated adverse effects. A successful product liability claim or series of claims brought against us could cause our stock price
to decline and, if judgments are excluded from our insurance coverage or exceed our insurance coverage, could adversely affect our results of operations
and business. Moreover, insurance coverage is becoming increasingly expensive and, in the future, we may not be able to maintain insurance coverage at a
reasonable cost or in sufficient amounts to protect us against losses due to liability.
Our insurance coverage included the sale of Zalviso to our former commercial partner, Grünenthal, and will likely include the sale of Zalviso by any future
commercial partner. We intend to commercialize and promote DZUVEO in Europe with a strategic partner which may result in further expansion of our
insurance coverage to include sales of DZUVEO in Europe. There can be no assurance that such coverage will be adequate to protect us against any future
losses due to liability.
Our employees, independent contractors, principal investigators, consultants, commercial partners and vendors may engage in misconduct or other
improper activities, including non-compliance with regulatory standards and requirements and insider trading.
We are exposed to the risk that our employees, independent contractors, investigators, consultants, commercial partners and vendors may engage in
fraudulent conduct or other illegal activity. Misconduct by these parties could include intentional, reckless and/or negligent conduct that violates
(1) regulations implemented by the FDA and similar foreign regulatory bodies; (2) laws requiring the reporting of true, complete and accurate information
to such regulatory bodies; (3) healthcare fraud and abuse laws of the United States and similar foreign fraudulent misconduct laws; and (4) laws requiring
the reporting of financial information or data accurately. The promotion, sales and marketing of healthcare items and services, as well as certain business
arrangements in the healthcare industry are subject to extensive laws designed to prevent misconduct, including fraud, kickbacks, self-dealing and other
abusive practices. These laws may restrict or prohibit a wide range of pricing, discounting, marketing, structuring and commission(s), certain customer
incentive programs and other business arrangements generally. Activities subject to these laws also involve the improper use of information obtained in the
course of patient recruitment for clinical trials. It is not always possible to identify and deter employee and other third-party misconduct. The precautions
we take to detect and prevent inappropriate conduct may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from
governmental investigations or other actions or lawsuits stemming from a failure to comply with these laws. If any such actions are instituted against us,
and we are not successful in defending ourselves, those actions could have a significant impact on our business, including the imposition of significant
civil, criminal and administrative penalties, damages, monetary fines, disgorgement, imprisonment, additional oversight and reporting obligations if we
become subject to a corporate integrity agreement or similar agreements to resolve allegations of non-compliance with these laws, possible exclusion from
participation in Medicare, Medicaid and other federal healthcare programs, contractual damages, reputational harm, diminished profits and future earnings,
and curtailment of our operations, any of which could adversely affect our ability to operate our business and our results of operations.
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Risks Related to Our Intellectual Property
If we cannot defend our issued patents from third party claims or if our pending patent applications fail to issue, our business could be adversely
affected.
To protect our proprietary technology, we rely on patents as well as other intellectual property protections including trade secrets, nondisclosure
agreements, and confidentiality provisions. As of December 31, 2020, we are the owner of record of 81 issued patents worldwide. These issued patents
cover AcelRx’s sufentanil sublingual tablet, medication delivery devices and other platform technology. These issued patents include patents we have listed
in the FDA’s Orange Book for DSUVIA and patents expected to provide coverage until 2031. These issued patents also include a European patent covering
the DZUVEO device that is expected to provide coverage until at least 2036.
Because sufentanil is not a new chemical entity, its regulatory exclusivity period in the United States is limited to three years under the Hatch-Waxman Act.
While the FDA may not approve a 505(b)(2) NDA or abbreviated new drug application, or ANDA, using DSUVIA as its reference listed drug prior to
November 2, 2021, we may be subject to certification based on the patents we have listed in the FDA’s Orange Book for DSUVIA and engage in litigation
against such a 505(b)(2) or ANDA applicant at any time.
In addition, we are pursuing a number of U.S. non-provisional patent applications and foreign national applications directed to DSUVIA and Zalviso. The
patent applications that we have filed and have not yet been granted may fail to result in issued patents in the United States or in foreign countries. Even if
the patents do successfully issue, third parties may challenge the patents.
Our commercial success will depend in part on successfully defending our current patents against third party challenges and expanding our existing patent
portfolio to provide additional layers of patent protection, as well as extending patent protection. There can be no assurance that we will be successful in
defending our existing and future patents against third party challenges, or that our pending patent applications will result in additional issued patents.
The patent positions of pharmaceutical companies, including ours, can be highly uncertain and involve complex and evolving legal and factual questions.
No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United States. Legal developments may
preclude or limit the scope of available patent protection.
There is also no assurance that any patents issued to us will not become the subject of adversarial proceedings such as opposition, inter partes review, post-
grant review, reissue, supplemental examination, re-examination or other post-issuance proceedings. In addition, there is no assurance that the respective
court or agency in such adversarial proceedings would not make unfavorable decisions, such as reducing the scope of a patent of ours or determining that a
patent of ours is invalid or unenforceable. There is also no assurance that any patents issued to us will provide us with competitive advantages, will not be
challenged by any third parties, or that the patents of others will not prevent the commercialization of products incorporating our technology. Furthermore,
there can be no guarantee that others will not independently develop similar products, duplicate any of our products, or design around our patents.
Litigation involving patents, patent applications and other proprietary rights is expensive and time consuming. If we are involved in such litigation, it
could cause delays in bringing our products to market and interfere with our business.
Our commercial success depends in part on not infringing patents and proprietary rights of third parties. Although we are not currently aware of litigation
or other proceedings or third-party claims of intellectual property infringement related to DSUVIA or Zalviso, the pharmaceutical industry is characterized
by extensive litigation regarding patents and other intellectual property rights.
As we enter our target markets, it is possible that competitors or other third parties will claim that our products and/or processes infringe on their
intellectual property rights. These third parties may have obtained and may in the future obtain patents covering products or processes that are similar to, or
may include compositions or methods that encompass our technology, allowing them to claim that the use of our technologies infringes on these patents.
In a patent infringement claim against us, we may assert, as a defense, that we do not infringe the relevant patent claims, that the patent is invalid or both.
The strength of our defenses will depend on the patents asserted, the interpretation of these patents, and our ability to invalidate the asserted patents.
However, we could be unsuccessful in advancing non-infringement and invalidity arguments in our defense. In the United States, issued patents enjoy a
presumption of validity, and the party challenging the validity of a patent claim must present clear and convincing evidence of invalidity, which is a high
burden of proof. Conversely, the patent owner need only prove infringement by a preponderance of the evidence, which is a lower burden of proof.
If we were found by a court to have infringed a valid patent claim, we could be prevented from using the patented technology and be required to pay the
owner of the patent for damages for past sales and for the right to license the patented technology for future sales. If we decide to pursue a license to one or
more of these patents, we may not be able to obtain a license on commercially reasonable terms, if at all, or the license we obtain may require us to pay
substantial royalties or grant cross licenses to our patent rights. For example, if the relevant patent is owned by a competitor, that competitor may choose
not to license patent rights to us. If we decide to develop alternative technology, we may not be able to do so in a timely or cost-effective manner, if at all.
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In addition, because patent applications can take years to issue and are often afforded confidentiality for some period of time there may currently be
pending applications, unknown to us, that later result in issued patents that could cover one or more of our products.
It is possible that we may in the future receive communications from competitors and other companies alleging that we may be infringing their patents,
trade secrets or other intellectual property rights, offering licenses to such intellectual property or threatening litigation. In addition to patent infringement
claims, third parties may assert copyright, trademark or other proprietary rights against us. We may need to expend considerable resources to counter such
claims and may not be successful in our defense. Our business may suffer if a finding of infringement is established.
It is difficult and costly to protect our proprietary rights, and we may not be able to ensure their protection.
The patent positions of pharmaceutical companies can be highly uncertain and involve complex legal and factual questions for which important legal
principles remain unresolved. No consistent policy regarding the breadth of claims allowed in pharmaceutical patents has emerged to date in the United
States. The pharmaceutical patent situation outside the United States is even more uncertain. Changes in either the patent laws or in interpretations of patent
laws in the United States and other countries may diminish the value of our intellectual property.
We cannot predict the breadth of claims that may be allowed or enforced in the patents that may be issued from the applications we currently, or may in the
future, own or license from third parties. Claims could be brought regarding the validity of our patents by third parties and regulatory agencies. Further, if
any patent license we obtain is deemed invalid and/or unenforceable, it could impact our ability to commercialize or partner our technology.
Competitors or third parties may infringe our patents. We may decide it is necessary to file patent infringement claims, which can be expensive and time-
consuming. In addition, in an infringement proceeding, a court may decide that a patent of ours is not valid or is unenforceable, or that the third party’s
technology does not in fact infringe upon our patents. An adverse determination of any litigation or defense proceedings could put one or more of our
patents at risk of being invalidated or interpreted narrowly and could put our related pending patent applications at risk of not issuing. Litigation may fail
and, even if successful, may result in substantial costs and be a distraction to our management. We may not be able to prevent misappropriation of our
proprietary rights, particularly in countries outside the United States where patent rights may be more difficult to enforce. Furthermore, because of the
substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive
information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements
of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it
could have a substantial adverse effect on the price of our common stock.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
• we were the first to make the inventions covered by each of our pending patent applications or issued patents;
• our patent applications were filed before the inventions covered by each patent or patent application was published by a third party;
• we were the first to file patent applications for these inventions;
• others will not independently develop similar or alternative technologies or duplicate any of our technologies;
•
•
any patents issued to us or our collaborators will provide a basis for commercially viable products, will provide us with any competitive advantages
or will not be challenged by third parties; or,
the patents of others will not have an adverse effect on our business.
If we do not adequately protect our proprietary rights, competitors may be able to use our technologies and erode or negate any competitive advantage we
may have, which could materially harm our business, negatively affect our position in the marketplace, limit our ability to commercialize DSUVIA and
Zalviso, if approved, and delay or render impossible our achievement of profitability.
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is
appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants,
outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements
may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of
confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming
litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable
competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our
competitive business position.
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Periodic maintenance fees, renewal fees, annuity fees and various other governmental fees on patents and applications will be due to be paid to the
United States Patent and Trademark Office and various foreign governmental patent agencies in several stages over the lifetime of the patents and/or
applications.
We have systems in place, including use of third party vendors, to manage payment of periodic maintenance fees, renewal fees, annuity fees and various
other patent and application fees. The United States Patent and Trademark Office, or the USPTO, and various foreign governmental patent agencies require
compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application process. There are situations
in which noncompliance can result in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the
relevant jurisdiction. If this occurs, our competitors might be able to enter the market, which would have a material adverse effect on our business.
We may not be able to enforce our intellectual property rights throughout the world.
The laws of some foreign countries do not protect intellectual property rights to the same extent as the laws of the United States. Many companies have
encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions. The legal systems of some
countries, particularly developing countries, do not favor the enforcement of patents and other intellectual property protection, especially those relating to
life sciences. This could make it difficult for us to stop the infringement of our patents or the misappropriation of our other intellectual property rights. For
example, many foreign countries have compulsory licensing laws under which a patent owner must grant licenses to third parties. In addition, many
countries limit the enforceability of patents against third parties, including government agencies or government contractors. In these countries, patents may
provide limited or no benefit.
Proceedings to enforce our patent rights in foreign jurisdictions could result in substantial costs and divert our efforts and attention from other aspects of
our business. Accordingly, our efforts to protect our intellectual property rights in such countries may be inadequate. Additionally, claims may be brought
regarding the validity of our patents by third parties and regulatory agencies in the United States and foreign countries. In addition, changes in the law and
legal decisions by courts in the United States and foreign countries may affect our ability to obtain adequate protection for our technology and the
enforcement of intellectual property.
We have not yet registered our trademarks in all our potential markets, and failure to secure those registrations could adversely affect our business.
We have registered our ACELRX mark in the United States, Canada, the EU and India. In early 2014, the FDA accepted the Zalviso mark and, in
November 2018, the FDA accepted the DSUVIA mark. Although we are not currently aware of any oppositions to or cancellations of our registered
trademarks or pending applications, it is possible that one or more of the applications could be subject to opposition or cancellation after the marks are
registered. The registrations will be subject to use and maintenance requirements. It is also possible that we have not yet registered all of our trademarks in
all of our potential markets, such as securing the registration of DSUVIA in Canada, and that there are names or symbols other than “ACELRX” that may
be protectable marks for which we have not sought registration, and failure to secure those registrations could adversely affect our business. Opposition or
cancellation proceedings may be filed against our trademarks and our trademarks may not survive such proceedings.
Risks Related to Ownership of Our Common Stock
The market price of our common stock may be highly volatile.
The trading price of our common stock has experienced significant volatility and is likely to be volatile in the future. For example, the closing price of our
common stock ranged between $3.93 and $1.66 during 2019, and between $0.76 and $2.07 during 2020. Our stock price could be subject to wide
fluctuations in response to a variety of factors, including the following:
•
•
•
failure to successfully commercialize DSUVIA in the United States or to successfully develop and commercialize Zalviso in the United States;
inability to obtain additional funding needed to conduct our planned business operations;
the integration and performance of any businesses or assets we may acquire;
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• uncertainties regarding the magnitude and duration of impacts we are experiencing due to COVID-19;
•
•
•
•
•
•
•
•
•
•
•
•
•
the perception of limited market sizes or pricing for our products;
further delays in resubmitting the NDA for Zalviso, and any additional adverse developments or perceived adverse developments with respect to
the FDA’s review of the Zalviso NDA, upon resubmission;
inability to enter into, or unfavorable terms associated with, a New Arrangement for the commercialization of Zalviso in Europe;
safety issues;
adverse results or delays in future clinical trials;
changes in laws or regulations applicable to our products;
inability to obtain adequate product supply for our products, or the inability to do so at acceptable prices;
adverse regulatory decisions;
changes in the structure of the healthcare payment systems;
inability to maintain ISO 13485 certification and CE Mark approval for Zalviso;
introduction of new products, services or technologies by our competitors;
failure to meet or exceed financial projections we provide to the public;
failure to meet or exceed the estimates and projections of the investment community;
• decisions by our collaboration partners regarding market access, pricing, and commercialization efforts in countries where they have the right to
commercialize our products;
•
•
•
failure to maintain our existing collaborations or enter into new collaborations;
the perception of the pharmaceutical industry generally, and of opioid manufacturers more specifically, by the public, legislatures, regulators and
the investment community;
announcements of significant acquisitions, strategic partnerships, joint ventures, or other significant transactions, including disposition transactions,
or capital commitments by us or our competitors;
• disputes or other developments relating to employment matters, business development efforts, proprietary rights, including patents, litigation
matters and our ability to obtain patent protection for our technologies;
•
•
additions or departures of key management or scientific personnel;
costs associated with potential governmental investigations, inquiries, regulatory actions or lawsuits that may be brought against us as a result of us
being an opioid manufacturer;
• other types of significant lawsuits, including patent or stockholder litigation;
•
•
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changes in the market valuations of similar companies;
sales of our common stock by us or our stockholders in the future; and
trading volume of our common stock.
In addition, the stock market in general, and The Nasdaq Global Market, or Nasdaq, in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry factors may negatively
affect the market price of our common stock, regardless of our actual operating performance.
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Sales of a substantial number of shares of our common stock in the public market by our stockholders could cause our stock price to fall.
Because we will continue to need additional capital in the future to continue to expand our business and our research and development activities, among
other things, we may conduct additional equity offerings. For example, under the universal shelf registration statement filed by us in June 2020 and
declared effective by the SEC in July 2020, we may offer and sell any combination of common stock, preferred stock, debt securities and warrants in one or
more offerings, up to a cumulative value of $150 million. To date, we have approximately $54.5 million remaining under such universal shelf registration
statement. Sales of a substantial number of shares of our common stock in the public market or the perception that these sales might occur, could depress
the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. Our management is
authorized to grant stock options and other equity-based awards to our employees, directors and consultants under our equity incentive plans. Grants under
our equity incentive plans may also cause our stockholders to experience additional dilution, which could cause our stock price to fall. We may also issue
shares of our common stock as consideration in mergers, acquisitions and other business development transactions. We are unable to predict the effect that
sales may have on the prevailing market price of our common stock. All of our shares of common stock outstanding are eligible for sale in the public
market, subject in some cases to the volume limitations and manner of sale requirements of Rule 144 under the Securities Act. Sales of stock by our
stockholders could have a material adverse effect on the trading price of our common stock.
Our involvement in securities-related class action litigation could divert our resources and management's attention and harm our business.
The stock markets have from time to time experienced significant price and volume fluctuations that have affected the market prices for the common stock
of pharmaceutical companies. These broad market fluctuations may cause the market price of our common stock to decline. In addition, the market price of
our common stock may vary significantly based on AcelRx-specific events, such as receipt of future complete response letters, negative clinical results, a
negative vote or decision by an FDA advisory committee, or other negative feedback from the FDA, EMA, or other regulatory agencies. In the past,
securities-related class action litigation has often been brought against a company following a decline in the market price of its securities. This risk is
especially relevant for us because biotechnology and biopharmaceutical companies often experience significant stock price volatility in connection with
their investigational drug candidate development programs and the FDA's review of their NDAs.
If AcelRx experiences a decline in its stock price, we could face additional securities class action lawsuits. Securities class actions are often expensive and
can divert management’s attention and our financial resources, which could adversely affect our business.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited.
As of December 31, 2020, we had federal net operating loss carryforwards of $264.4 million, of which $114.9 million federal net operating losses
generated before January 1, 2018 will begin to expire in 2029. Federal net operating losses of $149.5 million generated after January 1, 2018 will
carryforward indefinitely but are subject to the 80% taxable income limitation. As of December 31, 2020, we had state net operating loss carryforwards of
$141.5 million, which begin to expire in 2028.
Our ability to use our federal and state net operating losses to offset potential future taxable income and related income taxes that would otherwise be due is
dependent upon our generation of future taxable income before the expiration dates of the net operating losses, and we cannot predict with certainty when,
or whether, we will generate sufficient taxable income to use all of our net operating losses. Federal net operating losses generated prior to 2018 will
continue to be governed by the net operating loss tax rules as they existed prior to the adoption of the Tax Cuts and Jobs Act of 2017, or Tax Act, which
means that generally they will expire 20 years after they were generated if not used prior thereto. Many states have similar laws. Accordingly, our federal
and state net operating losses could expire unused and be unavailable to offset future income tax liabilities. Under the newly enacted Tax Act as modified
by CARES Act, federal net operating losses incurred in tax years beginning after December 31, 2017 and before January 1, 2021 may be carried back to
each of the five tax years preceding such loss, and federal net operating losses arising in tax years beginning after December 31, 2020 may not be carried
back. Moreover, federal net operating losses generated in tax years ending after December 31, 2017 may be carried forward indefinitely, but the
deductibility of such federal net operating losses is limited to 80% of current year taxable income for tax years beginning after December 31, 2020.
In addition, under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as
a greater than 50% change (by value) in its equity ownership over a three-year period, the corporation’s ability to use its pre-change net operating loss
carryforwards and other pre-change tax attributes (such as research tax credits) to offset its post-change income may be limited. The completion of the July
2013 public equity offering, together with our public equity offering in December 2012, our initial public offering, private placements and other
transactions that have occurred, have triggered such an ownership change. In addition, since we will need to raise substantial additional funding to finance
our operations, we may undergo further ownership changes in the future. In the future, if we earn net taxable income, our ability to use our pre-change net
operating loss carryforwards to offset United States federal taxable income may be subject to limitations, which could potentially result in increased future
tax liability to us.
Our effective tax rate may fluctuate, and we may incur obligations in tax jurisdictions in excess of accrued amounts.
We are subject to taxation in numerous U.S. states and territories. As a result, our effective tax rate is derived from a combination of applicable tax rates in
the various places that we operate. In preparing our financial statements, we estimate the amount of tax that will become payable in each of such places.
Nevertheless, our effective tax rate may be different than experienced in the past due to numerous factors, including passage of the newly enacted federal
income tax law, changes in the mix of our profitability from state to state, the results of examinations and audits of our tax filings, our inability to secure or
sustain acceptable agreements with tax authorities, changes in accounting for income taxes and changes in tax laws. Any of these factors could cause us to
experience an effective tax rate significantly different from previous periods or our current expectations and may result in tax obligations in excess of
amounts accrued in our financial statements.
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We do not intend to pay dividends on our common stock so any returns will be limited to the value of our stock.
We have never declared or paid any cash dividends on our capital stock, and we are prohibited from doing so under the terms of the Loan Agreement.
Regardless of the restrictions in the Loan Agreement or the terms of any potential future indebtedness, we anticipate that we will retain all available funds
and any future earnings to support our operations and finance the growth and development of our business and, therefore, we do not expect to pay cash
dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and
will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business
prospects and other factors our Board of Directors may deem relevant.
Provisions in our amended and restated certificate of incorporation and bylaws, as well as provisions of Delaware law, could make it more difficult for
a third party to acquire us or increase the cost of acquiring us, even if doing so would benefit our stockholders or remove our current management.
Some provisions of our charter documents and Delaware law may have anti-takeover effects that could discourage an acquisition of us by others, even if an
acquisition would be beneficial to our stockholders and may prevent attempts by our stockholders to replace or remove our current management. These
provisions include:
•
•
•
authorizing the issuance of “blank check” preferred stock, the terms of which may be established and shares of which may be issued without
stockholder approval;
limiting the removal of directors by the stockholders;
a staggered Board of Directors;
• prohibiting stockholder action by written consent, thereby requiring all stockholder actions to be taken at a meeting of our stockholders;
•
•
eliminating the ability of stockholders to call a special meeting of stockholders; and
establishing advance notice requirements for nominations for election to our Board of Directors or for proposing matters that can be acted upon at
stockholder meetings.
These provisions may frustrate or prevent any attempts by our stockholders to replace or remove our current management by making it more difficult for
stockholders to replace members of our Board of Directors, which is responsible for appointing the members of our management. In addition, we are
subject to Section 203 of the Delaware General Corporation Law, which generally prohibits a Delaware corporation from engaging in any of a broad range
of business combinations with an interested stockholder for a period of three years following the date on which the stockholder became an interested
stockholder, unless such transactions are approved by our Board of Directors. This provision could have the effect of delaying or preventing a change of
control, whether or not it is desired by or beneficial to our stockholders. Further, other provisions of Delaware law may also discourage, delay or prevent
someone from acquiring us or merging with us.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease approximately 25,893 square feet of office and laboratory space in Redwood City, California under an agreement that expires on January 31,
2024, with an option to extend for an additional period of six years. On January 2, 2019, we entered into an agreement to sublease 12,106 square feet of this
space commencing on February 16, 2019 and expiring on January 31, 2024. We believe that our facilities are adequate to meet our current needs.
Item 3. Legal Proceedings
From time to time we may be involved in legal proceedings relating to intellectual property, commercial, employment and other matters arising in the
ordinary course of business. We are not currently involved in any material legal proceedings. We may, however, be involved in material legal proceedings
in the future. Such matters are subject to uncertainty and there can be no assurance that such legal proceedings will not have a material adverse effect on
our business, results of operations, financial position or cash flows.
Item 4. Mine Safety Disclosures
Not Applicable.
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Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
PART II
Our common stock has been traded on The Nasdaq Global Market since February 11, 2011 under the symbol “ACRX”. As of March 9, 2021, there were 12
holders of record of our common stock. This number does not include “street name” or beneficial holders, whose shares are held of record by banks,
brokers, financial institutions and other nominees.
