AcelRx Pharmaceuticals, Inc.

First quarter 2021 earnings call. This call is being webcast live on the events page of the investor select section of XLRX's website at acelrx.com. This call is the property of XLRX and any recording, reproduction, or transmission of this call without the express written consent of XLRX is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a webcast replay of this call by going to the investor section of XLRX's website. I would now like to turn the call over to Rafi Asadorian, XLRX Chief Financial Officer. Please go ahead.

Thank you for joining us this afternoon. Earlier today, we announced our first quarter financial results and some business updates in a press release. This press release and the slide presentation accompanying this call are available in the investors section of our website. With me today is Vince Angotti, our Chief Executive Officer, and Dr. Pam Palmer, our Chief Medical Officer. Before we begin, I'll remind listeners that during this call, we will make forward-looking statements within the meaning of the federal securities laws. These forward-looking statements involve risks and uncertainties regarding the operations and future results of Accelerex. Please refer to our press release in addition to the company's periodic, current, and annual reports filed with the Securities and Exchange Commission for a discussion of the risks associated with such forward-looking statements. I will now hand the call over to Vince.

Thank you, Rafi, and good afternoon, everyone. We appreciate you taking the time to join the call. I'll keep our prepared remarks brief since our last update was just a couple of months ago. On the year-end call, we discussed the expectation that the COVID backlog for elective surgeries would begin clearing up in the second half of this year. In particular, these last two months have provided more clarity on the post-COVID environment as surgery centers and hospitals in the U.S. are beginning to open, accept visitors, and reinitiate elective surgeries. In fact, April was our best commercial month since the launch of Desuvia. We have a long way to go, but we're seeing light at the end of the tunnel and trending back to the growth we expected prior to COVID. Although the pandemic delayed formulary reviews over the last year, through April, we've achieved 432 approvals. We're well on track to achieve our year-end target of 615 formulary approvals. Also encouraging is the continued expansion of the clinical site studying Dissidia, as well as growth in the diversity of physician specialties beginning to adopt Dissidia. One of our key messages that is resonating with healthcare providers is how Dissidia supports opioid stewardship, which is reinforced with real-world clinical data published in the second half of last year. The generation of highly relevant clinical endpoints beyond what was studied in our registration trials remains a priority for us in 2021. We're supporting a diverse array of investigator-initiated studies with an emphasis on commonly performed orthopedic procedures. I'll touch on each of these important points shortly as I update you on the progress within our four pillars of revenue growth. Our first pillar is focused on the Department of Defense. Progress on sale to the DoD in the first quarter remains slow as they continue to work through complex administrative and logistical matters, which we expect will be resolved soon. Although the Army has ordered each of the last three quarters, we're awaiting clarity on regular shipments for deploying troops and an estimate of purchases for the year. We still believe the $30 million for initial stocking over three years is reasonable, but await further clarity on the timing of these purchases. Our second pillar is focused on specialty markets and partnering with larger, more established commercial partners. As you may recall, Zimmer Biomet Dental was our first partnership for specialty market outside hospitals and general surgery centers. Approximately 70 commercial team members at Zimmer Biomet have now been trained and were encouraged by the investment they're making in the distributed launch into the oral dental surgery space. We expect this segment to gain more traction as Zimmer Biomet Dental progresses the launch with the now trained personnel. Importantly, we were informed by the American Dental Association in April about a code that can be used guiding reimbursement for the administration of Desuvia in this discipline. We believe this will also help with increased adoption within this space. Our third pillar is focused on hospitals and ambulatory surgery centers, as well as an increasing focus on surgeries and procedures moving into surgical suites. Our internal commercial team is focused on this pillar, which is ultimately the largest market opportunity for Desuvia. As mentioned at the beginning of the call, the breadth of the type of physician specialists that are adopting Desuvia continues to grow. And the interest behind Desuvia initiated with the phase three clinical trial data demonstrating efficacy or low rate of side effects and lack of cognitive impairment. But broader enthusiasm is rebuilding due to recently published clinical data demonstrating significant reductions in the amount of opioids administered when using Desuvia, faster discharge times, and better patient satisfaction, as noted in the poster presentation announced last week. Each physician specialist has a unique reason for adopting Desuvia, but in the end, the universal drivers are, one, patient satisfaction, two, the differentiated pharmacokinetic profile, and three, the opioid-sparing nature of Desuvia. Each of these can support an economic advantage of adopting Desuvia. Our fastest-growing specialty remains plastic surgery, with orthopedics being close second. In addition to these, in oral and dental surgery, we're seeing increased interest in eye surgery, ENT procedures, and palliative care. I mentioned earlier that new data generation is a priority for us in 2021, data that was not available at launch. We've always known that peer-to-peer shared experiences amongst clinicians regarding the use of dysthymia is a powerful driver for adoption as we're disrupting the well-entrenched standard of care, IV opioids. To that end, the clinical data from the investigator-initiated studies will be extremely valuable to physicians and hospitals when they're assessing the practical applications of Desuvia in their clinical protocols. The two publications in the second half of last year that demonstrated reductions in overall opioid utilization when administering Vesuvia perioperatively, as well as faster packing discharge times have provided a strong value proposition. Opioid stewardship programs are becoming more common throughout institutions as clinicians realize the importance of including opioids in a multimodal treatment program. Yet, they want to minimize the side effects often seen with this drug class. From the clinical trial publications, as well as anecdotally discussions with physicians, Desuvia is becoming recognized as the opioid that is opioid sparing in the perioperative setting. In fact, the poster presentation last week at the ASRA annual meeting from a study performed at the University of Minnesota continued to illustrate this concept. Some statistically significant highlights from the poster supporting this opioid sparing effect are as follows. Compared to patients receiving standard IV opioids, Patients in the dysubia group dosed prior to extubation required 50% less opioids in the PACU, with significantly more of them opioid-free, 36% versus 8%. Furthermore, dysubia-treated patients had improved overall benefit of analgesia scores, referred to as OBAS, O-B-A-S, compared to