Dividend Policy
We have never declared or paid any cash dividends on our capital stock, and we are prohibited from doing so under the terms of our Loan Agreement.
Regardless of the restrictions in our Loan Agreement or the terms of any potential future indebtedness, we anticipate that we will retain all available funds
and any future earnings to support our operations and finance the growth and development of our business and, therefore, we do not expect to pay cash
dividends in the foreseeable future. Any future determination related to our dividend policy will be made at the discretion of our Board of Directors and
will depend on then-existing conditions, including our financial condition, operating results, contractual restrictions, capital requirements, business
prospects and other factors our Board of Directors may deem relevant.
Recent Sales of Unregistered Securities
None.
Item 6. Selected Financial Data
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not
required to provide the information specified under this item.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our audited financial statements and the related notes that appear elsewhere in
this Annual Report on Form 10-K.
This discussion and analysis generally covers our financial condition and results of operations for the year ended December 31, 2020, including year-over-
year comparisons versus the year ended December 31, 2019. Our Annual Report on Form 10-K for the year ended December 31, 2019 includes a
discussion and analysis of our financial condition and results of operations for the year ended December 31, 2018 in Item 7 of Part II, “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
Overview
We are a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised
settings. DSUVIA® (known as DZUVEO in Europe) and Zalviso, are both focused on the treatment of acute pain, and each utilize sufentanil, delivered via
a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and Drug
Administration, or FDA, approved our resubmitted NDA for DSUVIA for use in adults in certified medically supervised healthcare settings, such as
hospitals, surgical centers, and emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which
alternative treatments are inadequate. In June 2018, the European Commission, or EC, granted marketing approval of DZUVEO for the treatment of
patients with moderate-to-severe acute pain in medically monitored settings. We are further developing a distribution capability and commercial
organization to continue to market and sell DSUVIA in the United States. The commercial launch of DSUVIA in the United States occurred in the first
quarter of 2019. In geographies where we decide not to commercialize ourselves, including for DZUVEO in Europe, we may seek to out-license
commercialization rights. We currently intend to commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic
partners, although we have not yet entered into any such arrangement. The timing of the resubmission of the Zalviso NDA is dependent upon the
finalization of the FDA’s new opioid approval guidelines and process. If we are successful in obtaining approval of Zalviso in the United States, we plan to
potentially promote Zalviso either by ourselves or with strategic partners. Zalviso was approved for sale in the European Union on September 18, 2015,
and was initially commercialized by Grünenthal GmbH, or Grünenthal. On May 18, 2020, we received a notice from Grünenthal that it was exercising its
right to terminate the Collaboration and License Agreement, or, as amended, the License Agreement, which granted Grünenthal the European rights to
commercialize Zalviso in the 28 EU member states at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway and Australia, or the
Territory, for human use in pain treatment in medically supervised settings, and the related Manufacture and Supply Agreement, or, as amended, the MSA,
under which AcelRx exclusively manufactured and supplied Zalviso to Grünenthal for commercial sales in the Territory. The MSA, together with the
License Agreement, are referred to as the Grünenthal Agreements. The terms of the Grünenthal Agreements were extended to May 2021 to enable
Grünenthal to sell down its Zalviso inventory, a right it had under the Grünenthal Agreements. The rights to market and sell Zalviso in the Territory revert
back to us in May 2021.
Product Development Programs
Our product development portfolio features two innovative therapies for the treatment of acute pain. Please refer to “Part I. Item 1. Business—Our
Portfolio” for a detailed discussion of DSUVIA and Zalviso.
Promotion Agreement
On October 1, 2020, we entered into a promotion agreement, or the Promotion Agreement, with La Jolla Pharmaceutical Company, or La Jolla, and
Tetraphase Pharmaceuticals, Inc., or Tetraphase, effective as of September 30, 2020, pursuant to which La Jolla will detail and promote DSUVIA. Under
the terms of this agreement, La Jolla is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a minimum
number of sales calls per calendar quarter. We will not detail and promote XERAVA™ (eravacycline) under this agreement.
The Promotion Agreement has a two-year term. We may terminate the agreement upon 30 days’ notice. After one year, La Jolla may terminate the
agreement upon 30 days’ notice and may do so earlier in the event we undergo a change of control and change in management. We will pay La Jolla a
revenue share on net sales of DSUVIA in the sales territories covered by the Promotion Agreement, other than sales to certain excluded accounts. These
sales territories do not overlap with the territories covered by our sales force. If La Jolla fails to meet its detailing requirements in a given calendar quarter,
it will pay us a royalty on net sales of XERAVA in the United States during such quarter.
The Promotion Agreement terminated the co-promotion agreement, or the Co-Promotion Agreement, we entered into with Tetraphase on March 15, 2020.
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On March 16, 2020, in connection with entering into the Co-Promotion Agreement, we eliminated 30 positions, mainly within the commercial
organization. As of December 31, 2020, we had approximately 25 sales representatives, including those under the Promotion Agreement with La Jolla.
Distribution Agreement
On July 17, 2020, we entered into a distribution agreement, or the Distribution Agreement, with Zimmer Biomet Dental, or ZB Dental, pursuant to which
ZB Dental obtained the exclusive right to promote, market, sell, and arrange to distribute DSUVIA in the United States to clinicians, dentists, surgeons and
other licensed health care practitioners that perform dental (including specialty dental), oral-maxillofacial, cranio-maxillofacial or oral surgery procedures,
or Professionals, and their respective institutions and facilities that are permitted to use DSUVIA.
ZB Dental’s distribution rights are non-exclusive for crossover ambulatory surgery centers and certain government customers, and do not extend to
ambulatory care centers outside the class of trade or into hospitals. ZB Dental will conduct any distribution activities in a manner consistent with
DSUVIA’s FDA-approved indication and REMS program, and within the parameters established in the Distribution Agreement. ZB Dental has the right to
sublicense its distribution rights to its qualified marketing partners but may not otherwise sublicense its distribution rights to any third party without our
prior written consent.
DSUVIA is expected to be available for order by Professionals exclusively through ZB Dental in the United States, pending satisfaction of applicable
licensing requirements; prior to such satisfaction, ZB Dental sales representatives will promote and market DSUVIA on our behalf.
General Trends and Outlook
COVID-19-related
Government-mandated shelter-in-place orders and related safety policies on account of the COVID-19 pandemic continue to prevent us from operating our
business in the normal course. Beginning in early 2020, state and local officials issued orders in response to the pandemic which included, among other
things, requirements for residents to shelter in place and for non-essential businesses to cease activities at facilities within certain cities, counties, and states.
State and local officials have taken different approaches to these orders, and some have not issued any such orders. Once issued, the orders have been
relaxed and then tightened, depending on the rate of COVID-19 cases. As a result of these orders, we implemented a work from home policy for our
California-based employees and we continue to adhere to the various and diverse orders issued by government officials in the jurisdictions in which we
operate. In addition, some hospitals, ambulatory surgery centers and other healthcare facilities have barred visitors that are not caregivers or mission-
critical and otherwise restricted access to such facilities, and we have no visibility as to when these restrictions will be lifted. As a result, the educational
and promotional efforts of our commercial and medical affairs personnel have been substantially reduced, and in some cases, stopped. Cancellation or
delays of formulary committee meetings and delays of elective surgeries have also affected the pace of formulary approvals and, consequently, the rate of
adoption and use of DSUVIA. We expect our near-term sales volumes to be adversely impacted as long as access to healthcare facilities by our commercial
and medical affairs personnel continues to be limited. We will continue to evaluate the impact on our revenues and related metrics and operating expenses
during this period and assess the need to adjust our expenses and expectations.
As a result of international travel restrictions, the timing for testing and acceptance of our DSUVIA high-volume packaging line has been delayed. Based
on our best estimate, we project that the line will be installed in the first half of 2021, with FDA approval expected in 2022.
We will continue to engage with various elements of our supply chain and distribution channel, including our customers, contract manufacturers, and
logistics and transportation providers, to meet demand for products and to remain informed of any challenges within our supply chain. We continue to
monitor demand and intend to adapt our plans as needed to continue to drive our business and meet our obligations during the evolving COVID-19
pandemic. However, if the COVID-19 pandemic continues and persists for an extended period of time, we may face disruptions to our supply chain and
operations, and associated delays in the manufacturing and supply of our products. Such supply disruptions may adversely impact our ability to generate
sales of and revenues from our products and our business, financial condition, results of operations and growth prospects could be adversely affected.
As the global pandemic of COVID-19 continues to rapidly evolve, it could result in a significant long-term disruption of global financial markets, reducing
our ability to access capital, which could in the future negatively affect our liquidity. The extent to which the COVID-19 pandemic impacts our business,
our ability to generate sales of and revenues from our approved products, and our future clinical development and regulatory efforts will depend on future
developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the
outbreak, travel restrictions, quarantines and social distancing requirements in the United States and other countries, business closures or business
disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus.
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Department of Defense
In April 2020, DSUVIA achieved Milestone C approval by the Department of Defense, or DoD, a decision that clears the path for the DoD to begin placing
orders for DSUVIA. In September 2020, we announced that DSUVIA was added to the DoD Joint Deployment Formulary, a core list of pharmaceutical
products that are designated for deploying military units across all service branches. Also in September 2020, the U.S. Army awarded AcelRx with an
initial contract of up to $3.6 million over the next four years for the purchase of DSUVIA to support a DoD-sponsored study to aid the development of
clinical practice guidelines.
Financial Overview
We have incurred net losses and generated negative cash flows from operations since inception and expect to incur losses in the future as we continue
commercialization activities to support the U.S. launch of DSUVIA, support European sales of Zalviso by any replacement partner, and any future research
and development activities needed to support the U.S. approval of Zalviso, once, and if, the NDA is resubmitted. As a result, we expect to continue to incur
operating losses and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.
We will incur capital expenditures related to the installation of our high-volume automated packaging line for DSUVIA, which we project will be installed
in the first half of 2021 with FDA approval expected in 2022. We anticipate that the high-volume line for DSUVIA will contribute to a significant decrease
in costs of goods sold in 2022 and beyond.
Our net losses were $40.4 million, $53.2 million and $47.1 million during the years ended December 31, 2020, 2019 and 2018, respectively. As of
December 31, 2020, we had an accumulated deficit of $438.5 million. As of December 31, 2020, we had cash, cash equivalents and short-term investments
totaling $42.9 million compared to $66.1 million as of December 31, 2019.
Critical Accounting Estimates
The accompanying discussion and analysis of our financial condition and results of operations are based upon our Consolidated Financial Statements and
the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our financial statements and
accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences
between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be
affected. Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying Notes to Consolidated Financial Statements
describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make
difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical
accounting estimates have the following attributes: (i) we are required to make assumptions about matters that are highly uncertain at the time of the
estimate; and (ii) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material
effect on our financial condition or results of operations.
We believe the following policies to be the most critical to an understanding of our financial condition and results of operations because they require us to
make estimates, assumptions and judgments about matters that are inherently uncertain. Management has discussed the development, selection and
disclosure of the following estimates with the Audit Committee.
Revenue from Contracts with Customers
We follow the provisions of ASC Topic 606, Revenue from Contracts with Customers. The guidance provides a unified model to determine how revenue is
recognized. We recognize revenue upon transfer of control of promised products or services to customers in an amount that reflects the consideration we
expect to receive in exchange for those products or services. We sell our products primarily through wholesale distributors.
In determining the appropriate amount of revenue to be recognized as we fulfill our obligations under our agreements, we perform the following steps:
(i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance
obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when
(or as) we satisfy each performance obligation.
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Product sales revenue
We sell our product primarily through distributors. Revenues from product sales are recognized when distributors obtain control of our product, which
occurs at a point in time, upon delivery to such distributors. These distributors subsequently resell the product to certified medically supervised healthcare
settings. In addition to distribution agreements with these customers, we enter into arrangements with group purchasing organizations, or GPOs, and other
certified medically supervised healthcare settings that provide for privately negotiated discounts with respect to the purchase of our products. For revenue
recognition under bill-and-hold arrangements, wherein the customer agrees to buy product from us but requests delivery at a later date, we deem that
control passes to the customer when the product is ready for delivery. We recognize revenue under these types of arrangements when a signed agreement is
in place, the transaction is billable, the customer has significant risk and rewards for the product and the ability to direct the asset, the product has been set
aside specifically for the customer, and the product cannot be redirected to another customer. Revenue from product sales is recorded at the transaction
price, net of estimates for variable consideration consisting of chargebacks, government rebates, returns, distribution fees and GPO fees. Variable
consideration is recorded at the time product sales are recognized resulting in a reduction in product revenue. The amount of variable consideration that is
included in the transaction price may be constrained and is included in the net sales price only to the extent that it is probable that a significant reversal in
the amount of the cumulative revenue recognized will not occur in a future period. Variable consideration is estimated using the most-likely amount
method, which is the single-most likely outcome under a contract and is typically at the stated contractual rate. Where appropriate, these estimates take into
consideration a range of possible outcomes that are probability-weighted in accordance with the expected value method under ASC Topic 606 for relevant
factors. These factors include current contractual and statutory requirements, specific known market events and trends, industry data, and/or forecasted
customer buying and payment patterns. Actual amounts of consideration ultimately received may differ from our estimates. If actual results vary materially
from our estimates, we will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted.
These estimates include:
Chargebacks - Our customers subsequently resell our product to qualified healthcare providers. In addition to distribution agreements with
customers, we enter into arrangements with qualified healthcare providers that provide for chargebacks and discounts with respect to the purchase
of our product. Chargebacks represent the estimated obligations resulting from contractual commitments to sell product to qualified healthcare
providers at prices lower than the list prices charged to customers who directly purchase the product from us. Customers charge us for the
difference between what they pay for the product and the ultimate selling price to the qualified healthcare providers. These reserves are established
in the same period that the related revenue is recognized, resulting in a reduction of product revenue and accounts receivable. Chargeback amounts
are determined at the time of resale to the qualified healthcare providers by customers, and we issue credits for such amounts generally within a
few weeks of the customer's notification to us of the resale. Reserves for chargebacks consists of credits that we expect to issue for units that
remain in the distribution channel inventories at each reporting period end that we expect will be sold to the qualified healthcare providers, and
chargebacks for units that our customers have sold to the qualified healthcare providers, but for which credits have not been issued.
Government Rebates - We are subject to discount obligations under state Medicaid programs. We estimate our Medicaid rebates and record them
in the same period the related product revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability
that is included in accrued liabilities on the Consolidated Balance Sheet.
Returns - We allow our distributors to return product for credit 6 months prior to, and up to 12 months after, the product expiration date. As such,
there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned product.
Distribution Fees - Distribution fees include fees paid to certain customers for sales order management, data and distribution services. Distribution
fees are recorded as a reduction of revenue in the period the related product revenue is recognized.
GPO Fees - We pay administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid after the
quarter in which the product was purchased by the GPOs’ members.
Trade Discounts and Allowances - We provide our customers with discounts which include early payment incentives that are explicitly stated in
our contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized.
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We believe our estimated allowances for chargebacks, government rebates and product returns require a high degree of judgment and are subject to change
based on our limited experience and certain quantitative and qualitative factors. We believe our estimated allowances for distribution fees, GPO fees and
trade discounts and allowances do not require a high degree of judgment because the amounts are settled within a relatively short period of time. We will
continue to assess our estimates of variable consideration as we accumulate additional historical data and will adjust these estimates accordingly. Changes
in product revenue allowance estimates could materially affect our results of operations and financial position.
Contract and other collaboration revenue
We entered into award contracts with the DoD to support the development of DSUVIA. These contracts provided for the reimbursement of qualified
expenses for research and development activities. Revenue under these arrangements was recognized when the related qualified research expenses were
incurred. We were entitled to reimbursement of overhead costs associated with the study costs under the DoD arrangements. We estimated this overhead
rate by utilizing forecasted expenditures. Final reimbursable overhead expenses were dependent on direct labor and direct reimbursable expenses
throughout the life of each contract, which increased or decreased based on actual expenses incurred.
We also generate revenue from collaboration agreements. These agreements typically include payments for upfront signing or license fees, cost
reimbursements for development and manufacturing services, milestone payments, product sales, and royalties on licensee’s future product sales. Product
sales related revenue under these collaboration agreements is classified as product sales revenue, while other revenue generated from collaboration
agreements is classified as contract and other collaboration revenue.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. Our
performance obligations include delivering product to our distributors, commercialization license rights, development services, services associated with the
regulatory approval process, joint steering committee services, demonstration devices, manufacturing services, material rights for discounts on
manufacturing services, and product supply.
We have optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the customer elects
such options. Arrangements that include a promise for future commercial product supply and optional research and development services at the customer’s
or our discretion are generally considered as options. We assess if these options provide a material right to the licensee and if so, such material rights are
accounted for as separate performance obligations. If we are entitled to additional payments when the customer exercises these options, any additional
payments are recorded in revenue when the customer obtains control of the goods or services.
Transaction Price
We have both fixed and variable consideration. Non-refundable upfront fees and product supply selling prices are considered fixed, while milestone
payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is considered
variable until such costs are reimbursed at which point, they are considered fixed. We allocate the total transaction price to each performance obligation
based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation.
At the inception of each arrangement that includes milestone payments, we evaluate whether the milestones are considered probable of being achieved and
estimate the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue reversal would
not occur, the value of the associated milestone (such as a regulatory submission by us) is included in the transaction price. Milestone payments that are not
within our control, such as approvals from regulators, are not considered probable of being achieved until those approvals are received.
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the
predominant item to which the royalties relate, we recognize revenue at the later of (a) when the related sales occur, or (b) when the performance obligation
to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Allocation of Consideration
As part of the accounting for these arrangements, we must develop assumptions that require judgment to determine the stand-alone selling price of each
performance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on manufacturing services are
calculated using an income approach model and can include the following key assumptions: the development timeline, sales forecasts, costs of product
sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and probabilities of technical
and regulatory success. For all other performance obligations, we use a cost-plus margin approach.
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Timing of Recognition
Significant management judgment is required to determine the level of effort required under an arrangement and the period over which we expect to
complete our performance obligations under the arrangement. We estimate the performance period or measure of progress at the inception of the
arrangement and re-evaluate it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is recognized. Changes to
these estimates are recorded on a cumulative catch-up basis. If we cannot reasonably estimate when our performance obligations either are completed or
become inconsequential, then revenue recognition is deferred until we can reasonably make such estimates. Revenue is then recognized over the remaining
estimated period of performance using the cumulative catch-up method. Revenue is recognized for products at a point in time when control of the product
is transferred to the customer in an amount that reflects the consideration we expect to be entitled to in exchange for those product sales, which is typically
once the product physically arrives at the customer, and for licenses of functional intellectual property at the point in time the customer can use and benefit
from the license. For performance obligations that are services, revenue is recognized over time proportionate to the costs that we have incurred to perform
the services using the cost-to-cost input method.
Inventories
Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Inventory
includes the cost of the active pharmaceutical ingredients, or API, raw materials and third-party contract manufacturing and packaging services. Indirect
overhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the units
produced or distributed, assuming normal capacity, in the applicable period. Indirect overhead costs in excess of normal capacity are recorded as period
costs in the period incurred. DSUVIA was approved by the FDA in November 2018. Prior to FDA approval, all manufacturing costs for DSUVIA were
expensed to research and development. Upon FDA approval, manufacturing costs for DSUVIA manufactured for commercial sale have been capitalized.
Our policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and inventory
in excess of expected requirements. We periodically evaluate the carrying value of inventory on hand for potential excess amount over demand using the
same lower of cost or net realizable value approach as that used to value the inventory. Because the predetermined, contractual transfer prices we received
from Grünenthal were less than the direct costs of manufacturing, all Zalviso inventories were carried at net realizable value.
Cost of Goods Sold
Cost of goods sold for product revenue includes third party manufacturing costs, shipping costs, and indirect overhead costs associated with production and
distribution which are allocated to the appropriate cost pool and recognized when revenue is recognized. Indirect overhead costs in excess of normal
capacity are recorded as period costs in the period incurred.
Under the Amended Agreements with Grünenthal, we sold Zalviso to Grünenthal at predetermined, contractual transfer prices that were less than the direct
costs of manufacturing and recognized indirect costs as period costs where they were in excess of normal capacity and not recoverable on a lower of cost or
net realizable value basis. Cost of goods sold for Zalviso shipped to Grünenthal includes the inventory costs of API, third-party contract manufacturing
costs, packaging and distribution costs, shipping, handling and storage costs, depreciation and costs of the employees involved with production.
Leases
In February 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), to enhance the transparency and
comparability of financial reporting related to leasing arrangements. We adopted the standard effective January 1, 2019.
At the inception of an arrangement, we determine whether the arrangement is or contains a lease based on the unique facts and circumstances present.
Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected lease
term. The interest rate implicit in lease contracts is typically not readily determinable. As such, we utilize our incremental borrowing rate, which is the rate
incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment. Certain
adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
Lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the balance sheet as right-of-use assets,
operating lease liabilities current and operating lease liabilities non-current. As a result, we no longer recognize deferred rent on the balance sheet.
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Research and Development Expenses
We expense research and development expenses as incurred. Research and development expenses consist primarily of direct and research-related allocated
overhead costs such as facilities costs, salaries and related personnel costs, and material and supply costs. In addition, research and development expenses
include costs related to clinical trials to validate our testing processes and procedures and related overhead expenses. Expenses resulting from clinical trials
are recorded when incurred based in part on factors such as estimates of work performed, patient enrollment, progress of patient studies and other events.
We make good faith estimates that we believe to be accurate, but the actual costs and timing of clinical trials are highly uncertain, subject to risks and may
change depending upon a number of factors, including our clinical development plan.
Stock-Based Compensation
We measure and recognize compensation expense for all stock-based payment awards made to our employees and directors, including employee stock
options, restricted stock units and employee stock purchases related to the Employee Share Purchase Plan, or ESPP, on estimated fair values. The fair value
of equity-based awards is amortized over the vesting period of the award using a straight-line method.
The Black-Scholes option pricing model requires inputs such as expected term, expected volatility and risk-free interest rate. These inputs are subjective
and generally require significant analysis and judgment to develop. The expected term, which represents the period of time that options granted are
expected to be outstanding, is derived by analyzing the historical experience of similar awards, giving consideration to the contractual terms of the
stock‑based awards, vesting schedules and expectations of future employee behavior. Expected volatilities are estimated using the historical stock price
performance over the expected term of the option, which are adjusted as necessary for any other factors which may reasonably affect the volatility of
AcelRx’s stock in the future. The risk‑free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for the expected term of the
award. We recognize forfeitures as they occur and do not anticipate paying any dividends in the near future.
Non-Cash Interest Expense on Liability Related to Sale of Future Royalties
In September 2015, we sold certain royalty and milestone payment rights from the sales of Zalviso in the European Union by our former commercial
partner, Grünenthal, pursuant to the Collaboration and License Agreement, dated as of December 16, 2013, as amended, to PDL for an upfront cash
purchase price of $65.0 million. Under the relevant accounting guidance, because of our significant continuing involvement, the Royalty Monetization has
been accounted for as a liability that will be amortized using the effective interest method over the life of the arrangement. In order to determine the
amortization of the liability, we are required to estimate the total amount of future royalty and milestone payments to be received by ARPI LLC and paid to
PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and milestone payments (subject to
the capped amount), less the $61.2 million of net proceeds we received, are recorded as interest expense over the life of the liability. Consequently, we
impute interest on the unamortized portion of the liability and record interest expense related to the Royalty Monetization accordingly.
During the three months ended June 30, 2020, Grünenthal notified us that it was terminating the Amended License Agreement, effective November 13,
2020. The terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it had under the
Grünenthal Agreements. The rights to market and sell Zalviso in the Territory revert back to us in May 2021.
There is a continuing obligation on our part, through the term of the Royalty Monetization, to use commercially reasonable efforts to negotiate a
replacement license agreement, or New Arrangement. However, without a New Arrangement to commercialize Zalviso in Europe, we are currently unable
to reliably estimate the future payments to PDL over the remaining life of the Royalty Monetization. If we are unable to find a New Arrangement, a
contingent gain of up to approximately $65 million may be recognized when it is realized upon expiration of the liability at the end of the Royalty
Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty Monetization, there are
significant uncertainties surrounding the amount and timing of future payments and the probability of realization of the estimated contingent gain.
We will record non-cash royalty revenues and non-cash interest (income) expense within our Consolidated Statements of Comprehensive Loss over the
term of the Royalty Monetization.
When the expected payments under the Royalty Monetization are lower than the gross proceeds of $65.0 million received, we defer recognition of any
probable contingent gain until the Royalty Monetization liability expires.
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Results of Operations
Our results of operations have fluctuated from period to period and may continue to fluctuate in the future, based upon the progress of our commercial
launch of DSUVIA, our research and development efforts, variations in the level of expenditures related to commercial launch, development efforts and
debt service obligations during any given period, and the uncertainty as to the extent and magnitude of the impact from the COVID-19 pandemic. Results
of operations for any period may be unrelated to results of operations for any other period. In addition, historical results should not be viewed as indicative
of future operating results. In particular, to the extent our commercial and medical affairs personnel continue to be subject to varying levels of restriction on
accessing hospitals and ambulatory surgical centers due to COVID-19, and to the extent government authorities and healthcare providers are continuing to
limit elective surgeries, we expect our sales volume to be adversely affected.
Years Ended December 31, 2020 and 2019
Revenue
Product Sales Revenue
Product sales revenue consists of sales of DSUVIA in the U.S. and Zalviso in Europe.
Product sales revenue by product for the years ended December 31, 2020 and 2019, was as follows (in thousands, except percentages):
DSUVIA
Zalviso
Total product sales revenue
Years Ended
December 31,
$ Change
% Change
2020
2019
2020 vs. 2019 2020 vs. 2019
$
$
1,409 $
1,112
2,521 $
377 $
1,453
1,830 $
1,032
(341)
691
274%
(23)%
38%
The increase in DSUVIA product sales revenue for the year ended December 31, 2020, as compared to the prior year, is primarily due to DoD purchases of
DSUVIA.
The decrease in Zalviso product sales revenue for the year ended December 31, 2020, as compared to the prior year, was primarily the result of decreased
orders from Grünenthal. As of December 31, 2020, we had current deferred revenue under the Grünenthal Agreements of $49.0 thousand.
Contract and Other Collaboration Revenue
Contract and other collaboration revenue includes revenue under the Grünenthal Agreements related to research and development services, non-cash
royalty revenue related to the Royalty Monetization and royalty revenue for sales of Zalviso in Europe.
Contract and other collaboration revenue for the years ended December 31, 2020 and 2019, was as follows (in thousands, except percentages):
Non-cash royalty revenue related to Royalty Monetization (See Note
8)
Royalty revenue
Other revenue
Total contract and other collaboration revenue
$
$
Years Ended
December 31,
$ Change
% Change
2020
2019
2020 vs. 2019 2020 vs. 2019
242 $
81
2,572
2,895 $
312 $
104
43
459 $
(70)
(23)
2,529
2,436
(22)%
(22)%
5,881%
531%
We estimate and recognize royalty revenue and non-cash royalty revenue on a quarterly basis. Adjustments to estimated revenue are recognized in the
subsequent quarter based on actual revenue earned per the royalty reports received from Grünenthal. In addition, under the Royalty Monetization, we sold a
portion of the expected royalty stream and commercial milestones from the European sales of Zalviso by Grünenthal to PDL. On August 31, 2020, PDL
announced it sold its royalty interest for Zalviso to SWK Funding, LLC.
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Cost of goods sold
As mentioned above, we commenced commercial sales of DSUVIA in the first quarter of 2019.
Total costs of goods sold for the years ended December 31, 2020 and 2019, were as follows (in thousands, except percentages):
Direct costs
Indirect costs
Total costs of goods sold
$
$
1,900 $
4,132
6,032 $
Years Ended
December 31,
2020
2019
$ Change
% Change
2020 vs. 2019 2020 vs. 2019
(625)
(149)
(774)
(25)%
(3)%
(11)%
2,525 $
4,281
6,806 $
Direct costs from contract manufacturers for DSUVIA and Zalviso totaled $1.9 million and $2.5 million in the years ended December 31, 2020 and 2019,
respectively. Direct cost of goods sold for DSUVIA and Zalviso includes the inventory costs of the active pharmaceutical ingredient, or API, third-party
contract manufacturing costs, estimated warranty costs, packaging and distribution costs, shipping, handling and storage costs.
We periodically evaluate the carrying value of inventory on hand for potential excess amounts over demand using the same lower of cost or net realizable
value approach as that used to value the inventory. During the year ended December 31, 2020, we recorded inventory impairment charges of $0.7 million,
of which $0.3 million related to the termination of the Grünenthal Agreements, and $0.4 million related to DSUVIA, primarily as a result of inventory that
may expire before being sold. During the year ended December 31, 2019, we recorded an inventory impairment reserve of approximately $1.0 million as a
result of an analysis to estimate potential DSUVIA inventory that may expire before being sold. This represented initial DSUVIA batches produced for
development and therefore represented shorter dated product than batches manufactured for commercial sale.
The indirect costs to manufacture DSUVIA and Zalviso totaled $4.1 million and $4.3 million in the years ended December 31, 2020 and 2019, respectively.
Indirect costs include internal personnel and related costs for purchasing, supply chain, quality assurance, depreciation and related expenses. We expect
these indirect costs to represent a smaller percentage of revenue as our product sales increase.
Research and Development Expenses
The majority of our operating expenses to date have been for research and development activities related to Zalviso and DSUVIA. Research and
development expenses included the following:
•
•
expenses incurred under agreements with contract research organizations and clinical trial sites;
employee-related expenses, which include salaries, benefits and stock-based compensation;
• payments to third party pharmaceutical and engineering development contractors;
• payments to third party manufacturers;
• depreciation and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities and equipment, and
equipment and laboratory and other supply costs; and
•
costs for equipment and laboratory and other supplies.
We expect to incur future research and development expenditures to support the FDA regulatory review of the Zalviso NDA, once, and if, it is resubmitted.
The timing of the resubmission of the Zalviso NDA is in part dependent on the finalization of the FDA’s new opioid approval guidelines and process.
We track external development expenses on a program-by-program basis. Our development resources are shared among all our programs. Compensation
and benefits, facilities, depreciation, stock-based compensation, and development support services are not allocated specifically to projects and are
considered research and development overhead.
66
Below is a summary of our research and development expenses for the years ended December 31, 2020 and 2019, were as follows (in thousands, except
percentages):
DSUVIA
Zalviso
Overhead
Total research and development expenses
$
$
812 $
95
3,110
4,017 $
Years Ended
December 31,
2020
2019
$ Change
% Change
2020 vs. 2019 2020 vs. 2019
154
(454)
(344)
(644)
23%
(83)%
(10)%
(14)%
658 $
549
3,454
4,661 $
Research and development expenses during the year ended December 31, 2020, as compared to the year ended December 31, 2019, decreased by $0.6
million primarily due to decreases in Zalviso-related spending and overhead expenses, partially offset by increases in DSUVIA-related spending.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consisted primarily of salaries, benefits and stock-based compensation for personnel engaged in
commercialization, administration, finance and business development activities. Other significant expenses included allocated facility costs and
professional fees for general legal, audit and consulting services.
Total selling, general and administrative expenses for the years ended December 31, 2020 and 2019, were as follows (in thousands, except percentages):
Selling, general and administrative expenses
Years Ended
December 31,
$ Change
% Change
2020
2019
2020 vs. 2019 2020 vs. 2019
$
36,330 $
45,027 $
(8,697)
(19)%
Selling, general and administrative expenses decreased by $8.7 million during the year ended December 31, 2020, as compared to the year ended December
31, 2019. The decrease is primarily due to net decreases in selling, general and administrative expenses including a $4.0 million reduction in personnel
costs, a $3.3 million reduction in DSUVIA commercialization-related expenses, and a $1.5 million reduction in travel-related expenses.
In March 2020, we eliminated 30 positions, mainly within the commercial organization. For additional information regarding the Restructuring Costs see
Note 1 “Organization and Summary of Significant Accounting Policies” in the accompanying notes to the Consolidated Financial Statements.
Other Income (Expense)
Total other income (expense) for the years ended December 31, 2020 and 2019, was as follows (in thousands, except percentages):
Interest expense
Interest income and other income (expense), net
Non-cash interest income (expense) on liability related to sale of future
royalties
Total other income (expense)
$
$
(3,305) $
583
3,310
588 $
Years Ended
December 31,
2020
2019
$ Change
% Change
2020 vs. 2019 2020 vs. 2019
(770)
(1,583)
30%
(73)%
(2,535) $
2,166
1,337
968 $
1,973
(380)
148%
(39)%
Interest expense consisted primarily of interest accrued or paid on our debt obligation agreements and amortization of debt discounts. Interest expense
increased for the year ended December 31, 2020, as compared to the year ended December 31, 2019, primarily as a result of a higher average outstanding
loan balance. As of December 31, 2020, the accrued balance due under the Loan Agreement with Oxford was $21.0 million. Refer to Note 6 “Long-Term
Debt” in the accompanying notes to the Consolidated Financial Statements for additional information.
Interest income and other income (expense), net, for the years ended December 31, 2020 and 2019 primarily consisted of interest earned on our
investments. The decrease in interest income and other income (expense), net, in the year ended December 31, 2020, compared to the year ended December
31, 2019, was primarily due to a lower average investment balance, combined with lower yields on those investments.
67
The non-cash interest income (expense) on the liability related to the sale of future royalties is attributable to the Royalty Monetization that we completed
in September 2015. As described in Note 8 “Liability Related to Sale of Future Royalties”, the Royalty Monetization has been recorded as debt under the
applicable accounting guidance. We periodically assess the expected royalty and milestone payments using a combination of historical results, internal
projections and forecasts from external sources. To the extent such payments are greater or less than our initial estimates or the timing of such payments is
materially different than our original estimates, we will prospectively adjust the amortization of the liability and the interest rate. During the three months
ended June 30, 2019, we made a material revision to our estimates as the expected payments under the Royalty Monetization are less than the $65.0 million
in gross proceeds received. The change in estimate reduced the effective interest rate over the life of the liability to 0% by recording interest income over
the remaining term of the arrangement, prospectively, as an offset to the interest expense that was recognized in prior periods, and resulted in a decrease of
$8.1 million to the net loss for the year ended December 31, 2019. The effective interest income rate for the years ended December 31, 2020 and 2019, was
approximately 3.6% and 1.4%, respectively. We anticipate that we will record approximately $3 million in non-cash interest income related to the Royalty
Monetization for the year ended December 31, 2021.
Liquidity and Capital Resources
Liquidity
We have incurred losses and generated negative cash flows from operations since inception. We expect to continue to incur significant losses in 2021 and
may incur significant losses and negative cash flows from operations in the future. We have funded our operations primarily through issuance of equity
securities, borrowings, payments from our commercial partner, Grünenthal, monetization of certain future royalties and commercial sales milestones from
the European sales of Zalviso by Grünenthal, funding of approximately $22.6 million from the DoD, and more recently with revenues from sales of
DSUVIA since the commercial launch in the first quarter of 2019.
As of December 31, 2020, we had cash, cash equivalents and investments totaling $42.9 million, compared to $66.1 million as of December 31, 2019. The
decrease was primarily due to cash required to fund our continuing operations, including debt service, as we continued our commercialization activities for
DSUVIA and support for Grünenthal’s European sales of Zalviso, as well as business development activities. We anticipate that our existing capital
resources will permit us to meet our capital and operational requirements for at least the next twelve months; however, our expectations may change
depending on a number of factors including the extent and magnitude of the impact from the COVID-19 pandemic, in particular the negative impact on
sales volumes as our sales force is limited in its access to potential customers, our expenditures related to the United States commercial launch of DSUVIA
and the timing of business development activities. Our existing capital resources will not be sufficient to fund our operations until such time as we may be
able to generate sufficient revenues to sustain our operations.
On July 23, 2020, we completed a registered direct offering in which we issued and sold 9,433,962 shares of our common stock at a price of $1.06 per
share. The total net proceeds from this offering were approximately $10.0 million.
On December 11, 2020, we completed a registered direct offering in which we issued and sold 8,333,333 shares of our common stock at a price of $1.20
per share. The total net proceeds from this offering were approximately $9.9 million.
On January 22, 2021, we completed an underwritten public offering in which we issued and sold 14,500,000 shares of our common stock to the underwriter
at a price of $1.7625 per share. On January 27, 2021, the underwriters exercised their option in full and purchased an additional 2,175,000 shares at a price
of $1.7625 per share. The total net proceeds from this offering of an aggregate 16,675,000 shares were approximately $28.9 million.
We have a Controlled Equity OfferingSM Sales Agreement, or, as amended, the ATM Agreement, with Cantor Fitzgerald & Co., or Cantor, as agent,
pursuant to which we may offer and sell, from time to time through Cantor, shares of our common stock. During the year ended December 31, 2020, we
issued and sold 876,800 shares of common stock pursuant to the ATM Agreement, for which we received net proceeds of approximately $1.4 million. As
of December 31, 2020, we had the ability to sell approximately $43.8 million of our common stock under the ATM Agreement. Subsequent to December
31, 2020, we issued and sold approximately 3.0 million additional shares of common stock and received additional net proceeds of approximately
$7.4 million, after deducting fees and expenses, under the ATM Agreement. As of March 4, 2021, we had the ability to sell approximately $36.2 million of
our common stock under the ATM Agreement.
On May 30, 2019, we entered into the Loan Agreement with Oxford. Under the Loan Agreement, we borrowed an aggregate principal amount of $25.0
million under a term loan and used approximately $8.9 million of the proceeds from the Loan to repay our outstanding obligations under the Prior
Agreement. After deducting all loan initiation costs and outstanding interest on the Prior Agreement, we received $15.9 million in net proceeds. As of
December 31, 2020, the accrued balance under the Loan Agreement was $21.0 million. For more information, see Note 6 “Long-Term Debt” in the
accompanying notes to the Consolidated Financial Statements.
68
On May 18, 2020, we received a notice from Grünenthal that it was exercising its right to terminate the Grünenthal Agreements. The terms of the
Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory. There is a continuing obligation on our part,
through the term of the Royalty Monetization, to use commercially reasonable efforts to negotiate a New Arrangement. The Royalty Monetization will be
repaid to SWK (assignee of PDL) over the life of the agreement through a portion of the European royalties and milestones received under the Grünenthal
Agreements and any New Arrangement, if executed. For more information, see Note 8 “Liability Related to the Sale of Future Royalties” in the
accompanying notes to the Consolidated Financial Statements.
Our cash and investment balances are held in a variety of interest-bearing instruments, including obligations of commercial paper, corporate debt securities,
U.S. government sponsored enterprise debt securities and money market funds. Cash in excess of immediate requirements is invested with a view toward
capital preservation and liquidity. We do not expect COVID-19 to have a material impact on our high quality, short-dated investments.
Cash Flows
Net cash used in operating activities
Net cash provided by (used in) investing activities
Net cash provided by financing activities
Cash Flows from Operating Activities
Years Ended December 31,
2019
2020
$
(38,505) $
34,139
16,956
(51,180)
(36,563)
14,452
The primary use of cash for our operating activities during these periods was to fund commercial readiness activities for our approved product, DSUVIA,
and our product candidate, Zalviso, in addition to the support of Grünenthal’s European sales of Zalviso. Our cash used in operating activities also reflected
changes in our working capital, net of adjustments for non-cash charges, such as depreciation and amortization of our fixed assets, stock-based
compensation, non-cash interest income (expense) related to the sale of future royalties and interest expense related to our debt financings.
Cash used in operating activities of $38.5 million during the year ended December 31, 2020, reflected a net loss of $40.4 million, partially offset by
aggregate non-cash charges of $4.2 million and included an approximate $2.3 million net change in our operating assets and liabilities. Non-cash charges
included $4.4 million for stock-based compensation expense, $3.3 million in non-cash interest income on the liability related to the Royalty Monetization,
$1.9 million in depreciation expense and $1.1 million in non-cash interest expense related to debt financing. The net change in our operating assets and
liabilities included a $1.0 million increase in accounts payable and a $3.2 million decrease in deferred revenue.
Cash used in operating activities of $51.2 million during the year ended December 31, 2019, reflected a net loss of $53.2 million, partially offset by
aggregate non-cash charges of $6.0 million. Non-cash charges included $5.1 million in stock-based compensation expense, $1.7 million in depreciation
expense, a $1.0 million inventory impairment charge and $0.7 million in non-cash interest income on the liability related to the Royalty Monetization. The
net change in our operating assets and liabilities of $3.9 million included a $3.4 million increase in inventories.
Cash Flows from Investing Activities
Our investing activities have consisted primarily of our capital expenditures and purchases and sales and maturities of our available-for-sale investments.
During the year ended December 31, 2020, cash provided by investing activities of $34.1 million was the net result of $80.6 million in proceeds from
maturity of investments, offset by $44.6 million for purchases of investments and purchases of property and equipment of $1.9 million.
During the year ended December 31, 2019, cash used in investing activities of $36.6 million was the net result of $100.1 million for purchases of
investments and $3.5 million for purchases of property and equipment, offset by $67.0 million in proceeds from maturity of investments.
69
Cash Flows from Financing Activities
Cash flows from financing activities primarily reflect proceeds from the sale of our securities and payments made on debt financings.
During the year ended December 31, 2020, cash provided by financing activities was primarily due to $21.3 million in net proceeds received in connection
with equity financings, and $0.4 million in net proceeds received through our equity plans, partially offset by $4.7 million used for payment of long-term
debt.
During the year ended December 31, 2019, cash provided by financing activities was primarily due to $24.8 million in net proceeds received in connection
with the Loan Agreement with Oxford, offset by $8.9 million for the repayment of the Prior Agreement, $3.5 million in payments of long-term debt under
the Prior Agreement, plus $1.2 million in net proceeds received under the Sales Agreement and $0.8 million in proceeds as a result of stock purchases
made under our 2011 Employee Stock Purchase Plan, or ESPP, and stock option exercises.
Operating Capital and Capital Expenditure Requirements
Our current operating plan includes expenditures related to the continued launch of DSUVIA in the United States. This plan includes an assumption that
COVID-19 related restrictions on access to potential customers and elective surgeries will continue to be lifted, as well as anticipated activities required to
resubmit the Zalviso NDA. These assumptions may change as a result of many factors. We will continue to evaluate the work necessary to successfully
launch DSUVIA and gain approval of Zalviso in the United States and intend to update our cash forecasts accordingly. Our forecast that our existing capital
resources will permit us to meet our capital and operational requirements for at least the next twelve months is a forward-looking statement that involves
risks and uncertainties, and actual results could vary materially.
Our future capital requirements may vary materially from our expectations based on numerous factors, including, but not limited to, the following:
•
•
•
•
•
•
•
•
the accuracy of our estimates regarding the sufficiency of our cash resources and expenses;
the impact and timing of COVID-19 on our operations, our sales representatives’ access to hospitals or other healthcare facilities, and our level of
sales;
expenditures related to the launch of DSUVIA and potential commercialization of Zalviso;
future manufacturing, selling and marketing costs related to DSUVIA and Zalviso, including our contractual obligations to Grünenthal or another
third party for Zalviso;
costs associated with business development activities and licensing transactions;
the outcome, timing and cost of the regulatory resubmission of Zalviso and any approval for Zalviso;
the initiation, progress, timing and completion of any post-approval clinical trials for DSUVIA, or Zalviso, if approved;
changes in the focus and direction of our business strategy and/or research and development programs;
• milestone and royalty revenue we receive under our collaborative development and commercialization arrangements;
• delays that may be caused by changing regulatory requirements;
•
•
•
•
•
•
the costs involved in filing and prosecuting patent applications and enforcing and defending patent claims;
the timing and terms of future in-licensing and out-licensing transactions;
the cost and timing of establishing sales, marketing, manufacturing and distribution capabilities;
the cost of procuring clinical and commercial supplies of DSUVIA and Zalviso;
the extent to which we acquire or invest in businesses, products or technologies; and
the expenses associated with any possible litigation.
In the long-term, our existing capital resources will not be sufficient to fund our operations until such time as we may be able to generate sufficient
revenues to sustain our operations. We will have to raise additional funds through the sale of our equity securities, monetization of current and future assets,
issuance of debt or debt-like securities or from development and licensing arrangements to sustain our operations and continue our development programs.
Please see “Part I., Item 1A. Risk Factors—Risks Related to Our Financial Condition and Need for Additional Capital.”
70
Off-Balance Sheet Arrangements
Through December 31, 2020, we have not entered into any off-balance sheet arrangements and do not have any holdings in variable interest entities.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, and are not
required to provide the information specified under this item.
Item 8. Financial Statements and Supplementary Data
The financial statements required by this item are attached to this Form 10-K beginning with page F-1.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We have carried out an evaluation, under the supervision, and with the participation, of management including our principal executive officer and principal
financial officer, of our disclosure controls and procedures (as defined in Rule 13a-15(e)) of the Securities Exchange Act of 1934, as amended, or the
Exchange Act) as of the end of the period covered by this Annual Report on Form 10–K. Based on their evaluation, our principal executive officer and
principal financial officer concluded that, subject to the limitations described below, our disclosure controls and procedures were effective as of
December 31, 2020.
Management’s Annual Report on Internal Control over Financial Reporting
The following report is provided by management in respect of AcelRx Pharmaceuticals’ internal control over financial reporting (as defined in Rules 13a-
15(f) and 15d-15(f) under the Exchange Act):
1. AcelRx Pharmaceuticals’ management is responsible for establishing and maintaining adequate internal control over financial reporting.
2. AcelRx Pharmaceuticals management has used the Committee of Sponsoring Organizations of the Treadway Commission, or COSO, framework
(2013 framework) to evaluate the effectiveness of internal control over financial reporting. Management believes that the COSO framework is a
suitable framework for its evaluation of financial reporting because it is free from bias, permits reasonably consistent qualitative and quantitative
measurements of AcelRx Pharmaceuticals’ internal control over financial reporting, is sufficiently complete so that those relevant factors that would
alter a conclusion about the effectiveness of AcelRx Pharmaceuticals’ internal control over financial reporting are not omitted and is relevant to an
evaluation of internal control over financial reporting.
3. Management has assessed the effectiveness of AcelRx Pharmaceuticals’ internal control over financial reporting as of December 31, 2020 and has
concluded that such internal control over financial reporting was effective.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange
Commission applicable to smaller reporting companies that permit us to provide only management's report in this Annual Report.
Changes in Internal Control over Financial Reporting
There have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially
affect, internal control over financial reporting during the fiscal quarter ended December 31, 2020.
Limitations on the Effectiveness of Controls.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control
system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if
any, within an organization have been detected. Accordingly, our disclosure controls and procedures and our internal control over financial reporting are
designed to provide reasonable, not absolute, assurance that the objectives of the control system are met. We continue to implement, improve and refine our
disclosure controls and procedures and our internal control over financial reporting.
Item 9B. Other Information
None.
71
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 11. Executive Compensation
Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related Transactions and Director Independence
Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
Item 14. Principal Accounting Fees and Services
Information responsive to this item is incorporated herein by reference to our definitive proxy statement with respect to our 2021 Annual Meeting of
Stockholders to be filed with the SEC within 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules
(a) The following documents are filed as part of this Form 10-K:
1. Financial Statements:
See Index to Financial Statements in Item 8 of this Form 10-K.
2. Financial Statement Schedules:
Reference is made to the financial statement schedules included under Item 8 of Part II hereof. All other schedules are omitted because they are not
applicable, not required or the information is shown in the financial statements or the notes thereto.
(b) Exhibits
Exhibit
Number
Exhibit Description
Incorporation By Reference
Form
SEC
File No.
Exhibit Filing Date
3.1 Amended and Restated Certificate of Incorporation of the Registrant.
8-K
001-35068
3.1 2/18/2011
3.2 Certificate of Amendment of Amended and Restated Certificate of Incorporation of the
8-K
001-35068
3.1 6/25/2019
Registrant.
72
Exhibit
Number
Exhibit Description
3.3 Amended and Restated Bylaws of the Registrant.
4.1 Description of Capital Stock.
4.2 Reference is made to Exhibits 3.1 through 3.3.
Incorporation By Reference
Form
S-1
SEC
File No.
Exhibit
Filing Date
333-170594
3.4 1/7/2011
4.3 Specimen Common Stock Certificate of the Registrant.
S-1
333-170594
4.2 1/31/2011
4.4 Form of Warrant to Purchase Common Stock of the Registrant, dated as of May 30, 2019.
8-K
001-35068
4.1 6/3/2019
10.1+ Form of Indemnification Agreement between the Registrant and each of its directors and
S-1
333-170594
10.1 1/7/2011
executive officers.
10.2+ 2011 Equity Incentive Plan.
S-8
333-172409
99.3 2/24/2011
10.3+ Forms of Stock Option Grant Notice, Notice of Exercise and Option Agreement under 2011
10-K
001-35068
10.5 3/30/2011
Equity Incentive Plan.
10.4+ Forms of Restricted Stock Unit Grant Notice and Restricted Stock Unit Agreement under
10-K
001-35068
10.6 3/30/2011
2011 Equity Incentive Plan.
10.5+ Form of Performance-Based Stock Option Award under 2011 Equity Incentive Plan.
10-Q
001-35068
10.2 5/10/2018
10.6+ 2020 Equity Incentive Plan.
S-8
333-239213
99.1 6/16/2020
10.7+ Forms of Stock Option Grant Notice, Stock Option Agreement and Notice of Exercise under
S-8
333-239213
99.2 6/16/2020
the 2020 Equity Incentive Plan.
10.8+ Forms of RSU Award Grant Notice and Award Agreement (RSU Award) under the 2020
S-8
333-239213
99.3 6/16/2020
Equity Incentive Plan.
10.9+ Amended and Restated 2011 Employee Stock Purchase Plan.
S-8
333-239213
99.4 6/16/2020
10.10 Lease between Metropolitan Life Insurance Company and the Registrant, dated December 15,
10-K
001-35068
10.9 3/23/2012
2011.
10.11 First Amendment to Lease between Metropolitan Life Insurance and the Registrant, dated
8-K
001-35068
10.1 5/7/2014
May 2, 2014
10.12 Second Amendment to Lease between Metropolitan Life Insurance and the Registrant, dated
8-K
001-35068
10.1 6/20/2017
June 14, 2017
10.13+ Amended and Restated Offer Letter between the Registrant and Badri (Anil) Dasu, dated
S-1
333-170594
10.15 1/7/2011
December 30, 2010.
10.14+ Amended and Restated Offer Letter between the Registrant and Pamela Palmer, dated
S-1
333-170594
10.16 1/7/2011
December 29, 2010.
10.15+ Offer Letter between the Registrant and Vincent J. Angotti, effective as of March 6, 2017.
10-Q
001-35068
10.4 5/8/2017
10.16+ Offer Letter between the Registrant and Raffi Asadorian, dated July 18, 2017.
8-K
001-35068
10.1 7/19/2017
10.17+ Non-Employee Director Compensation Policy.
10.18+ 2021 Cash Bonus Plan Summary.
10.19+ Amended and Restated Severance Benefit Plan effective as of February 7, 2017.
8-K
001-35068
10.2 2/9/2017
73
Exhibit
Number
Exhibit Description
10.20 Manufacturing Services Agreement between Registrant and Patheon Pharmaceuticals, Inc.,
dated as of January 18, 2013
Incorporation By Reference
Form
10-Q
SEC
File No.
001-35068
Exhibit
Filing Date
10.1 5/8/2013
10.21 Amended and Restated Capital Expenditure Agreement between Registrant and Patheon
10-Q
001-35068
10.2 5/8/2013
Pharmaceuticals, Inc., dated as of January 18, 2013
10.22 Second Amendment to Amended and Restated Capital Expenditure and Equipment
10-Q
001-35068
10.4 5/8/2014
Agreement, between the Registrant and Patheon Pharmaceuticals, Inc. effective as of January
30, 2014.
10.23# Amendment #1 to Manufacturing Services Agreement between the Registrant and Patheon
10-Q
001-35068
10.6 5/2/2016
Pharmaceuticals, Inc., effective as of January 19, 2016.
10.24# Amendment #2 to Manufacturing Services Agreement between the Registrant and Patheon
10-Q
001-35068
10.1 11/9/2017
Pharmaceuticals, Inc., effective as of August 4, 2017.
10.25# Purchase and Sale Agreement between Registrant and ARPI LLC, dated as of September 18,
10-Q
001-35068
10.6 11/3/2015
2015.
10.26# Subsequent Purchase and Sale Agreement between ARPI LLC (a wholly owned subsidiary of
10-Q
001-35068
10.7 11/3/2015
the Registrant) and SWK Funding, LLC (assigned of PDL BioPharma, Inc.), dated as of
September 18, 2015.
10.27 Controlled Equity OfferingSM Sales Agreement between the Registrant and Cantor Fitzgerald
8-K
001-35068
10.1 6/21/2016
& Co., dated as of June 21, 2016.
10.28 Amendment No. 1 to the Controlled Equity OfferingSM Sales Agreement between the
S-3
333-239156
1.3 6/12/2020
Registrant and Cantor Fitzgerald & Co., dated as of August 29, 2020.
10.29 Sublease by and between Registrant and Genomic Health, Inc. dated as of November 30,
10-K
001-35068
10.44 3/7/2019
2018.
10.30 Loan and Security Agreement between the Registrant and Oxford Finance, LLC, dated as of
8-K
001-35068
10.1 6/3/2019
May 30, 2019
10.31# Agreement between the Registrant and SpecGX, LLC, dated June 16, 2017.
10-Q
001-35068
10.1 11/7/2019
10.32 Amendment to Agreement between the Registrant and SpecGX, LLC, dated September 23,
10-Q
001-35068
10.2 11/7/2019
2019.
10.33§ Distribution Agreement between the Registrant and Biomet 3i LLC d/b/a Zimmer Biomet
10-Q
001-35068
10.1 11/5/2020
Dental, dated July 17, 2020.
10.34§ Promotion Agreement among the Registrant, La Jolla Pharmaceutical Company and
10-Q
001-35068
10.3 11/5/2020
Tetraphase Pharmaceuticals, Inc., effective September 30, 2020.
21.2 Subsidiaries of the Registrant.
74
Incorporation By Reference
Form
SEC
File No.
Exhibit
Filing Date
Exhibit
Number
Exhibit Description
23.1 Consent of OUM & Co. LLP, Independent Registered Public Accounting Firm.
24.1 Power of Attorney (included in signature page).
31.1 Certification of Principal Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
31.2 Certification of Principal Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a)
promulgated under the Securities Exchange Act of 1934, as amended.
32.1 Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS XBRL Instance Document- the instance document does not appear in the Interactive Data
File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Schema Document
101.CAL XBRL Taxonomy Calculation Linkbase Document
101.DEF XBRL Taxonomy Definition Linkbase Document
101.LAB XBRL Taxonomy Label Linkbase Document
101.PRE XBRL Taxonomy Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL with applicable taxonomy
extension information contained in Exhibits 101.INS, 101.SCH, 101.CAL, 101.DEF,
101.LAB, and 101.PRE).
§
+
#
Schedules omitted pursuant to Item 601(a)(5) of Regulation S-K. The Registrant agrees to furnish supplementally a copy of any omitted schedule
upon request by the SEC.
Indicates management contract or compensatory plan.
Material in the exhibit marked with am “[*]” has been omitted because it is confidential, not material, and would be competitively harmful if
publicly disclosed.
The certifications attached as Exhibit 32.1 accompany this Annual Report on Form 10-K pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, and shall not be deemed “filed” by the Registrant for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended.
Item 16. Form 10-K Summary
None.
75
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SIGNATURES
Date: March 15, 2021
AcelRx Pharmaceuticals, Inc.
(Registrant)
/s/ Vincent J. Angotti
Vincent J. Angotti
Chief Executive Officer and Director
(Principal Executive Officer)
/s/ Raffi Asadorian
Raffi Asadorian
Chief Financial Officer
(Principal Financial and Accounting Officer)
76
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Vincent J. Angotti and
Raffi Asadorian, and each of them, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution for him or her, and in his or her
name in any and all capacities, to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full
power and authority to do and perform each and every act and thing requisite and necessary to be done therewith, as fully to all intents and purposes as he
or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, and any of them, his or her substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature
/s/ Vincent J. Angotti
Vincent J. Angotti
/s/ Raffi Asadorian
Raffi Asadorian
/s/ Adrian Adams
Adrian Adams
/s/ Pamela P. Palmer, M.D., Ph.D.
Pamela P. Palmer, M.D., Ph.D.
/s/ Mark G. Edwards
Mark G. Edwards
/s/ Stephen J. Hoffman, Ph.D., M.D.
Stephen J. Hoffman, Ph.D., M.D.
/s/ Richard Afable, M.D.
Richard Afable, M.D.
/s/ Howard B. Rosen
Howard B. Rosen
/s/ Mark Wan
Mark Wan
Title
Chief Executive Officer and Director
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial and Accounting Officer)
Chairman
Director
Director
Director
Director
Director
Director
77
Date
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
March 15, 2021
ACELRX PHARMACEUTICALS, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets at December 31, 2020 and 2019
Consolidated Statements of Comprehensive Loss for each of the three years in the period ended December 31, 2020
Consolidated Statements of Stockholders’ Equity (Deficit) for each of the three years in the period ended December 31, 2020
Consolidated Statements of Cash Flows for each of the three years in the period ended December 31, 2020
Notes to Consolidated Financial Statements
Financial Statement Schedule II
F-1
Page
F-2
F-4
F-5
F-6
F-7
F-8
F-34
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Stockholders and Board of Directors
AcelRx Pharmaceuticals, Inc.
Redwood City, California
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of AcelRx Pharmaceuticals, Inc. (the “Company”) as of December 31, 2020 and 2019, the
related consolidated statements of comprehensive loss, stockholders’ equity (deficit), and cash flows for each of the three years in the period ended
December 31, 2020, and the related notes and schedule (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated
financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2020 and 2019, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally
accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s
consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an
understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or
fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and
disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis
for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was
communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated
financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not
alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below,
providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Product Revenue Allowances for Chargebacks, Government Rebates and Product Returns
Description of the Matter
As described in Note 1 to the consolidated financial statements, revenue from product sales is recorded at the transaction price, net of estimates for variable
consideration consisting of chargebacks, government rebates, returns, distribution fees, GPO fees and product returns. Variable consideration is recorded at
the time product sales are recognized, resulting in a reduction in product revenue. The variable consideration provisions are recorded within accrued and
other current liabilities or as a reduction of accounts receivable. Liabilities related to government rebates and rebate programs of managed healthcare
organizations involve the use of significant assumptions and judgments in their calculation. These significant assumptions and judgments include
consideration of legal interpretations of applicable laws and regulations, historical claims experience, the payer channel mix, current contract prices,
unbilled claims, claims submission time lags, and inventory levels in the distribution channel. Product return provisions are estimated utilizing existing
return policies with customers, historical sales and return rates, inventory levels in the distribution channel, and product shelf lives.
F-2
Management’s estimated allowance for chargebacks, government rebates, and product returns requires a high degree of judgment and is subject to change
based on various quantitative and qualitative factors. Accordingly, extensive audit effort and a high degree of auditor judgment were needed to evaluate
management’s estimates and assumptions used in the determination of chargebacks, government rebates, and product returns.
How We Addressed the Matter in Our Audit
We obtained an understanding of and evaluated the design of controls relating to the Company’s processes for estimating chargebacks, government rebates,
and product returns.
We evaluated the significant accounting policies relating to chargebacks, government rebates, and product returns, as well as management’s application of
the policies, for appropriateness and reasonableness.
To test management’s estimates of chargebacks, rebates and returns, we obtained management’s calculations for the respective estimates and performed one
or more of the following procedures: clerically tested the calculation, agreed relevant inputs to the terms of relevant contracts, performed retrospective
reviews, performed a sensitivity analysis on the inputs and assumptions used in the estimates and assessed subsequent events, evaluated the methodologies
and assumptions used and the underlying data used by the Company, evaluated the assumptions used by management against historical trends, evaluated
the change in estimated accruals from the prior periods, and assessed the historical accuracy of the Company’s estimates against actual results.
/s/ OUM & CO. LLP
San Francisco, California
March 15, 2021
We have served as the Company's auditor since 2015.
F-3
AcelRx Pharmaceuticals, Inc.
Consolidated Balance Sheets
(in thousands, except share data)
Assets
Current Assets:
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventories, net
Prepaid expenses and other current assets
Total current assets
Operating lease right-of-use assets
Property and equipment, net
Other assets
Total Assets
Liabilities and Stockholders’ Deficit
Current Liabilities:
Accounts payable
Accrued liabilities
Long-term debt, current portion
Deferred revenue, current portion
Operating lease liabilities, current portion
Liability related to the sale of future royalties, current portion
Total current liabilities
Long-term debt, net of current portion
Deferred revenue, net of current portion
Operating lease liabilities, net of current portion
Liability related to the sale of future royalties, net of current portion
Other long-term liabilities
Total liabilities
Commitments and Contingencies
Stockholders’ Deficit:
December 31, 2020
December 31,
2019
$
$
$
27,274 $
15,612
635
1,626
1,683
46,830
3,150
15,659
656
66,295 $
2,737 $
4,890
8,735
49
1,118
106
17,635
13,140
—
2,606
88,365
299
122,045
14,684
51,453
432
3,295
1,824
71,688
3,928
14,552
1,188
91,356
1,720
5,528
4,630
411
970
352
13,611
20,517
2,833
3,640
91,683
490
132,774
Common stock, $0.001 par value—200,000,000 shares authorized as of December 31, 2020 and 2019;
98,812,008 and 79,573,101 shares issued and outstanding as of December 31, 2020 and 2019,
respectively
Additional paid-in capital
Accumulated deficit
Total stockholders’ deficit
Total Liabilities and Stockholders’ Deficit
98
382,637
(438,485)
(55,750)
66,295 $
79
356,609
(398,106)
(41,418)
91,356
$
See notes to consolidated financial statements.
F-4
AcelRx Pharmaceuticals, Inc.
Consolidated Statements of Comprehensive Loss
(in thousands, except share and per share data)
Revenue:
Product sales
Contract and other collaboration
Total revenue
Operating costs and expenses:
Cost of goods sold
Research and development
Selling, general and administrative
Total operating costs and expenses
Loss from operations
Other income (expense):
Interest expense
Interest income and other income, net
Non-cash interest income (expense) on liability related to sale of future
royalties
Total other income (expense)
Net loss before income taxes
Provision for income taxes
Net loss
Comprehensive loss
Net loss per share of common stock, basic and diluted
Year Ended December 31,
2020
2019
2018
2,521 $
2,895
5,416
6,032
4,017
36,330
46,379
1,830 $
459
2,289
6,806
4,661
45,027
56,494
825
1,326
2,151
3,976
13,137
20,765
37,878
(40,963)
(54,205)
(35,727)
(3,305)
583
3,310
588
(40,375)
4
(40,379)
(2,535)
2,166
1,337
968
(53,237)
3
(53,240)
(2,217)
1,138
(10,341)
(11,420)
(47,147)
2
(47,149)
(40,379) $
(53,240) $
(47,149)
(0.47) $
(0.67) $
(0.81)
$
$
$
Shares used in computing net loss per share of common stock, basic and diluted –see
Note 13
85,257,008
79,184,266
58,408,548
See notes to consolidated financial statements.
F-5
AcelRx Pharmaceuticals, Inc.
Consolidated Statements of Stockholders’ Equity (Deficit)
(in thousands, except share data)
Balance as of December 31, 2017
Stock-based compensation
Net proceeds from issuance of common stock in connection
with equity financings
Issuance of common stock upon exercise of stock options
Issuance of common stock upon exercise of warrants
Issuance of common stock upon ESPP purchase
Net loss
Balance as of December 31, 2018
Cumulative effect adjustment for adoption of ASU No. 2016-
02
Stock-based compensation
Net proceeds from issuance of common stock in connection
with equity financings
Issuance of common stock upon exercise of stock options
Issuance of common stock upon ESPP purchase
Issuance of warrants related to debt financing
Net loss
Balance as of December 31, 2019
Stock-based compensation
Restricted stock units vested
Tax payments related to shares withheld for restricted stock
units vested
Net proceeds from issuance of common stock in connection
with equity financings
Issuance of common stock upon ESPP purchase
Net loss
Balance as of December 31, 2020
Common
Stock
Shares
50,899,154 $
—
27,364,301
135,385
176,730
182,360
—
78,757,930
—
—
500,000
111,702
203,469
—
—
79,573,101
—
254,684
—
18,644,095
340,128
—
98,812,008 $
Additional
Paid-in
Capital
Amount
Accumulated
Deficit
Total
Stockholders’
Equity
(Deficit)
51 $
—
261,310 $
5,168
(297,870) $
—
81,498
401
542
275
—
349,194
—
5,057
1,233
270
472
383
—
356,609
4,424
—
—
—
—
—
(47,149)
(345,019)
153
—
—
—
—
—
(53,240)
(398,106)
—
—
(36,509)
5,168
81,525
401
542
275
(47,149)
4,253
153
5,057
1,233
270
473
383
(53,240)
(41,418)
4,424
—
(86)
—
(86)
21,318
372
—
382,637 $
—
—
(40,379)
(438,485) $
21,337
372
(40,379)
(55,750)
27
—
—
—
—
78
—
—
—
—
1
—
—
79
—
—
—
19
—
—
98 $
See notes to consolidated financial statements.
F-6
AcelRx Pharmaceuticals, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2020
2019
2018
$
(40,379) $
(53,240) $
(47,149)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Non-cash royalty revenue related to royalty monetization
Non-cash interest (income) expense on liability related to royalty
monetization
Depreciation and amortization
Non-cash interest expense related to debt financing
Stock-based compensation
Other
Changes in operating assets and liabilities:
Accounts receivable
Inventories
Prepaid expenses and other assets
Accounts payable
Accrued liabilities
Operating lease liabilities
Deferred revenue
Net cash used in operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment
Purchase of investments
Proceeds from maturities of investments
Net cash provided by (used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt
Payment of costs in connection with refinancing of long-term debt
Payment of long-term debt
Extinguishment of debt
Net proceeds from issuance of common stock in connection with equity
financings
Net proceeds from issuance of common stock through equity plans
Tax payments related to shares withheld for restricted stock units vested
Net cash provided by financing activities
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS
CASH, CASH EQUIVALENTS —Beginning of period
CASH, CASH EQUIVALENTS —End of period
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest
Income taxes (refunded) paid
NONCASH INVESTING AND FINANCING ACTIVITIES:
Purchases of property and equipment in accounts payable
Leasehold paid with note payable
Transfer of tenant improvement allowance to sublease
Establishment of right-of-use asset due to the adoption of ASU 2016-02
$
$
$
$
$
$
$
(242)
(312)
(3,310)
1,853
1,069
4,424
368
(203)
957
661
1,016
(638)
(886)
(3,195)
(38,505)
(1,855)
(44,611)
80,605
34,139
—
—
(4,667)
—
21,337
372
(86)
16,956
12,590
14,684
27,274 $
2,269 $
(347) $
— $
326 $
— $
— $
(1,337)
1,668
712
5,057
178
(383)
(3,392)
(333)
(19)
1,141
(701)
(219)
(51,180)
(3,470)
(100,068)
66,975
(36,563)
25,000
(190)
(3,470)
(8,864)
1,233
743
—
14,452
(73,291)
87,975
14,684 $
1,712 $
(350) $
— $
899 $
242 $
4,730 $
(289)
10,341
575
613
5,168
(201)
1,484
102
(850)
458
922
—
(249)
(29,075)
(819)
(30,558)
20,500
(10,877)
—
—
(7,718)
—
81,525
1,218
—
75,025
35,073
52,902
87,975
1,667
2
410
—
—
—
See notes to consolidated financial statements.
F-7
1. Organization and Summary of Significant Accounting Policies
The Company
AcelRx Pharmaceuticals, Inc., or the Company or AcelRx, was incorporated in Delaware on July 13, 2005 as SuRx, Inc., and in January 2006, the
Company changed its name to AcelRx Pharmaceuticals, Inc. The Company’s operations are based in Redwood City, California.
AcelRx is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for use in medically supervised
settings. DSUVIA® (known as DZUVEOTM in Europe) and Zalviso® are both focused on the treatment of acute pain, and each utilize sufentanil, delivered
via a non-invasive route of sublingual administration, exclusively for use in medically supervised settings. On November 2, 2018, the U.S. Food and Drug
Administration, or FDA, approved DSUVIA for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and
emergency departments, for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are
inadequate. The commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. In June 2018, the European Commission, or EC,
granted marketing approval of DZUVEO for the treatment of patients with moderate-to-severe acute pain in medically monitored settings. AcelRx is
further developing a distribution capability and commercial organization to continue to market and sell DSUVIA in the United States. In geographies where
AcelRx decides not to commercialize products by itself, the Company may seek to out-license commercialization rights. The Company currently intends to
commercialize and promote DSUVIA/DZUVEO outside the United States with one or more strategic partners, although it has not yet entered into any such
arrangement. The timing of the resubmission of the Zalviso new drug application, or NDA, is in part dependent upon the finalization of the FDA’s new
opioid approval guidelines and process. AcelRx intends to seek regulatory approval for Zalviso in the United States and, if successful, potentially promote
Zalviso either by itself or with strategic partners. Zalviso is approved in Europe and will be commercialized by Grünenthal GmbH, or Grünenthal, through
May 2021 (see Termination of Grünenthal Amended Agreements below).
The Company has incurred recurring operating losses and negative cash flows from operating activities since inception. Although Zalviso was approved for
sale in Europe on September 18, 2015, the Company sold the majority of the royalty rights and certain commercial sales milestones it is entitled to receive
under the Amended License Agreement (defined below) with Grünenthal to PDL BioPharma, Inc., or PDL, in a transaction referred to as the Royalty
Monetization. In consideration of the termination of the Amended License Agreement, under the Royalty Monetization, the Company must use
commercially reasonable efforts to negotiate a replacement license agreement with a third party. The Company expects to continue to incur operating losses
and negative cash flows until such time as DSUVIA has gained market acceptance and generated significant revenues.
DSUVIA/DZUVEO
DSUVIA, known as DZUVEO in Europe, approved by the FDA in November 2018 and granted marketing approval by the EC in June 2018, is indicated
for use in adults in a certified medically supervised healthcare setting, such as hospitals, surgical centers, and emergency departments, for the management
of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. DSUVIA was designed to provide rapid
analgesia via a non-invasive route and to eliminate dosing errors associated with IV administration. DSUVIA is a single-strength solid dosage form
administered sublingually via a single-dose applicator, or SDA, by healthcare professionals. Sufentanil is an opioid analgesic currently marketed for
intravenous, or IV, and epidural anesthesia and analgesia. The sufentanil pharmacokinetic profile when delivered sublingually avoids the high peak plasma
levels and short duration of action observed with IV administration.
DSUVIA was approved with a Risk Evaluation and Mitigation Strategy, or REMS, which restricts distribution to certified medically supervised healthcare
settings in order to prevent respiratory depression resulting from accidental exposure. DSUVIA is only distributed to facilities certified in the DSUVIA
REMS program following attestation by an authorized representative to comply with appropriate dispensing and use restrictions of DSUVIA. To become
certified, a healthcare setting is required to train their healthcare professionals on the proper use of DSUVIA and have the ability to manage respiratory
depression. DSUVIA is not available in retail pharmacies or for outpatient use. As part of the REMS program, the Company monitors distribution and
audits wholesalers’ data, evaluates proper usage within the healthcare settings and monitors for any diversion and abuse. AcelRx will de-certify healthcare
settings that are non-compliant with the REMS program.
Promotion Agreement
On March 15, 2020, the Company entered into the Agreement and Plan of Merger (as amended on May 27, 2020 and May 29, 2020, the Merger
Agreement) and a Co-Promotion Agreement, or the Co-Promotion Agreement, with Tetraphase Pharmaceuticals, Inc., or Tetraphase, to co-promote
DSUVIA and Tetraphases’s XERAVA™ (eravacycline). On June 4, 2020, Tetraphase terminated the Merger Agreement pursuant to its terms and paid
AcelRx a termination fee . Net of the termination fee, the Company incurred charges of approximately $1.1 million in connection with the Merger
Agreement. On July 28, 2020, Tetraphase was acquired by La Jolla Pharmaceutical Company, or La Jolla. On October 1, 2020, the Company entered into a
Promotion Agreement, or the Promotion Agreement, with La Jolla and Tetraphase, effective as of September 30, 2020, pursuant to which the Company, La
Jolla and Tetraphase restructured their co-promotion arrangement, with La Jolla agreeing to detail and promote DSUVIA and AcelRx and Tetraphase
agreeing to terminate the Co-Promotion Agreement between them.
F- 8
Under the terms of this agreement, La Jolla is responsible for maintaining compliance under the agreed marketing and promotion plan and achieving a
minimum number of sales calls per calendar quarter. The Company will not detail and promote XERAVA™ (eravacycline) under this agreement.
The Promotion Agreement has a two-year term. The Company may terminate the agreement upon 30 days’ notice. After one year, La Jolla may terminate
the agreement upon 30 days’ notice and may do so earlier in the event the Company undergoes a change of control and change in management. The
Company pay La Jolla a revenue share on net sales of DSUVIA in the sales territories covered by the Promotion Agreement, other than sales to certain
excluded accounts. These sales territories do not overlap with the territories covered by the Company’s sales force. If La Jolla fails to meet its detailing
requirements in a given calendar quarter, it will pay the Company a royalty on net sales of XERAVA in the United States during such quarter.
There were no material revenues or expenses related to the Promotion Agreement in the year ended December 31, 2020.
Distribution Agreement
On July 17, 2020, the Company entered into a distribution agreement, or the Distribution Agreement, with Zimmer Biomet Dental, or ZB Dental, pursuant
to which ZB Dental obtained the exclusive right to promote, market, sell, and arrange to distribute DSUVIA in the United States to clinicians, dentists,
surgeons and other licensed health care practitioners that perform dental (including specialty dental), oral-maxillofacial, cranio-maxillofacial or oral surgery
procedures, or Professionals, and their respective institutions and facilities that are permitted to use DSUVIA.
ZB Dental’s distribution rights are non-exclusive for crossover ambulatory surgery centers and certain government customers, and do not extend to
ambulatory care centers outside the class of trade or into hospitals. ZB Dental will conduct any distribution activities in a manner consistent with
DSUVIA’s FDA-approved indication and REMS program, and within the parameters established in the Distribution Agreement. ZB Dental has the right to
sublicense its distribution rights to its qualified marketing partners but may not otherwise sublicense its distribution rights to any third party without our
prior written consent.
There were no material revenues or expenses related to the Distribution Agreement in the year ended December 31, 2020.
Zalviso
Zalviso delivers 15 mcg sufentanil sublingually through a non-invasive delivery route via a pre-programmed, patient-controlled analgesia, or PCA, system.
Zalviso is approved in Europe and is in late-stage development in the United States. The Company had initially submitted to the FDA an NDA seeking
approval for Zalviso in September 2013 but received a complete response letter, or CRL, on July 25, 2014. Subsequently, the FDA requested an additional
clinical study, IAP312, designed to evaluate the effectiveness of changes made to the functionality and usability of the Zalviso device and to take into
account comments from the FDA on the study protocol. In the IAP312 study, for which top-line results were announced in August 2017, Zalviso met
safety, satisfaction and device usability expectations. These results will supplement the three Phase 3 trials already completed in the Zalviso NDA
resubmission.
Termination of Grünenthal Amended Agreements
On December 16, 2013, AcelRx and Grünenthal entered into a Collaboration and License Agreement, or the License Agreement, which was amended
effective July 17, 2015 and September 20, 2016, or the Amended License Agreement, which granted Grünenthal rights to commercialize the Zalviso PCA
system, or the Product, in the 28 European Union, or EU, member states, at the time of the agreement, plus Switzerland, Liechtenstein, Iceland, Norway
and Australia (collectively, the Territory) for human use in pain treatment within, or dispensed by, hospitals, hospices, nursing homes and other medically
supervised settings, (collectively, the Field). In September 2015, the EC granted marketing approval for the marketing authorization application, or MAA,
previously submitted to the EMA, for Zalviso for the management of acute moderate-to-severe post-operative pain in adult patients. On December 16,
2013, AcelRx and Grünenthal, entered into a Manufacture and Supply Agreement, or the MSA, and together with the License Agreement, the Agreements.
Under the MSA, the Company exclusively manufactured and supplied the Product to Grünenthal for the Field in the Territory. On July 22, 2015, the
Company and Grünenthal amended the MSA, or the Amended MSA, effective as of July 17, 2015. The Amended MSA and the Amended License
Agreement are referred to as the Grünenthal Agreements.
On May 18, 2020, the Company received a notice from Grünenthal that it had exercised its right to terminate the Grünenthal Agreements, effective
November 13, 2020. The terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory, a right it
had under the Grünenthal Agreements. The rights to market and sell Zalviso in the European Union, Switzerland, Liechtenstein, Iceland, Norway and
Australia, or the Territory, will revert back to the Company in May 2021.
F- 9
Except as the context otherwise requires, when we refer to "we," "our," "us," the "Company" or "AcelRx" in this document, we mean AcelRx
Pharmaceuticals, Inc., and its consolidated subsidiary. “DZUVEO” is a trademark, and “ACELRX”, “DSUVIA” and “Zalviso” are registered trademarks,
all owned by AcelRx Pharmaceuticals, Inc. This report also contains trademarks and trade names that are the property of their respective owners.
Basis of Presentation
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the Consolidated Financial Statements and the accompanying notes. Actual results could differ from those
estimates.
Reclassifications
Certain prior year amounts in the Consolidated Financial Statements have been reclassified to conform to the current year's presentation. In particular, the
amounts reported in the Consolidated Balance Sheets as tax receivable and long-term tax receivable have been reclassified to prepaid expenses and other
current assets, and other assets, respectively, at December 31, 2019. In addition, the amounts reported in the Consolidated Statements of Cash Flows as
inventory impairment have been reclassified to other for the years ended December 31, 2019 and 2018, the amounts reported as tax receivable and other
assets have been reclassified to prepaid expenses and other assets for the year ended December 31, 2019, and the amount reported as deferred rent has been
reclassified to prepaid expenses and other assets for the year ended December 31, 2018.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of the Company and its wholly owned subsidiary, ARPI LLC, which was formed in September
2015 for the sole purpose of facilitating the Royalty Monetization with PDL of the expected royalty stream and milestone payments due from the sales of
Zalviso in the European Union by its commercial partner, Grünenthal, pursuant to the Amended License Agreement. All intercompany accounts and
transactions have been eliminated in consolidation. Refer to Note 8 “Liability Related to Sale of Future Royalties” for additional information.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Management evaluates its
estimates on an ongoing basis including critical accounting policies. Estimates are based on historical experience and on various other market-specific and
other relevant assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Cash, Cash Equivalents and Short-Term Investments
The Company considers all highly liquid investments with an original maturity (at date of purchase) of three months or less to be cash equivalents. Cash
and cash equivalents consist of cash on deposit with banks.
All marketable securities are classified as available-for-sale and consist of commercial paper, U.S. government sponsored enterprise debt securities and
corporate debt securities. These securities are carried at estimated fair value, which is based on quoted market prices or observable market inputs of almost
identical assets, with unrealized gains and losses included in accumulated other comprehensive income (loss). The amortized cost of securities is adjusted
for amortization of premiums and accretion of discounts to maturity. Such amortization and accretion is included in interest income or expense. The cost of
securities sold is based on specific identification. The Company’s investments are subject to a periodic impairment review for other-than-temporary
declines in fair value. The Company’s review includes the consideration of the cause of the impairment including the creditworthiness of the security
issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses and the Company’s intent and ability to
hold the investment for a period of time sufficient to allow for any anticipated recovery in the market value. When the Company determines that the decline
in fair value of an investment is below its accounting basis and this decline is other-than-temporary, it reduces the carrying value of the security it holds and
records a loss in the amount of such decline.
F- 10
Fair Value of Financial Instruments
The Company measures and reports its cash equivalents, investments and financial liabilities at fair value. Fair value is defined as the exchange price that
would be received for an asset or an exit price paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly
transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable
inputs and minimize the use of unobservable inputs. The fair value hierarchy defines a three-level valuation hierarchy for disclosure of fair value
measurements as follows:
Level I—Unadjusted quoted prices in active markets for identical assets or liabilities;
Level II—Inputs other than quoted prices included within Level I that are observable, unadjusted quoted prices in markets that are not active, or other
inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and
Level III—Unobservable inputs that are supported by little or no market activity for the related assets or liabilities.
The categorization of a financial instrument within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value
measurement.
Segment Information
The Company operates in a single segment, the development and commercialization of product candidates and products for the treatment of pain. The
Company’s product sales revenue consists of sales of DSUVIA in the United States and Zalviso in Europe. The Company’s contract and collaboration
revenue consists of non-cash royalty revenue, royalty revenue, and other revenue under the Grünenthal Agreements.
Concentration of Risk
The Company invests cash that is currently not being used for operational purposes in accordance with its investment policy in debt securities of U.S.
government sponsored agencies, commercial paper and overnight deposits. The Company is exposed to credit risk in the event of default by the institutions
holding the cash equivalents and available-for-sale securities to the extent recorded on the Consolidated Balance Sheets.
The Company relies on a single third-party supplier for the supply of sufentanil, the active pharmaceutical ingredient in DSUVIA and Zalviso, and various
sole-source third-party contract manufacturer organizations to manufacture the DSUVIA SDA.
DSUVIA sales are concentrated with the DoD and in a limited number of wholesalers. Zalviso has been sold in Europe by Grünenthal, who terminated the
Grünenthal Agreements, effective November 13, 2020. The terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell
down its Zalviso inventory. Revenue and accounts receivable have been concentrated with these customers.
Percent of Total Revenue
Grünenthal
DoD
Wholesaler A
Wholesaler B
Wholesaler C
All others
Accounts Receivable, net
2020
Year Ended December 31,
2019
2018
74.0%
16.9%
3.9%
2.1%
1.2%
1.9%
83.6%
0%
0%
7.5%
5.7%
3.2%
61.1%
38.9%
0%
0%
0%
0%
The need for a bad debt allowance is evaluated each reporting period based on the Company’s assessment of the credit worthiness of its customers or any
other potential circumstances that could result in bad debt.
The Company has not experienced any losses with respect to the collection of its accounts receivable and believes that the entire accounts receivable
balance as of December 31, 2020 is collectible.
F- 11
Percent of Accounts Receivable, Net
Customer A
Customer B
Customer C
Customer D
All Others
Inventories, net
As of December 31,
2020
2019
79%
12%
6%
0%
3%
0%
15%
5%
72%
8%
Inventories are valued at the lower of cost or net realizable value. Cost is determined using the first-in, first-out method for all inventories. Inventory
includes the cost of the active pharmaceutical ingredients, or API, raw materials and third-party contract manufacturing and packaging services. Indirect
overhead costs associated with production and distribution are allocated to the appropriate cost pool and then absorbed into inventory based on the units
produced or distributed, assuming normal capacity, in the applicable period. Indirect overhead costs in excess of normal capacity are recorded as period
costs in the period incurred. DSUVIA was approved by the FDA in November 2018. Prior to FDA approval, all manufacturing costs for DSUVIA were
expensed to research and development. Upon FDA approval, manufacturing costs for DSUVIA manufactured for commercial sale have been capitalized.
The Company's policy is to write down inventory that has become obsolete, inventory that has a cost basis in excess of its expected net realizable value and
inventory in excess of expected requirements. The Company periodically evaluates the carrying value of inventory on hand for potential excess amount
over demand using the same lower of cost or net realizable value approach as that used to value the inventory.
Property and Equipment, net
Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets, generally three to five years. Leasehold improvements are amortized over the shorter of the estimated useful life of the
improvements or the remaining lease term. Expenditures for repairs and maintenance, which do not extend the useful life of the property and equipment,
are expensed as incurred. Upon retirement, the asset cost and related accumulated depreciation are relieved from the accompanying Consolidated Balance
Sheets. Gains and losses associated with dispositions are reflected as a component of interest income and other income, net in the accompanying
Consolidated Statements of Comprehensive Loss.
Impairment of Long-Lived Assets
The Company periodically assesses the impairment of long-lived assets and, if indicators of asset impairment exist, the Company assesses the
recoverability of the affected long-lived assets by determining whether the carrying value of such assets can be recovered through an analysis of the
undiscounted future expected operating cash flows. If impairment is indicated, the Company records the amount of such impairment for the excess of the
carrying value of the asset over its estimated fair value. For example, if the Company is not successful in its commercialization of DSUVIA, and if
approved, Zalviso, purchased equipment and manufacturing-related facility improvements the Company has made at its contract manufacturers could
become impaired. The Company may determine that it is no longer probable that the Company will realize the future economic benefit associated with the
costs of these assets through future manufacturing activities, and if so, the Company would record an impairment charge associated with these assets.
Contingent put option
The contingent put option associated with the Company’s Loan Agreement with Oxford is recorded as a liability. Changes in the fair value of the
contingent put option are recognized as interest income and other income (expense), net in the Consolidated Statements of Comprehensive Loss. For
further discussion, see Note 6 “Long-Term Debt”.
F- 12
Leases
In February 2016, the FASB issued Accounting Standards Update, or ASU, No. 2016-02, Leases (Topic 842), to enhance the transparency and
comparability of financial reporting related to leasing arrangements. The Company adopted the standard effective January 1, 2019.
At the inception of an arrangement, the Company determines whether the arrangement is, or contains, a lease based on the unique facts and circumstances
present. Operating lease liabilities and their corresponding right-of-use assets are recorded based on the present value of lease payments over the expected
lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company utilizes its incremental borrowing rate,
which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
Certain adjustments to the right-of-use asset may be required for items such as initial direct costs paid or incentives received.
Lease expense is recognized over the expected term on a straight-line basis. Operating leases are recognized on the Consolidated Balance Sheet as
operating lease right-of-use assets, operating lease liabilities current and operating lease liabilities non-current. As a result, the Company no longer
recognizes deferred rent on the Consolidated Balance Sheet.
Revenue from Contracts with Customers
The Company follows the provisions of Accounting Standards Codification, or ASC, Topic 606, Revenue from Contracts with Customers. This guidance
provides a unified model to determine how revenue is recognized. The Company recognizes revenue upon transfer of control of promised products or
services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The Company
sells its products primarily through wholesale distributors.
In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under its agreements, the Company performs the following
steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance
obligations, including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable
consideration; (iv) allocation of the transaction price to the performance obligations based on estimated selling prices; and (v) recognition of revenue when
(or as) the Company satisfies each performance obligation.
Product sales revenue
The Company sells its product primarily through distributors. Revenues from product sales are recognized when distributors obtain control of the
Company’s product, which occurs at a point in time, upon delivery to such distributors. These distributors subsequently resell the product to certified
medically supervised healthcare settings. In addition to distribution agreements with these customers, the Company enters into arrangements with group
purchasing organizations, or GPOs, and other certified medically supervised healthcare settings that provide for privately negotiated discounts with respect
to the purchase of its products. For revenue recognition under bill-and-hold arrangements, wherein the customer agrees to buy product from the Company
but requests delivery at a later date, the Company deems that control passes to the customer when the product is ready for delivery. The Company
recognizes revenue under these types of arrangements when a signed agreement is in place, the transaction is billable, the customer has significant risk and
rewards for the product and the ability to direct the asset, the product has been set aside specifically for the customer, and the product cannot be redirected
to another customer. Revenue from product sales is recorded at the transaction price, net of estimates for variable consideration consisting of chargebacks,
government rebates, returns, distribution fees, GPO fees and product returns. Variable consideration is recorded at the time product sales are recognized
resulting in a reduction in product revenue. The amount of variable consideration that is included in the transaction price may be constrained and is
included in the net sales price only to the extent that it is probable that a significant reversal in the amount of the cumulative revenue recognized will not
occur in a future period. Variable consideration is estimated using the most-likely amount method, which is the single-most likely outcome under a contract
and is typically at the stated contractual rate. Where appropriate, these estimates take into consideration a range of possible outcomes that are probability-
weighted in accordance with the expected value method under ASC Topic 606 for relevant factors. These factors include current contractual and statutory
requirements, specific known market events and trends, industry data, and/or forecasted customer buying and payment patterns. Actual amounts of
consideration ultimately received may differ from the Company’s estimates. If actual results vary materially from the Company’s estimates, the Company
will adjust these estimates, which will affect revenue from product sales and earnings in the period such estimates are adjusted. These estimates include:
F- 13
Chargebacks – The Company’s customers subsequently resell its product to qualified healthcare providers. In addition to distribution agreements
with customers, the Company enters into arrangements with qualified healthcare providers that provide for chargebacks and discounts with respect
to the purchase of our product. Chargebacks represent the estimated obligations resulting from contractual commitments to sell product to
qualified healthcare providers at prices lower than the list prices charged to customers who directly purchase the product from the Company.
Customers charge the Company for the difference between what they pay for the product and the ultimate selling price to the qualified healthcare
providers. These reserves are established in the same period that the related revenue is recognized, resulting in a reduction of product revenue and
accounts receivable. Chargeback amounts are determined at the time of resale to the qualified healthcare providers by customers, and the
Company issues credits for such amounts generally within a few weeks of the customer's notification to the Company of the resale. Reserves for
chargebacks consists of credits that the Company expects to issue for units that remain in the distribution channel inventories at each reporting
period end that the Company expects will be sold to the qualified healthcare providers, and chargebacks for units that the Company’s customers
have sold to the qualified healthcare providers, but for which credits have not been issued.
Government Rebates – The Company is subject to discount obligations under state Medicaid programs. The Company estimates its Medicaid
rebates, and reserves are recorded in the same period the related product revenue is recognized, resulting in a reduction of product revenue and the
establishment of a current liability that is included in accrued liabilities on the Consolidated Balance Sheet.
Returns – The Company allows its distributors to return product for credit 6 months prior to, and up to 12 months after, the product expiration
date. As such, there may be a significant period of time between the time the product is shipped and the time the credit is issued on returned
product.
Distribution Fees - Distribution fees include fees paid to certain customers for sales order management, data and distribution services. Distribution
fees are recorded as a reduction of revenue in the period the related product revenue is recognized.
GPO Fees – The Company pays administrative fees to GPOs for services and access to data. These fees are based on contracted terms and are paid
after the quarter in which the product was purchased by the GPOs’ members.
Trade Discounts and Allowances - The Company provides its customers with discounts which include early payment incentives that are explicitly
stated in its contracts and are recorded as a reduction of revenue in the period the related product revenue is recognized.
The Company believes its estimated allowances for chargebacks, government rebates and product returns require a high degree of judgment and are subject
to change based on its limited experience and certain quantitative and qualitative factors. The Company believes its estimated allowances for distribution
fees, GPO fees and trade discounts and allowances do not require a high degree of judgment because the amounts are settled within a relatively short period
of time. The Company will continue to assess its estimates of variable consideration as it accumulates additional historical data and will adjust these
estimates accordingly. Changes in product revenue allowance estimates could materially affect the Company’s results of operations and financial position.
Contract and other collaboration revenue
The Company generates revenue from collaboration agreements. These agreements typically include payments for upfront signing or license fees, cost
reimbursements for development and manufacturing services, milestone payments, product sales, and royalties on licensee’s future product sales. Product
sales related revenue under these collaboration agreements is classified as product sales revenue, while other revenue generated from collaboration
agreements is classified as contract and other collaboration revenue.
The Company entered into award contracts with U.S. Department of Defense, or the DoD, to support the development of DSUVIA. These contracts
provided for the reimbursement of qualified expenses for research and development activities. Revenue under these arrangements was recognized when the
related qualified research expenses were incurred. The Company was entitled to reimbursement of overhead costs associated with the study costs under the
DoD arrangements. The Company estimated this overhead rate by utilizing forecasted expenditures. Final reimbursable overhead expenses were dependent
on direct labor and direct reimbursable expenses throughout the life of each contract, which increased or decreased based on actual expenses incurred.
Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC Topic 606. The
Company’s performance obligations include delivering product to its distributors, commercialization license rights, development services, services
associated with the regulatory approval process, joint steering committee services, demonstration devices, manufacturing services, material rights for
discounts on manufacturing services, and product supply.
The Company has optional additional items in contracts, which are considered marketing offers and are accounted for as separate contracts when the
customer elects such options. Arrangements that include a promise for future commercial product supply and optional research and development services at
the customer’s or the Company’s discretion are generally considered as options. The Company assesses if these options provide a material right to the
licensee and if so, such material rights are accounted for as separate performance obligations. If the Company is entitled to additional payments when the
customer exercises these options, any additional payments are recorded in revenue when the customer obtains control of the goods or services.
F- 14
Transaction Price
The Company has both fixed and variable consideration. Variable consideration for product revenue is described as Net product sales in the Consolidated
Statements of Comprehensive Loss. For collaboration agreements, non-refundable upfront fees and product supply selling prices are considered fixed,
while milestone payments are identified as variable consideration when determining the transaction price. Funding of research and development activities is
considered variable until such costs are reimbursed at which point, they are considered fixed. The Company allocates the total transaction price to each
performance obligation based on the relative estimated standalone selling prices of the promised goods or services for each performance obligation.
At the inception of each arrangement that includes milestone payments, the Company evaluates whether the milestones are considered probable of being
achieved and estimates the amount to be included in the transaction price using the most likely amount method. If it is probable that a significant revenue
reversal would not occur, the value of the associated milestone (such as a regulatory submission by the Company) is included in the transaction price.
Milestone payments that are not within the control of the Company, such as approvals from regulators, are not considered probable of being achieved until
those approvals are received.
For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the
predominant item to which the royalties relate, the Company recognizes revenue at the later of (a) when the related sales occur, or (b) when the
performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).
Allocation of Consideration
As part of the accounting for collaboration arrangements, the Company must develop assumptions that require judgment to determine the stand-alone
selling price of each performance obligation identified in the contract. Estimated selling prices for license rights and material rights for discounts on
manufacturing services are calculated using an income approach model and can include the following key assumptions: the development timeline, sales
forecasts, costs of product sales, commercialization expenses, discount rate, the time which the manufacturing services are expected to be performed, and
probabilities of technical and regulatory success. For all other performance obligations, the Company uses a cost- plus margin approach.
Timing of Recognition
Significant management judgment is required to determine the level of effort required under collaboration arrangements and the period over which the
Company expects to complete its performance obligations under the arrangement. The Company estimates the performance period or measure of progress
at the inception of the arrangement and re-evaluates it each reporting period. This re-evaluation may shorten or lengthen the period over which revenue is
recognized. Changes to these estimates are recorded on a cumulative catch up basis. If the Company cannot reasonably estimate when its performance
obligations either are completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates.
Revenue is then recognized over the remaining estimated period of performance using the cumulative catch-up method. Revenue is recognized for products
at a point in time when control of the product is transferred to the customer in an amount that reflects the consideration the Company expects to be entitled
to in exchange for those product sales, which is typically once the product physically arrives at the customer, and for licenses of functional intellectual
property at the point in time the customer can use and benefit from the license. For performance obligations that are services, revenue is recognized over
time proportionate to the costs that the Company has incurred to perform the services using the cost-to-cost input method.
Cost of Goods Sold
Cost of goods sold for product revenue includes third party manufacturing costs, shipping and handling costs, and indirect overhead costs associated with
production and distribution which are allocated to the appropriate cost pool and recognized when revenue is recognized. Indirect overhead costs in excess
of normal capacity are recorded as period costs in the period incurred.
Under the Grünenthal Agreements, the Company sold Zalviso to Grünenthal at predetermined, contractual transfer prices that were less than the direct costs
of manufacturing and recognized indirect costs as period costs where they were in excess of normal capacity and not recoverable on a lower of cost or net
realizable value basis. Cost of goods sold for Zalviso shipped to Grünenthal includes the inventory costs of API, third-party contract manufacturing costs,
packaging and distribution costs, shipping, handling and storage costs, depreciation and costs of the employees involved with production.
F- 15
Research and Development Expenses
Research and development costs are charged to expense when incurred. Research and development expenses include salaries, employee benefits, including
stock-based compensation, consultant fees, laboratory supplies, costs associated with clinical trials and manufacturing, including contract research
organization fees, other professional services and allocations of corporate costs. The Company reviews and accrues clinical trial expenses based on work
performed, which relies on estimates of total costs incurred based on patient enrollment, completion of patient studies and other events.
Advertising Expenses
Advertising costs are expensed as incurred. Advertising expenses were $0.5 million, $1.1 million and $0.5 million for the years ended December 31, 2020,
2019 and 2018, respectively, and are included in selling, general and administrative expenses in the Consolidated Statements of Comprehensive Loss.
Stock-Based Compensation
Compensation expense for all stock-based payment awards made to employees and directors, including employee stock options and restricted stock units
related to the 2011 Equity Incentive Plan, or 2011 EIP, and employee share purchases related to the 2011 Employee Stock Purchase Plan, or ESPP, is based
on estimated fair values at grant date. The Company determines the grant date fair value of the awards using the Black-Scholes option-pricing model and
generally recognizes the fair value as stock-based compensation expense on a straight-line basis over the vesting period of the respective awards.
The Black-Scholes option pricing model requires inputs such as expected term, expected volatility and risk-free interest rate. These inputs are subjective
and generally require significant analysis and judgment to develop. The expected term, which represents the period of time that options granted are
expected to be outstanding, is derived by analyzing the historical experience of similar awards, giving consideration to the contractual terms of the
stock‑based awards, vesting schedules and expectations of future employee behavior. Expected volatilities are estimated using the historical stock price
performance over the expected term of the option, which are adjusted as necessary for any other factors which may reasonably affect the volatility of
AcelRx’s stock in the future. The risk‑free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for the expected term of the
award. The Company recognizes forfeitures when they occur and does not anticipate paying dividends in the near future.
Restructuring Costs
The Company's restructuring costs consist of employee termination benefit costs. Liabilities for costs associated with the cost reduction plan are recognized
when the liability is incurred and are measured at fair value. One-time termination benefits are expensed at the date the Company notifies the employee,
unless the employee must provide future service, in which case the benefits are expensed ratably over the future service period.
On March 16, 2020, in connection with entering into the Co-Promotion Agreement, the Company initiated a reduction in headcount, designed to eliminate
the overlap with the Tetraphase commercial team in order to more efficiently commercialize DSUVIA alongside the Tetraphase commercial team and
reduce operating expenses. The Company eliminated 30 positions, primarily within the commercial organization. For the year ended December 31, 2020,
the Company incurred and paid $0.5 million in employee termination benefits related to this restructuring.
The headcount reduction was completed in the first quarter of 2020. No additional expenses are anticipated in connection with this cost reduction plan.
Non-Cash Interest Income (Expense) on Liability Related to Sale of Future Royalties
In September 2015, the Company sold certain royalty and milestone payment rights from the sales of Zalviso in the European Union by Grünenthal,
pursuant to the Grünenthal Agreements, to PDL for gross proceeds of $65.0 million. Grünenthal terminated the Grünenthal Agreements effective
November 13, 2020. The terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory. The
rights to market and sell Zalviso in the Territory, will revert back to the Company in May 2021.
Under the Royalty Monetization, the Company has a continuing obligation to use commercially reasonable efforts to negotiate a replacement license
agreement, or New Arrangement. Under the relevant accounting guidance, because of the Company’s significant continuing involvement, the Royalty
Monetization is accounted for as a liability that is being amortized using the effective interest method over the life of the arrangement. In order to determine
the amortization of the liability, the Company is required to estimate the total amount of future royalty and milestone payments to be received by ARPI
LLC and payments made to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and
milestone payments (subject to the capped amount), less the $61.2 million of net proceeds the Company received, are amortized as interest expense over
the life of the liability. Consequently, the Company imputes interest on the unamortized portion of the liability and records interest expense, or interest
income, as these estimates are updated.
F- 16
There are a number of factors that could materially affect the amount and timing of royalty and milestone payments from Zalviso in Europe, most of which
are not within the Company’s control. Such factors include, but are not limited to, the success of any future sales and promotion of Zalviso under any New
Arrangement, if achieved; changing standards of care; the introduction of competing products; manufacturing or other delays; intellectual property matters;
adverse events that result in governmental health authority imposed restrictions on the use of Zalviso; significant changes in foreign exchange rates as the
royalties remitted to ARPI LLC are made in U.S. dollars; and other events or circumstances that could result in reduced royalty payments from European
sales of Zalviso, all of which may result in a reduction of non-cash royalty revenues and the non-cash interest expense over the life of the Royalty
Monetization. Conversely, if sales of Zalviso in Europe are greater than expected, the non-cash royalty revenues and the non-cash interest expense recorded
by the Company would be greater over the term of the Royalty Monetization. The Company periodically assesses the expected royalty and milestone
payments using a combination of historical results, internal projections and forecasts from external sources. To the extent such payments are greater or less
than the Company’s initial estimates or the timing of such payments is materially different than its original estimates, the Company will prospectively
adjust the amortization of the liability and the effective interest rate. Because estimated sales forecasts and payments may vary over the life of the Royalty
Monetization, the Company may be required to recognize interest income as the imputed interest rate is adjusted prospectively to reflect the revised
effective interest rate over the term of the Royalty Monetization.
The Company records non-cash royalty revenues and non-cash interest income (expense), net, within its Consolidated Statements of Comprehensive Loss
over the term of the Royalty Monetization.
When the expected payments under the Royalty Monetization are lower than the gross proceeds of $65.0 million received, the Company defers recognition
of any probable contingent gain until the Royalty Monetization liability expires.
Comprehensive Loss
Comprehensive loss is comprised of net loss and other comprehensive income (loss) and is disclosed in the Consolidated Statements of Comprehensive
Loss. For the Company, other comprehensive income (loss) consists of changes in unrealized gains and losses on the Company’s investments.
Income Taxes
Deferred tax assets and liabilities are measured based on differences between the financial reporting and tax basis of assets and liabilities using enacted
rates and laws that are expected to be in effect when the differences are expected to reverse. The Company records a valuation allowance for the full
amount of deferred assets, which would otherwise be recorded for tax benefits relating to operating loss and tax credit carryforwards, as realization of such
deferred tax assets cannot be determined to be more likely than not.
Net Loss per Share of Common Stock
The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of common stock
outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents
outstanding for the period determined using the treasury stock method. For purposes of this calculation, convertible preferred stock, options to purchase
common stock, restricted stock subject to repurchase, restricted stock units, warrants to purchase convertible preferred stock and warrants to purchase
common stock were considered to be common stock equivalents. In periods with a reported net loss, such common stock equivalents are excluded from the
calculation of diluted net loss per share of common stock if their effect is antidilutive. For additional information regarding the net loss per share, see Note
13 “Net Loss per Share of Common Stock”.
Recently Issued Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments,” or ASU
2016-13. ASU 2016-13 replaces the incurred loss impairment model in current GAAP with a model that reflects expected credit losses and requires
consideration of a broader range of reasonable and supportable information to determine credit loss estimates. ASU 2016-13 is effective for the Company
beginning January 1, 2023, with early adoption allowed beginning January 1, 2020. In May 2019, the FASB issued ASU 2019-05, “Financial Instruments –
Credit Losses,” or ASU 2019-05, to allow entities to irrevocably elect the fair value option for certain financial assets previously measured at amortized
cost upon adoption of the new credit losses standard. The new effective dates and transition align with those of ASU 2016-13. Management is currently
assessing the date of adoption and the impact ASU 2016-13 and ASU 2019-05 will have on the Company, but it does not anticipate adoption of these new
standards to have a material impact on the Company’s financial position, results of operations or cash flows.
F- 17
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting.” The amendments provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new
guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships and other transactions affected by
reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another
reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to
contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The FASB also issued ASU No. 2021-
01, “Reference Rate Reform (Topic 848): Scope” in January 2021. It clarifies that certain optional expedients and exceptions in Topic 848 apply to
derivatives that are affected by the discounting transition. The amendments in this ASU affect the guidance in ASU 2020-04 and are effective in the same
timeframe as ASU 2020-04. The Company is currently evaluating its contracts and the optional expedients and exceptions provided by the new standard,
but it does not anticipate its adoption to have a material impact on the Company’s financial position, results of operations or cash flows.
2. Investments and Fair Value Measurement
Investments
The Company classifies its marketable securities as available-for-sale and records its investments at fair value. Available-for-sale securities are carried at
estimated fair value based on quoted market prices or observable market inputs of almost identical assets, with the unrealized holding gains and losses
included in accumulated other comprehensive income. Marketable securities which have maturities beyond one year as of the end of the reporting period
are classified as non-current.
The table below summarizes the Company’s cash, cash equivalents and investments (in thousands):
Cash and cash equivalents:
Cash
Money market funds
Commercial paper
Total cash and cash equivalents
Short-term investments:
U.S. government agency securities
Commercial paper
Total short-term investments
Total cash, cash equivalents and short-term investments
Amortized
Cost
As of December 31, 2020
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
5,181 $
3,996
18,097
27,274
5,818
9,794
15,612
42,886 $
$
$
F- 18
— $
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
— $
5,181
3,996
18,097
27,274
5,818
9,794
15,612
42,886
Cash and cash equivalents:
Cash
Money market funds
Commercial paper
Total cash and cash equivalents
Short-term investments:
U.S. government agency securities
Commercial paper
Corporate debt securities
Total short-term investments
Total cash, cash equivalents and short-term investments
Amortized
Cost
As of December 31, 2019
Gross
Gross
Unrealized
Unrealized
Losses
Gains
Fair
Value
$
$
1,957 $
598
12,129
14,684
14,268
27,131
10,054
51,453
66,137 $
— $
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
— $
1,957
598
12,129
14,684
14,268
27,131
10,054
51,453
66,137
None of the available-for-sale securities held by the Company had material unrealized losses and there were no realized losses for the years ended
December 31, 2020 and 2019. There were no other-than-temporary impairments for these securities as of December 31, 2020 or 2019. No gross realized
gains or losses were recognized on the available-for-sale securities and, accordingly, there were no amounts reclassified out of accumulated other
comprehensive income to earnings during the years ended December 31, 2020 and 2019.
As of December 31, 2020 and 2019, the contractual maturity of all investments held was less than one year.
Fair Value Measurement
The Company’s financial instruments consist of Level I and II assets and Level III liabilities. Money market funds are highly liquid investments and are
actively traded. The pricing information on these investment instruments are readily available and can be independently validated as of the measurement
date. This approach results in the classification of these securities as Level 1 of the fair value hierarchy. For Level II instruments, the Company estimates
fair value by utilizing third party pricing services in developing fair value measurements where fair value is based on valuation methodologies such as
models using observable market inputs, including benchmark yields, reported trades, broker/dealer quotes, bids, offers and other reference data. Such Level
II instruments typically include U.S. treasury, U.S. government agency securities and commercial paper. As of December 31, 2020, and December 31,
2019, the Company held, in addition to Level II assets, a contingent put option liability associated with the Loan Agreement with Oxford. See Note 6
“Long-Term Debt” for further description. The Company’s estimate of fair value of the contingent put option liability was determined by using a risk-
neutral valuation model, wherein the fair value of the underlying debt facility is estimated both with and without the presence of the default provisions,
holding all other assumptions constant. The resulting difference between the two estimated fair values is the estimated fair value of the default provisions,
or the contingent put option, which is included under other long-term liabilities on the Consolidated Balance Sheets. Changes to the estimated fair value of
this liability is recorded in interest income and other income (expense), net in the Consolidated Statements of Comprehensive Loss. The fair value of the
underlying debt facility is estimated by calculating the expected cash flows in consideration of an estimated probability of default and expected recovery
rate in default and discounting such cash flows back to the reporting date using a risk-free rate.
The following table sets forth the fair value of the Company’s financial assets and liabilities by level within the fair value hierarchy (in thousands):
Assets
Money market funds
U.S. government agency securities
Commercial paper
Total assets measured at fair value
Liabilities
Contingent put option liability
Total liabilities measured at fair value
Fair Value
As of December 31, 2020
Level II
Level I
Level III
3,996 $
5,818
27,891
37,705 $
3,996 $
—
—
3,996 $
— $
5,818
27,891
33,709 $
246 $
246 $
— $
— $
— $
— $
—
—
—
—
246
246
$
$
$
$
F- 19
Assets
Money market funds
U.S. government agency securities
Commercial paper
Corporate debt securities
Total assets measured at fair value
Liabilities
Contingent put option liability
Total liabilities measured at fair value
Fair Value
As of December 31, 2019
Level II
Level I
Level III
$
$
$
$
598 $
14,268
39,260
10,054
64,180 $
437 $
437 $
598 $
—
—
—
598 $
— $
— $
— $
14,268
39,260
10,054
63,582 $
— $
— $
—
—
—
—
—
437
437
The following table sets forth a summary of the changes in the fair value of the Company’s Level III financial liabilities for the years ended December 31,
2020 and 2019 (in thousands):
Fair value—beginning of period
Change in fair value of contingent put option associated with the Loan Agreement
Fair value—end of period
Fair value—beginning of period
Change in fair value of contingent put option associated with the Loan Agreement
Change in fair value of contingent put option associated with the Prior Agreement
Fair value—end of period
Year Ended
December 31,
2020
437
(191)
246
Year Ended
December 31,
2019
121
437
(121)
437
$
$
$
$
3. Inventories, net
Inventories consist of finished goods, raw materials and work in process and are stated at the lower of cost or net realizable value and consist of the
following (in thousands):
Raw materials
Work-in-process
Finished goods
Inventories
As of December 31,
2020
2019
257 $
30
1,339
1,626 $
1,153
593
1,549
3,295
$
$
During the year ended December 31, 2020, the Company recorded inventory impairment charges of approximately $0.7 million, of which $0.3 million
related to the termination of the Amended Agreements, while $0.4 million related to DSUVIA inventory, primarily inventory that may expire before being
sold. During the year ended December 31, 2019, the Company recorded a write-down of inventory of approximately $1.0 million, which represented initial
DSUVIA batches produced for development and therefore represented shorter dated product than batches manufactured for commercial sale. Inventory that
has been impaired is recorded in cost of goods sold in the accompanying Consolidated Statements of Comprehensive Loss.
F- 20
4. Property and Equipment, net
Property and equipment, net consist of the following (in thousands):
Laboratory equipment
Leasehold improvements
Computer equipment and software
Construction in process
Tooling
Furniture and fixtures
Less accumulated depreciation and amortization
Property and equipment, net
As of December 31,
2020
2019
$
$
4,406 $
4,616
1,724
14,101
1,109
292
26,248
(10,589)
15,659 $
4,389
4,616
1,749
11,949
1,109
292
24,104
(9,552)
14,552
Depreciation and amortization expense was $1.1 million, $0.9 million and $0.5 million during the years ended December 31, 2020, 2019 and 2018,
respectively.
5. Revenue from Contracts with Customers
The following table summarizes revenue from contracts with customers for the years ended December 31, 2020, 2019 and 2018 into categories that depict
how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors (in thousands):
Product sales:
DSUVIA
Zalviso
Total product sales
Contract and other collaboration:
DoD Contract revenue
Non-cash royalty revenue related to Royalty Monetization (See Note 8)
Royalty revenue
Other revenue
Total revenues from contract and other collaboration
Total revenue
2020
December 31,
2019
2018
$
$
1,409 $
1,112
2,521
—
242
81
2,572
2,895
5,416 $
377 $
1,453
1,830
—
312
104
43
459
2,289 $
—
825
825
838
289
96
103
1,326
2,151
For additional detail on the Company’s accounting policy regarding revenue recognition, refer to Note 1 “Organization and Summary of Significant
Accounting Policies - Revenue from Contracts with Customers.”
Product Sales
The Company’s commercial launch of DSUVIA in the United States occurred in the first quarter of 2019. Zalviso has been sold in Europe by the
Company’s collaboration partner, Grünenthal. Grünenthal has exercised its right to terminate the Amended Agreements, effective November 13, 2020. The
terms of the Grünenthal Agreements were extended to May 2021 to enable Grünenthal to sell down its Zalviso inventory.
F- 21
Contract and Other Collaboration
Amended License Agreement
Under the Amended License Agreement with Grünenthal, the Company was eligible to receive approximately $194.5 million in additional milestone
payments, based upon successful regulatory and product development efforts ($28.5 million) and net sales target achievements ($166.0 million). A portion
of the tiered royalty payments earned were paid to PDL in connection with the Royalty Monetization. For additional information on the Royalty
Monetization with PDL, see Note 8 “Liability Related to Sale of Future Royalties”. On August 31, 2020, PDL announced it sold its royalty interest for
Zalviso to SWK Funding, LLC.
Amended MSA
Under the terms of the Amended MSA with Grünenthal, the Company manufactured and supplied the Product for use in the Field for the Territory
exclusively for Grünenthal. The Product was supplied at prices approximating the Company’s manufacturing cost, subject to certain caps, as defined in the
MSA Amendment.
The Grünenthal Agreements entitled the Company to receive additional payments upon the achievement of certain development milestones which related
to post approval product enhancements, expanded market opportunities and manufacturing efficiencies for Zalviso and required future research,
development and regulatory activities. These payments were excluded from the transaction price as they were considered payments for optional additional
services elected by Grünenthal.
The Grünenthal Agreements also included milestone payments related to specified net sales targets, totaling $166.0 million. These payments were
considered sales-based license royalties under ASC Topic 606 and would have been recognized apart from the other contract consideration when the related
sales occurred. These net sales targets were not achieved prior to the termination of the Grünenthal Agreements.
In May 2020, upon notification of early termination by Grünenthal, the Company recognized approximately $2.6 million of deferred revenue under the
Grünenthal Agreements.
DoD Contract
On May 11, 2015, the Company entered into an award contract (referred to as the DoD Contract) supported by the Clinical and Rehabilitative Medicine
Research Program, or CRMRP, of the United States Army Medical Research and Materiel Command, or the USAMRMC, within the U.S. Department of
Defense, or the DoD, in which the DoD agreed to provide up to $17.0 million to the Company in order to support the development of DSUVIA. The DoD
contract period of performance ended on February 28, 2019.
Contract Liability
At December 31, 2020, the Company’s deferred revenue balance related to the significant and incremental discount on Zalviso manufacturing services for
Grünenthal. In May 2020, upon notification of early termination by Grünenthal, the Company recognized approximately $2.6 million of deferred revenue
for this discount on Zalviso manufacturing services which were no longer a performance obligation. At December 31, 2019, approximately $3.1 million of
deferred revenue, $0.3 million of which represented the current portion, was attributable to the significant and incremental discount on Zalviso
manufacturing services for Grünenthal.
The following table presents changes in the Company’s contract liability for the year ended December 31, 2020:
Contract liability:
Deferred revenue – Amended Agreements
$
3,244 $
— $
(3,195) $
49
F- 22
Balance at
Beginning
of the Period
Additions
Deductions
(in thousands)
Balance at
the end
of the Period
For the years ended December 31, 2020 and 2019, the Company recognized the following revenue from performance obligations satisfied (in thousands):
Amounts included in contract liabilities at the beginning of the period:
Performance obligations satisfied
Performance obligations eliminated upon termination
New activities in the period from performance obligations satisfied:
Performance obligations satisfied
Total revenue from performance obligations satisfied or eliminated
6. Long-Term Debt
Prior Agreement with Hercules
Year ended
December 31, 2020
Year ended
December 31, 2019
$
$
623 $
2,572
488
3,683 $
315
—
1,181
1,496
On March 2, 2017, the Company entered into an Amended and Restated Loan and Security Agreement with Hercules Capital Funding Trust 2014-1 and
Hercules Technology II, L.P., or Hercules, or the Prior Agreement. On May 30, 2019, the Company used approximately $8.9 million of the proceeds from
the Loan Agreement with Oxford (described below) to repay its outstanding obligations under the Prior Agreement, including the outstanding principal
plus accrued interest of $7.4 million, and the End of Term Fee of $1.3 million. The Company accounted for the termination of the Prior Agreement as a
debt extinguishment and, accordingly, incurred a loss of approximately $0.2 million associated with the unamortized End of Term Fee.
Interest expense related to the Prior Agreement was $0.0 million, $0.6 million and $2.2 million for the years ended December 31, 2020, 2019 and 2018,
respectively.
Loan Agreement with Oxford
On May 30, 2019, the Company entered into the Loan Agreement with Oxford as the Lender. Under the Loan Agreement, the Lender made a term loan to
the Company in an aggregate principal amount of $25.0 million, or the Loan, which was funded on May 30, 2019. The Company used approximately $8.9
million of the proceeds from the Loan to repay its outstanding obligations under the Prior Agreement, as described above. After deducting all loan initiation
costs and outstanding interest on the Prior Agreement, the Company received $15.9 million in net proceeds.
The interest rate is calculated at a rate equal to the sum of (a) the greater of (i) the 30-day U.S. LIBOR rate reported in The Wall Street Journal on the last
business day of the month that immediately precedes the month in which the interest will accrue and (ii) 2.50%, plus (b) 6.75%. On July 27, 2017, the
Financial Conduct Authority, or FCA, in the U.K. announced that it would phase out LIBOR as a benchmark by the end of 2021. It is unclear whether new
methods of calculating LIBOR will be established such that it continues to exist after 2021 or if LIBOR will be replaced with an alternative reference rate;
however, the Company does not believe such changes would have a material adverse effect on its financing costs. Payments on the Loan are interest-only
until July 1, 2020 followed by equal principal payments and monthly accrued interest payments through the scheduled maturity date of June 1, 2023. At the
Company’s election, the interest-only period may be extended to July 1, 2021, if prior to June 30, 2020, the Company receives unrestricted net cash
proceeds of at least $45.0 million from either (i) the issuance and sale of equity securities, or (ii) “up front” payments in connection with a joint venture,
collaboration or other partnering transaction, both of which are on terms and conditions acceptable to the Lender. A final payment equal to 5% of the
aggregate principal amount of the Loan, or EOT Fee, will be due at the earlier of the maturity date, acceleration of the Loan, or prepayment of the Loan.
The Company’s obligations under the Loan Agreement are secured by a security interest in all the assets of the Company, other than the Company’s
intellectual property which is subject to a negative pledge.
The Company may prepay the Loan at any time. If the Loan is paid prior to the maturity date, the Company will pay the Lender a prepayment charge,
based on a percentage of the then outstanding principal balance, equal to 1.5% if the prepayment occurs after May 30, 2020, but on or before May 30,
2021, or 1% if the prepayment occurs after May 30, 2021. Upon voluntary or mandatory prepayment, in addition to the prepayment charge, the Company is
required to pay the EOT Fee, Lender’s expenses and all outstanding principal and accrued interest through the prepayment date.
The Loan Agreement includes customary representations and covenants that, subject to exceptions, will restrict the Company’s ability to do the following
things: declare dividends or redeem or repurchase equity interests; incur additional liens; make loans and investments; incur additional indebtedness;
engage in mergers, acquisitions, and asset sales; transact with affiliates; undergo a change in control; add or change business locations; and engage in
businesses that are not related to its existing business. The Loan Agreement requires that the Company always maintain unrestricted cash of not less than
$5.0 million in accounts subject to control agreements in favor of Lender, tested monthly as of the last day of the month.
F- 23
The Loan Agreement also includes standard events of default, including payment defaults, breaches of covenants following any applicable cure period, a
material impairment in the perfection or priority of the Lender’s security interest or in the value of the collateral, a material adverse change in business,
operations or the prospect of repayment, events relating to bankruptcy or insolvency. The Loan also contains a cross default provision, under which if a
third party (under any agreement) has the right to accelerate indebtedness greater than $250,000, the Loan would also be considered in default. In addition,
the Loan defines events which negatively impact government approvals, judgements in excess of $500,000 and the delisting of the Company’s shares of
common stock on the Nasdaq Global Market, or Nasdaq, as events of default. Upon the occurrence of an event of default, a default interest rate of an
additional 5% may be applied to the outstanding loan balances, and the Lender may declare all outstanding obligations immediately due and payable and
take such other actions as set forth in the Loan Agreement. Acceleration would result in the payment of any applicable prepayment charges and application
of the default interest rate to the outstanding balance until payment is made if full. The Company bifurcated a compound derivative liability related to a
contingent interest feature and acceleration upon default provision (contingent put option) provided to the Lender. The bifurcated embedded derivative
must be valued and separately accounted for in the Company’s consolidated financial statements. The contingent put option liability is classified as a
component of other long-term liabilities. As of December 31, 2020, the estimated fair value of the contingent put option liability was $0.2 million which
was determined by using a risk-neutral valuation model, wherein the fair value of the underlying debt facility is estimated, both with and without the
presence of the default provisions, holding all other assumptions constant. See Note 2 “Investments and Fair Value Measurement” for further description.
In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, which are exercisable for an
aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83, or the Warrants. The Warrants have been classified
within stockholders’ (deficit) equity and accounted for as a discount to the loan by allocating the gross proceeds on a relative fair value basis. For further
discussion, see Note 9 “Warrants”.
The accrued balance due under the Loan Agreement was $21.0 million and $24.2 million at December 31, 2020 and 2019, respectively. Interest expense
related to the Loan Agreement was $3.2 million, of which $0.9 million represented amortization of the debt discount, and $1.9 million, $0.6 million of
which represented amortization of the debt discount, for the years ended December 31, 2020 and 2019, respectively.
Non-Interest Bearing Payments for the Construction of Leasehold Improvements
In August 2019, the Company entered into a Site Readiness Agreement, or SRA, with a potential Contract Manufacturing Organization, or CMO, in
contemplation of entering into a commercial supply agreement for its product DSUVIA® at a future date. Under the SRA, the Company is building out a
suite within the CMO’s production facility. If additional equipment and facility modifications are required to meet the Company’s product needs, the
Company may be required to contribute to the cost of such additional equipment and facility modifications. The Company has determined that it is the
owner of the leasehold improvements related to the build-out which will be paid for in four annual installments of $0.5 million through July 2022. As of
December 31, 2020, the accrued balance under the SRA is $0.8 million, and $1.7 million of these leasehold improvements have been capitalized. The
effective interest rate related to the payments at December 31, 2020 was 14.35%. The leasehold improvements are recorded as property and equipment, net,
in the Consolidated Balance Sheets.
The following table summarizes the balance of the future payments at December 31, 2020 (in thousands):
Present value of the face amount of $1.0 million
Less: current portion
Long-term debt, net of current portion
F- 24
As of
December 31,
2020
$
$
865
402
463
Future Payments on Long-Term Debt
The following table summarizes the outstanding future payments associated with the Company’s long-term debt as of December 31, 2020 (in thousands):
2021
2022
2023
Total payments
Less amount representing interest
Notes payable, gross
Less: Unamortized portion of EOT Fee
Less: Unamortized discount on notes payable
Long-term debt
Less current portion
Long-term debt, net of current portion
7. Leases
Office Lease
$
$
10,429
9,647
5,530
25,606
(2,523)
23,083
(524)
(684)
21,875
(8,735)
13,140
The Company leases office and laboratory space for its corporate headquarters, located at 351 Galveston Drive, Redwood City, California. In June 2017,
the Company renegotiated the Lease with its Landlord, or the New Lease. The New Lease is effective from February 1, 2018 through January 31, 2024 and
contains a renewal option for a six-year extension after the current expiration date. The Company does not expect that the renewal option will be exercised
and has therefore excluded the option from the calculation of the right of use asset and lease liability. The initial monthly rent is approximately $0.1 million
with annual increases of 3% commencing on February 1st. The lease includes non-lease components (i.e., property management costs) that are paid
separately from rent based on actual costs incurred and therefore were not included in the right-of-use asset and liability but are reflected as an expense in
the period incurred. In calculating the present value of the lease payments, the Company has elected to utilize its incremental borrowing rate based on the
remaining lease term.
On January 2, 2019, the Company entered into an agreement to sublease approximately 47% of its office and laboratory space effective February 16, 2019
and expiring on January 31, 2024, or the Sublease. The initial monthly rent from the sublessee is approximately $48,000 per month with annual increases
of 3% commencing on February 1, 2019. Under the Sublease agreement, the sublessee was granted early access to the facility on January 2, 2019, which is
deemed the lease commencement date and rent was abated for 45 days until the effective date of the lease. The sublessee is obligated to pay its
proportionate share of property management costs on a pass-through basis. The Company incurred a total of $0.4 million in initial direct costs in entering
the sublease, of which approximately $0.2 million is related to the tenant improvement allowance transferred to the sublessee. Initial direct costs are being
amortized over the term of the sublease.
The transfer of the tenant improvement allowance to the sublessee resulted in a change in cash flows for the New Lease and was accounted for as a
modification with changes in lease term and consideration. As a result, the Company remeasured the lease liability with the revised lease payments and
recognized approximately $24,000 as a decrease to the lease liability, with a corresponding adjustment to the right-of-use asset.
Contract Manufacturing Lease
On December 12, 2012, the Company entered into an agreement for commercial supply manufacturing services related to the Company’s Zalviso drug
product with a contract manufacturing organization. The initial term of the agreement was through December 31, 2017, which term automatically renews in
two-year increments unless earlier terminated by either party by giving eighteen months’ notice. Commencing in 2013, the Company is required to make
overhead fee payments each year of $0.2 million, prorated based on aggregate revenues. The Company has determined that this fee is an in-substance fixed
lease payment as it represents the minimum annual payment under the contract. The Company concluded that this agreement contains an embedded lease
as the clean rooms have been built specifically for production of the Company’s product and their use is effectively controlled by the Company as it has
priority over the space during the term of the agreement. The Company accounts for the agreement as an operating lease and has evaluated the non-
cancelable term to be through the binding commitment date of June 30, 2022.
F- 25
The components of lease expense are presented in the following table (in thousands):
Operating lease costs
Sublease income
Net lease costs
Year ended
December 31,
2020
Year ended
December 31,
2019
$
$
1,360 $
(598)
762 $
1,360
(596)
764
Other information related to the operating leases is presented in the following table (in thousands):
Year ended
December 31,
2020
Year ended
December 31,
2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows used for operating leases
Supplemental non-cash disclosures of lease activities:
Transfer of tenant improvement allowance to sublease
Right-of-use assets obtained in exchange for new operating lease liabilities
$
$
$
1,268 $
— $
— $
1,084
242
4,730
The weighted average remaining lease term and discount rate related to the operating leases are presented in the following table:
Weighted-average remaining lease term – operating leases (years)
Weighted-average remaining discount rate – operating leases
December 31,
2020
December 31,
2019
3.1
11.7%
4.1
11.7%
Maturities of lease liabilities as of December 31, 2020 are presented in the following table (in thousands):
Year:
2021
2022
2023
2024
Total future minimum lease payments
Less imputed interest
Total
Reported as:
Operating lease liabilities
Operating lease liabilities, net of current portion
Total lease liability
Future minimum sublease payments as of December 31, 2020 are presented in the following table (in thousands):
Year:
2021
2022
2023
2024
Total future minimum sublease payments
F- 26
$
$
$
$
$
$
1,504
1,445
1,386
116
4,451
(727)
3,724
1,118
2,606
3,724
610
629
648
54
1,941
The rent receivable balance is reported in the Consolidated Balance Sheets as follows (in thousands):
Reported as:
Prepaid expenses and other current assets
Other assets
Total rent receivable
8. Liability Related to Sale of Future Royalties
$
$
96
258
354
On September 18, 2015, the Company consummated the Royalty Monetization, in which it sold certain royalty and milestone payment rights to its newly
formed wholly owned subsidiary, ARPI LLC, pursuant to a Purchase and Sale Agreement, or PSA. Subsequently, ARPI LLC sold the royalty and milestone
payment rights to PDL for an upfront cash purchase price of $65.0 million, subject to a capped amount of $195.0 million pursuant to the Subsequent
Purchase and Sale Agreement, or SPSA. Under the SPSA, PDL was entitled to receive 75% of the European royalties under the Amended License
Agreement as well as 80% of the first four commercial milestones, worth $35.6 million (or 80% of $44.5 million), subject to the capped amount. The
Company was entitled to receive 25% of the royalties, 20% of the first four commercial milestones, 100% of the remaining commercial milestones and all
remaining development milestones of $43.5 million, including the $15.0 million payment for the marketing approval by the EC of the MAA for Zalviso.
Under the relevant accounting guidance, because of the Company’s significant continuing involvement, the Royalty Monetization has been accounted for
as a liability that will be amortized using the effective interest method over the life of the arrangement. In order to determine the amortization of the
liability, the Company is required to estimate the total amount of future royalty and milestone payments to be received by ARPI LLC and paid to PDL, up
to a capped amount of $195.0 million, over the life of the arrangement. The aggregate future estimated royalty and milestone payments (subject to the
capped amount), less the $61.2 million of net proceeds the Company received will be recorded as interest expense over the life of the liability.
Consequently, the Company imputes interest on the unamortized portion of the liability and records interest expense relating to the Royalty Monetization
accordingly.
The Company periodically assesses the expected royalty and milestone payments using a combination of historical results, internal projections and
forecasts from external sources. To the extent such payments are greater or less than the Company’s initial estimates or the timing of such payments is
materially different than its original estimates, the Company will prospectively adjust the amortization of the liability and the effective interest rate. During
the three months ended June 30, 2019, the Company made a material revision to its estimates which resulted in an interest income rate on the Royalty
Monetization liability balance at a prospective average rate of approximately 4.2%, which will be applied over the remaining term of the agreement. The
change in estimate of future payments to PDL was a result of lower projected European royalties and milestones from sales of Zalviso over the life of the
liability. The change in estimate results in interest income being recognized prospectively, over the remaining term of the agreement, as the estimated
expected payments are less than the $65.0 million in gross proceeds received. During the three months ended June 30, 2020, Grünenthal notified the
Company that it was terminating the Amended License Agreement, effective November 13, 2020. The terms of the Grünenthal Agreements were extended
to May 2021 to enable Grünenthal to sell down its Zalviso inventory. The rights to market and sell Zalviso in the Territory, will revert back to the Company
in May 2021. There is a continuing obligation on the Company’s part, through the term of the Royalty Monetization, to use commercially reasonable efforts
to negotiate a replacement license agreement, or New Arrangement. However, without a New Arrangement to commercialize Zalviso in the Territory, the
Company is currently unable to reliably estimate the future payments to PDL over the remaining life of the Royalty Monetization. If the Company is unable
to find a New Arrangement, a contingent gain of up to approximately $65 million may be recognized when it is realized upon expiration of the liability at
the end of the Royalty Monetization term. Due to the significant judgments and factors related to the estimates of future payments under the Royalty
Monetization, there are significant uncertainties surrounding the amount and timing of future payments and the probability of realization of the estimated
contingent gain.
The change in estimate reduced the effective interest rate over the life of the liability to 0% by recording interest income over the remaining term of the
arrangement as an offset to the interest expense that was recognized in prior periods and resulted in a decrease of $8.1 million to the net loss, or $0.10 per
share of common stock, basic and diluted, for the year ended December 31, 2019. The effective interest income rate for the years ended December 31, 2020
and 2019 was approximately 3.6% and 1.4%, respectively. During the three months ended December 31, 2018, the Company revised its estimates as a
result of lower projected European royalties from sales of Zalviso over the life of the liability because the product launch was progressing more slowly than
originally expected. The effective interest expense rate for the year ended December 31, 2018 was approximately 11.6%.
F- 27
The following table shows the activity within the liability account during the year ended December 31, 2020 (in thousands):
Liability related to sale of future royalties — beginning balance
Proceeds from sale of future royalties
Non-cash royalty revenue
Non-cash interest (income) expense recognized
Liability related to sale of future royalties as of December 31, 2020
Less: current portion
Liability related to sale of future royalties — net of current portion
Year ended
December 31,
2020
Period from
inception to
December 31,
2020
$
$
92,035 $
—
(254)
(3,310)
88,471
(106)
88,365 $
—
61,184
(938)
28,225
88,471
(106)
88,365
As royalties are remitted to PDL from ARPI LLC, as described in Note 1 “Organization and Summary of Significant Accounting Policies,” the balance of
the liability will be effectively repaid over the life of the agreement. The Company will record non-cash royalty revenues and non-cash interest expense
within its Consolidated Statements of Comprehensive Loss over the term of the Royalty Monetization. On August 31, 2020, PDL announced it sold its
royalty interest for Zalviso to SWK Funding, LLC.
9. Warrants
Loan Agreement Warrants
In connection with the Loan Agreement, on May 30, 2019, the Company issued warrants to the Lender and its affiliates, which are exercisable for an
aggregate of 176,679 shares of the Company’s common stock with a per share exercise price of $2.83, or the Warrants. The Warrants may be exercised on a
cashless basis. The Warrants are exercisable for a term beginning on the date of issuance and ending on the earlier to occur of ten years from the date of
issuance or the consummation of certain acquisitions of the Company as set forth in the Warrants. The number of shares for which the Warrants are
exercisable and the associated exercise price are subject to certain proportional adjustments as set forth in the Warrants.
The Company estimated the fair value of these Warrants as of the issuance date to be $0.4 million, which was used in estimating the fair value of the debt
instrument and was recorded as equity. The fair value of the Warrants was calculated using the Black-Scholes option-valuation model, and was based on the
strike price of $2.83, the stock price at issuance of $2.66, the ten-year contractual term of the warrants, a risk-free interest rate of 2.22%, expected volatility
of 80.22% and 0% expected dividend yield.
As of December 31, 2020, warrants to purchase 176,679 shares of common stock issued to the Lender and its affiliates had not been exercised and were
still outstanding. These warrants expire in May 2029.
10. Commitments and Contingencies
Litigation
From time to time the Company may be involved in legal proceedings arising in the ordinary course of business. The Company does not have contingent
liabilities established for any litigation matters.
11. Stockholders’ Equity
Common Stock
2020 Registered Direct Offerings
On July 23, 2020, the Company completed a registered direct offering in which it issued and sold 9,433,962 shares of its common stock at a price of $1.06
per share. The total net proceeds from this offering were approximately $10.0 million, after deducting estimated expenses payable by the Company of
$49,000. No underwriter or placement agent participated in the offering.
On December 11, 2020, the Company completed a registered direct offering in which it issued and sold 8,333,333 shares of its common stock at a price of
$1.20 per share. The total net proceeds from this offering were approximately $9.9 million, after deducting estimated expenses payable by the Company of
$51,000. No underwriter or placement agent participated in the offering.
F- 28
ATM Agreement
On June 21, 2016, the Company entered into a Controlled Equity OfferingSM Sales Agreement, or the ATM Agreement, with Cantor Fitzgerald & Co., or
Cantor, as agent, pursuant to which the Company may offer and sell, from time to time through Cantor, shares of the Company’s common stock, or the
Common Stock having an aggregate offering price of up to $40.0 million, or the Shares. On May 9, 2019, the Company increased the aggregate offering
price of shares of the Company’s common stock which may be offered and sold under the ATM Agreement by $40.0 million, for a total of $80.0 million, or
the Shares. The offering of Shares pursuant to the ATM Agreement will terminate upon the earlier of (a) the sale of all of the Shares subject to the ATM
Agreement or (b) the termination of the ATM Agreement by Cantor or the Company, as permitted therein. The Company will pay Cantor a commission rate
in the low single digits on the aggregate gross proceeds from each sale of Shares and have agreed to provide Cantor with customary indemnification and
contribution rights.
During the year ended December 31, 2020, the Company issued and sold 876,800 shares of common stock pursuant to the ATM Agreement, for which the
Company received net proceeds of approximately $1.4 million. During the year ended December 31, 2019, the Company issued and sold 500,000 shares of
common stock pursuant to the ATM Agreement, for which the Company received net proceeds of approximately $1.2 million, after deducting
commissions, fees and expenses of $32,000. During the year ended December 31, 2018, the Company issued and sold an aggregate of 4.4 million shares of
common stock pursuant to the ATM Agreement, for which the Company received net proceeds of approximately $16.8 million, after deducting
commissions, fees and expenses of $0.4 million.
As of December 31, 2020, the Company had the ability to offer and sell shares of the Company’s common stock having an aggregate offering price of up to
$43.8 million under the ATM Agreement.
Subsequent to December 31, 2020, the Company received total net proceeds of approximately $28.9 million pursuant to an underwriting agreement, dated
January 19, 2021, relating to the underwritten public offering of approximately 16.7 million shares of the Company’s common stock, and $7.4 million
through the issuance and sale of the Company’s common stock pursuant to the ATM Agreement. See Note 17 “Subsequent Events” for additional
information.
Stock Plans
2011 Equity Incentive Plan
In January 2011, the Board of Directors adopted, and the Company’s stockholders approved, the 2011 Equity Incentive Plan, or 2011 EIP. The initial
aggregate number of shares of the Company’s common stock that were issuable pursuant to stock awards under the 2011 EIP was approximately 1.9
million shares. The number of shares of common stock reserved for issuance under the 2011 EIP automatically increased on January 1 of each year, starting
on January 1, 2012 and continuing through January 1, 2020, by 4% of the total number of shares of the Company’s common stock outstanding on
December 31 of the preceding calendar year, or such lesser number of shares of common stock as determined by the Board of Directors.
As of June 16, 2020, no more awards may be granted under the 2011 Equity Incentive Plan, or the 2011 EIP, although all outstanding stock options and
other stock awards previously granted under the 2011 EIP will continue to remain subject to the terms of the 2011 EIP.
2020 Equity Incentive Plan
On June 16, 2020, at the 2020 Annual Meeting of Stockholders of the Company, the Company’s stockholders, upon the recommendation of the Company’s
Board of Directors, approved the Company’s 2020 Equity Incentive Plan, or the 2020 EIP.
The initial aggregate number of shares of the Company’s common stock issuable pursuant to stock awards under the 2020 EIP was 5,500,000 shares. In
addition, the share reserve will be increased by the number of returning shares, if any, as such shares become available from time to time under the 2011
EIP, for an additional number of shares not to exceed 14,892,170 shares. The term of any option granted under the 2020 EIP is determined on the date of
grant but shall not be longer than 10 years. The Company issues new shares for settlement of vested restricted stock units and exercises of stock options.
The Company does not have a policy of purchasing its shares relating to its stock-based programs.
Amended and Restated 2011 Employee Stock Purchase Plan
Additionally, on June 16, 2020, the Company’s stockholders, upon the recommendation of the Company’s Board of Directors, approved the Amended and
Restated 2011 Employee Stock Purchase Plan, or the Amended ESPP, which increased the aggregate number of shares of the Company’s common stock
reserved for issuance under the 2011 Employee Stock Purchase Plan, or ESPP, to 4,900,000 shares, subject to adjustment for certain changes in the
Company’s capitalization, and removed the “evergreen” provision from the ESPP.
F- 29
In the year ended December 31, 2020, there were 340,128 shares issued under the Amended ESPP. The weighted average fair value of shares issued under
the Amended ESPP in 2020, 2019 and 2018 was $1.09, $2.33 and $1.51 per share, respectively. As of December 31, 2020, there were 4,754,323 shares
available for future grant under the Amended ESPP.
12. Stock-Based Compensation
The Company recorded total stock-based compensation expense for stock options, stock awards and the Amended ESPP as follows (in thousands):
Cost of goods sold
Research and development
Selling, general and administrative
Total
December 31,
2020
December 31,
2019
December 31,
2018
$
$
123 $
764
3,537
4,424 $
260 $
920
3,877
5,057 $
358
1,970
2,840
5,168
The following table summarizes restricted stock unit activity under the Company’s Equity Incentive Plans:
Restricted stock units outstanding, January 1, 2019
Granted
Vested
Forfeited
Restricted stock units outstanding, December 31, 2019
Granted
Vested
Forfeited
Restricted stock units outstanding, December 31, 2020
The following table summarizes option activity under the Company’s Equity Incentive Plans:
Number of
Restricted
Stock Units
Weighted
Average
Grant Date
Fair Value
— $
1,029,085
—
(40,440)
988,645 $
908,300
(304,810)
(194,152)
1,397,983 $
—
2.53
—
2.54
2.53
1.30
2.53
2.16
1.79
December 31, 2019
Granted
Forfeited
Expired
Exercised
December 31, 2020
Vested and exercisable options—December 31, 2020
Vested and expected to vest—December 31, 2020
Number
of Stock
Options
Outstanding
Weighted-
Average
Exercise
Price
12,648,739 $
1,816,596
(610,518)
(1,041,795)
—
12,813,022 $
9,536,806 $
12,813,022 $
3.47
1.30
2.38
3.68
—
3.20
3.66
3.20
Weighted-
Average
Remaining
Contractual
Life (Years)
Aggregate
Intrinsic
Value
(in thousands)
6.1 $
5.2 $
6.1 $
298
—
298
As of December 31, 2020, there were 6,012,971 shares available for future grant under the 2020 EIP.
F- 30
Additional information regarding the Company’s stock options outstanding and vested and exercisable as of December 31, 2020 is summarized below:
Number of
Stock Options
Outstanding
Options Outstanding
Weighted-Average
Remaining
Contractual Life
(Years)
Options Vested and Exercisable
Weighted-Average
Exercise Price per
Share
Shares Subject
to Stock
Options
Weighted-Average
Exercise Price per
Share
752,276
2,549,458
5,216,124
2,481,883
1,286,781
526,500
12,813,022
9.2 $
7.8 $
6.7 $
4.3 $
2.7 $
3.1 $
6.1 $
0.84
1.88
2.69
3.51
5.75
10.28
3.20
— $
1,148,695 $
4,174,021 $
2,400,809 $
1,286,781 $
526,500 $
9,536,806 $
—
2.00
2.71
3.51
5.75
10.28
3.66
Exercise Prices
$0.84 - $1.31
$1.43 - $2.15
$2.19 - $3.29
$3.30 - $4.95
$5.31 - $7.97
$8.18 - $12.27
The weighted average grant-date fair value of options granted during the years ended December 31, 2020, 2019 and 2018 was $0.92, $1.83 and $1.62 per
share, respectively. As of December 31, 2020, total stock-based compensation expense related to unvested options to be recognized in future periods was
$3.8 million which is expected to be recognized over a weighted-average period of 2.1 years. The grant date fair value of shares vested during the years
ended December 31, 2020, 2019 and 2018 was $3.6 million, $4.4 million and $4.9 million, respectively. The total intrinsic value of options exercised
during the years ended December 31, 2020, 2019 and 2018 was $0.0 million, $0.1 million and $0.2 million, respectively.
The Company used the following assumptions to calculate the fair value of each employee stock option:
Expected term (in years)
Risk-free interest rate
Expected volatility
Expected dividend rate
13. Net Loss per Share of Common Stock
Year Ended December 31,
2020
6.2
0.4% -
2019
6.0
1.5% 1.5% -
83%
0%
85%
0%
2018
5.9
2.5% 2.5% - 3.1%
83%
0%
The Company’s basic net loss per share of common stock is calculated by dividing the net loss by the weighted average number of shares of common stock
outstanding for the period. The diluted net loss per share of common stock is computed by giving effect to all potential common stock equivalents
outstanding for the period determined using the treasury stock method. For purposes of this calculation, options to purchase common stock, restricted stock
units and warrants to purchase common stock were considered to be common stock equivalents. In periods with a reported net loss, common stock
equivalents are excluded from the calculation of diluted net loss per share of common stock if their effect is antidilutive.
The following outstanding shares of common stock equivalents were excluded from the computation of diluted net loss per share of common stock for the
periods presented because including them would have been antidilutive:
ESPP, RSUs and stock options to purchase common stock
Common stock warrants
14. Accrued Liabilities
Accrued liabilities consist of the following (in thousands):
Accrued compensation and employee benefits
Inventory and other contract manufacturing accruals
Other accrued liabilities
Total accrued liabilities
Year Ended December 31,
2020
14,541,005
176,679
2019
13,798,797
176,679
2018
11,797,960
—
December 31,
2020
2019
3,293 $
137
1,460
4,890 $
3,796
752
980
5,528
$
$
F- 31
15. 401(k) Plan
The Company sponsors a 401(k) plan that stipulates that eligible employees can elect to contribute to the 401(k) plan, subject to certain limitations.
Pursuant to the 401(k) plan, the Company makes a matching contribution of up to 4% of the related compensation. Under the vesting schedule, employees
have ownership in the matching employer contributions based on the number of years of vesting service completed. Company contributions were $0.5
million, $0.5 million, and $0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively.
16. Income Taxes
The Company recorded a provision for income taxes of $4.0 thousand, $3.0 thousand and $2.0 thousand during the years ended December 31, 2020, 2019
and 2018, respectively.
Net deferred tax assets as of December 31, 2020 and 2019 consist of the following (in thousands):
Deferred tax assets:
Accruals and other
Research credits
Net operating loss carryforward
Section 59(e) R&D expenditures
Deferred revenue
Total deferred tax assets
Valuation allowance
Net deferred tax assets
December 31,
2020
December 31,
2019
$
$
4,136 $
7,275
65,274
7,473
20,848
105,006
(105,006)
— $
3,672
7,275
52,361
8,933
21,324
93,565
(93,565)
—
Reconciliations of the statutory federal income tax to the Company’s effective tax during the years ended December 31, 2020, 2019 and 2018 are as follows
(in thousands):
Tax at statutory federal rate
State tax—net of federal benefit
General business credits
Stock options
Other
Change in valuation allowance
Provision for income taxes
Year Ended December 31,
2020
2019
2018
(8,486) $
(3,587)
—
636
—
11,441
4 $
(11,180) $
(2,538)
—
800
7
12,914
3 $
(9,901)
(792)
(500)
1,048
295
9,852
2
$
$
ASC 740 requires that the tax benefit of net operating losses, temporary differences and credit carryforwards be recorded as an asset to the extent that
management assesses that realization is “more likely than not.” Realization of deferred tax assets is dependent on future taxable income, if any, the timing
and the amount of which are uncertain. Accordingly, the deferred tax assets have been fully offset by a valuation allowance. The valuation allowance
increased by $11.4 million, $12.9 million and $9.9 million during the years ended December 31, 2020, 2019 and 2018, respectively.
As of December 31, 2020, the Company had federal net operating loss carryforwards of $264.4 million, of which $114.9 million federal net operating
losses generated before January 1, 2018 will begin to expire in 2029. Federal net operating losses of $149.5 million generated from 2018 to 2020 will
carryforward indefinitely but are subject to the 80% taxable income limitation. As of December 31, 2020, the Company had state net operating loss
carryforwards of $141.5 million, which begin to expire in 2028.
As of December 31, 2020, the Company had federal research credit carryovers of $6.5 million, which begin to expire in 2026. As of December 31, 2020,
the Company had state research credit carryovers of $4.0 million, which will carryforward indefinitely.
F- 32
Under Section 382 of the Internal Revenue Code of 1986, as amended, if a corporation undergoes an “ownership change,” generally defined as a greater
than 50% change (by value) in its equity ownership over a three year period, the corporation’s ability to use its pre-change net operating loss carryforwards
and other pre-change tax attributes, such as research credits, to offset its post-change income may be limited. Based on an analysis performed by the
Company as of December 31, 2013, it was determined that two ownership changes have occurred since inception of the Company. The first ownership
change occurred in 2006 at the time of the Series A financing and, as a result of the change, $1.4 million in federal and state net operating loss
carryforwards will expire unutilized. In addition, $26 thousand in federal and state research and development credits will expire unutilized. The second
ownership change occurred in July 2013 at the time of the underwritten public offering; however, the Company believes the resulting annual imposed
limitation on use of pre-change tax attributes is sufficiently high that the limit itself will not result in unutilized pre-change tax attributes.
Uncertain Tax Positions
A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended December 31, 2020, 2019 and 2018 is as
follows (in thousands):
Unrecognized benefit—beginning of period
Gross increases—prior period tax positions
Gross increases—current period tax positions
Unrecognized benefit—end of period
Year Ended December 31,
2020
2019
2018
2,635 $
—
—
2,635 $
2,635 $
—
—
2,635 $
2,365
57
213
2,635
$
$
The entire amount of the unrecognized tax benefits would not impact the Company’s effective tax rate if recognized.
There were no accrued interest or penalties related to unrecognized tax benefits in the years ended December 31, 2020, 2019 and 2018. The Company files
income tax returns in the United States, California, and other states. The tax years 2005 through 2014, and 2016 through 2020, remain open in all
jurisdictions. The Company is not currently under examination by income tax authorities in federal, state or other foreign jurisdictions. The Company does
not anticipate any significant changes within 12 months of this reporting date of its uncertain tax positions.
17. Subsequent Events
On January 22, 2021, the Company completed an underwritten public offering in which the Company issued and sold 14,500,000 shares of our common
stock to the underwriter at a price of $1.7625 per share. On January 27, 2021, the underwriters exercised their option in full and purchased an additional
2,175,000 shares at a price of $1.7625 per share. The total net proceeds from this offering of an aggregate 16,675,000 shares were approximately $28.9
million. This underwritten public offering was made pursuant to a Registration Statement on Form S-3 (No. 333-239156), which was initially filed by the
Company with the Securities and Exchange Commission, or SEC, on June 12, 2020 and declared effective by the SEC on July 8, 2020.
Subsequent to December 31, 2020, the Company issued and sold approximately 3.0 million additional shares of common stock and received additional net
proceeds of approximately $7.4 million, after deducting fees and expenses, under the ATM Agreement. As of March 4, 2021, the Company may offer and
sell shares of the Company’s common stock having an aggregate offering price of up to $36.2 million under the ATM Agreement.
F- 33
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
Description
Sales & return allowances, discounts, chargebacks and
rebates:
Year ended December 31, 2020
Year ended December 31, 2019
Year ended December 31, 2018
Balance at
Beginning of
Period
Additions
Charged as a
Reduction to
Revenue
Deductions*
Balance at
End of
Period
$
$
$
161 $
— $
— $
645 $
201 $
— $
(138) $
(40) $
— $
668
161
—
* Deductions to sales discounts and allowances relate to discounts or allowances actually taken or paid.
F-34
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE
SECURITIES EXCHANGE ACT OF 1934
Exhibit 4.1
The following is a description of the common stock, $0.001 par value (“Common Stock”) of AcelRx Pharmaceuticals, Inc. (the “Company”), which is
the only security of the Company registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended. The following summary
description is based on the provisions of our Amended and Restated Certificate of Incorporation (the “Certificate of Incorporation”), our Amended and
Restated Bylaws (the “Bylaws”), and the applicable provisions of the Delaware General Corporation Law (the “DGCL”). The description is intended as a
summary and is qualified in its entirety by reference to our Certificate of Incorporation and Bylaws. Our Certificate of Incorporation and our Bylaws are
filed as exhibits to this Annual Report on Form 10-K.
Authorized Capital Stock
Our authorized capital stock consists of 200,000,000 shares of Common Stock and 10,000,000 shares of preferred stock, $0.001 par value (“Preferred
Stock”). The rights, preferences and privileges of the holders of our Common Stock are subject to and may be adversely affected by the rights of the
holders of shares of any series of our Preferred Stock that we may designate in the future. As of December 31, 2020, we have no shares of Preferred Stock
issued and outstanding. For a complete description of the terms and provisions of the Company’s Preferred Stock refer to our Certificate of Incorporation
and Bylaws.
Common Stock
Voting Rights. Each holder of our Common Stock is entitled to one vote for each share on all matters submitted to a vote of the stockholders, including
the election of directors. In all matters other than the election of directors, the affirmative vote of the majority of shares present in person, by remote
communication, or represented by proxy at a meeting of the stockholders and entitled to vote generally on the subject matter shall be the act of the
stockholders. Directors shall be elected by a plurality of the votes of the shares present in person, by remote communication, or represented by proxy at a
meeting of the stockholders and entitled to vote generally on the election of directors. Our stockholders do not have cumulative voting rights in the election
of directors. Accordingly, holders of a majority of the voting shares are able to elect all of the directors to be elected at any particular time.
Dividends. Subject to preferences that may be applicable to any then outstanding Preferred Stock, holders of our Common Stock are entitled to receive
dividends, if any, as may be declared from time to time by our board of directors out of funds legally available if our board of directors, in its discretion,
determines to issue dividends and then only at the times and in the amounts that our board of directors may determine.
Liquidation. In the event of our liquidation, dissolution or winding up, holders of our Common Stock will be entitled to share ratably in the net assets
legally available for distribution to stockholders after the payment of all of our debts and other liabilities and the satisfaction of any liquidation preference
granted to the holders of any then outstanding shares of Preferred Stock.
Rights. Holders of our Common Stock have no preemptive, conversion, subscription or other rights, and there are no redemption or sinking fund
provisions applicable to our Common Stock.
Fully Paid and Nonassessable. All of our outstanding shares of Common Stock are fully paid and nonassessable.
Anti-Takeover Effects of Provisions of our Certificate of Incorporation and Bylaws and Delaware Law
Certificate of Incorporation and Bylaws. Our Certificate of Incorporation and Bylaws include a number of provisions that may deter or impede hostile
takeovers or changes of control or management. These provisions include:
● Issuance of undesignated Preferred Stock. Under our Certificate of Incorporation, our board of directors has the authority, without further
action by the stockholders, to issue up to 10,000,000 shares of undesignated Preferred Stock with rights and preferences, including voting
rights, designated from time to time by the board of directors. The existence of authorized but unissued shares of Preferred Stock enables our
board of directors to make it more difficult or to discourage an attempt to obtain control of us by means of a merger, tender offer, proxy
contest or otherwise.
● Classified board. Our Certificate of Incorporation provides for a classified board of directors consisting of three classes of directors, with
staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes
continuing for the remainder of their respective three-year terms. This provision may have the effect of delaying a change in control of the
board.
● Board of directors vacancies. Our Certificate of Incorporation and Bylaws authorize only our board of directors to fill vacant directorships. In
addition, the number of directors constituting our board of directors may be set only by resolution adopted by a majority vote of our entire
board of directors. These provisions prevent a stockholder from increasing the size of our board of directors and gaining control of our board
of directors by filling the resulting vacancies with its own nominees.
● Stockholder action; special meetings of stockholders. Our Certificate of Incorporation provides that our stockholders may not take action by
written consent and may only take action at annual or special meetings of our stockholders. Stockholders will not be permitted to cumulate
their votes for the election of directors. Our Bylaws further provide that special meetings of our stockholders may be called only by a majority
of our board of directors, the chairman of our board of directors, or our chief executive officer. These provisions may prevent stockholders
from corporate actions as stockholders at times when they otherwise would like to do so.
● Advance notice requirements for stockholder proposals and director nominations. Our Bylaws provide advance notice procedures for
stockholders seeking to bring business before our annual meeting of stockholders, or to nominate candidates for election as directors at our
annual meeting of stockholders. Our Bylaws also specify certain requirements as to the form and content of a stockholder’s notice. These
provisions may make it more difficult for our stockholders to bring matters before our annual meeting of stockholders or to nominate directors
at our annual meeting of stockholders.
These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and its policies and to
discourage certain types of transactions that may involve an actual or threatened acquisition of us. These provisions are designed to reduce our vulnerability
to an unsolicited acquisition proposal. The provisions also are intended to discourage certain tactics that may be used in proxy fights. However, these
provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they may also reduce fluctuations
in the market price of our shares that could result from actual or rumored takeover attempts.
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the DGCL (“Section 203”) regulating corporate takeovers. This section prevents some Delaware
corporations from engaging, under some circumstances, in a business combination, which includes a merger or sale of at least 10% of the corporation’s
assets with any interested stockholder, meaning a stockholder who, together with affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, did own 15% or more of the corporation’s outstanding voting stock, unless:
● the transaction is approved by the board of directors prior to the time that the interested stockholder became an interested stockholder;
● upon consummation of the transaction which resulted in the stockholder’s becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time the transaction commenced; or
● at or subsequent to such time that the stockholder became an interested stockholder the business combination is approved by the board of directors
and authorized at an annual or special meeting of stockholders by at least two-thirds of the outstanding voting stock which is not owned by the
interested stockholder.
In general, Section 203 defines “business combination" to include the following:
● any merger or consolidation involving the corporation and the interested stockholder;
● any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder;
● subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the
interested stockholder;
● any transaction involving the corporation that has the effect of increasing the proportionate share of the stock or any class or series of the
corporation beneficially owned by the interested stockholder; or
● the receipt by the interested stockholder of the benefit of any loss, advances, guarantees, pledges or other financial benefits by or through the
corporation.
In general, Section 203 defines an “interested stockholder” as an entity or person who, together with the person’s affiliates and associates,
beneficially owns, or within three years prior to the time of determination of interested stockholder status did own, 15% or more of the outstanding voting
stock of the corporation.
A Delaware corporation may “opt out” of these provisions with an express provision in its original certificate of incorporation or an express
provision in its certificate of incorporation or bylaws resulting from a stockholders’ amendment approved by at least a majority of the outstanding voting
shares. We have not “opted out” of these provisions and do not plan to do so. The statute could prohibit or delay mergers or other takeover or change in
control attempts and, accordingly, may discourage attempts to acquire us.
Transfer Agent and Registrar
The transfer agent and registrar for our Common Stock is Computershare, Inc.: 1-800-736-3001. The transfer agent's address is 250 Royall Street,
Canton, Massachusetts 02021.
Non-Employee Director Compensation Policy
Compensation for our non-employee directors consists of cash, restricted stock units and stock options. The Compensation Committee periodically
reviews the compensation paid to non-employee directors for their service on the Board and its committees and recommends any changes considered
appropriate to the full Board for its approval. Each member of our Board who is not our employee receives an annual retainer of $40,000. In addition, our
non-employee directors receive the following cash compensation for Board services, as applicable:
Exhibit 10.17
•
•
•
•
•
•
•
the Board Chair receives an additional annual retainer of $30,000;
the Audit Committee Chair receives an additional annual retainer of $20,000;
the Compensation Committee Chair receives an additional annual retainer of $15,000;
the Nominating and Corporate Governance Committee Chair receives an additional annual retainer of $10,000;
an Audit Committee member receives an additional annual retainer of $10,000;
a Compensation Committee member receives an additional annual retainer of $7,500; and
a Nominating and Corporate Governance Committee member receives an additional retainer of $5,000.
Beginning in February 2021, upon election or appointment to our Board, a new non-employee director will be granted an initial stock option to
purchase 30,000 shares of our common stock, which will vest as to 1/3rd of the shares subject to the option on the one-year anniversary of the date of grant
and as to the remaining shares subject to the option on an equal monthly basis over the following two-year period, and 15,000 RSUs, which will vest as to
1/3rd of the RSUs on each anniversary of the date of grant over a three-year period. Each non-employee director who is then serving as a director or who is
elected to our Board on the date of an annual meeting will be granted a stock option to purchase 20,000 shares of our common stock, which will vest in full
on the one-year anniversary of the date of grant, and 10,000 RSUs, which will vest in full on the one-year anniversary of the date of grant.
All Board and committee retainers accrue and are payable on a quarterly basis at the end of each calendar quarter of service. We reimburse our non-
employee directors for travel, lodging and other reasonable expenses incurred in connection with their attendance at Board or committee meetings.
2021 Cash Bonus Plan Summary
Exhibit 10.18
Target bonuses for named executive officers of AcelRx Pharmaceuticals, Inc. (the “Company”) under the 2021 Cash Bonus Plan (the “Plan”) will
range from 35% to 60% of such executive’s 2021 base salary. The target bonuses for the Company’s named executive officers for 2021 are as follows:
Name
Vincent Angotti
Pamela Palmer, M.D., Ph.D.
Raffi Asadorian
Badri Dasu
Position
Chief Executive Officer
Chief Medical Officer
Chief Financial Officer
Chief Engineering Officer
Bonus %
60%
40%
40%
35%
Mr. Angotti’s cash bonus under the Plan shall be based 100% on the achievement of the 2021 corporate objectives. The cash bonuses under the
Plan for all other named executive officers shall be based 40% on the achievement of his or her individual performance goals, as determined by the Board,
and 60% on the achievement of the 2021 corporate objectives. The named executive officers’ actual bonuses may exceed 100% of target in the event
performance exceeds the predetermined goals.
SUBSIDIARIES OF THE REGISTRANT
Exhibit 21.2
ARPI LLC, duly formed under the laws of the State of Delaware, a wholly owned subsidiary of AcelRx Pharmaceuticals, Inc.
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the following Registration Statements:
(i) Registration Statement on Form S-8 (No. 333-239213) pertaining to the 2020 Equity Incentive Plan and Amended and Restated 2011 Employee
Stock Purchase Plan,
(ii) Registration Statements on Form S-8 (Nos. 333-230139, 333-223535, 333-216492, 333-202709, 333-194634 and 333-187206) pertaining to the
2011 Equity Incentive Plan,
(iii)Registration Statements on Form S-8 (Nos. 333-237195, 333-209998 and 333-180334) pertaining to the 2011 Equity Incentive Plan and 2011
Employee Stock Purchase Plan,
(iv)Registration Statement on Form S-8 (No. 333-172409) pertaining to the 2006 Stock Plan, 2011 Equity Incentive Plan and 2011 Employee Stock
Purchase Plan, and
(v) Registration Statement on Form S-3 (No. 333-239156)
of our report dated March 15, 2021 with respect to the consolidated financial statements and schedule of AcelRx Pharmaceuticals, Inc., which appears in
this Annual Report on Form 10-K.
/s/ OUM & CO. LLP
San Francisco, California
March 15, 2021
Exhibit 31.1
I, Vincent J. Angotti, certify that:
1. I have reviewed this annual report on Form 10-K of AcelRx Pharmaceuticals, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 15, 2021
/s/ Vincent J. Angotti
Vincent J. Angotti
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Raffi Asadorian, certify that:
1. I have reviewed this annual report on Form 10-K of AcelRx Pharmaceuticals, Inc.;
CERTIFICATIONS
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities,
particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent
fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially
affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s Board of Directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control
over financial reporting.
Date: March 15, 2021
/s/ Raffi Asadorian
Raffi Asadorian
Chief Financial Officer
(Principal Financial Officer)
CERTIFICATION
Exhibit 32.1
Pursuant to the requirement set forth in Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Section 1350 of
Chapter 63 of Title 18 of the United States Code (18 U.S.C. §1350), Vincent J. Angotti, Chief Executive Officer of AcelRx Pharmaceuticals, Inc. (the
“Company”), and Raffi Asadorian, Chief Financial Officer of the Company, each hereby certifies that, to the best of his or her knowledge:
1. The Company’s Annual Report on Form 10-K for the period ended December 31, 2020, to which this Certification is attached as Exhibit 32.1 (the
“Annual Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Exchange Act, and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the
Company.
In Witness Whereof, the undersigned have set their hands hereto as of the 15th day of March 2021.
/s/ Vincent J. Angotti
Vincent J. Angotti
Chief Executive Officer
/s/ Raffi Asadorian
Raffi Asadorian
Chief Financial Officer
“This certification accompanies the Form 10-K to which it relates, is not deemed filed with the Securities and Exchange Commission and is not to be
incorporated by reference into any filing of AcelRx Pharmaceuticals, Inc. under the Securities Act of 1933, as amended, or the Securities Exchange Act of
1934, as amended (whether made before or after the date of the Form 10-K), irrespective of any general incorporation language contained in such filing.”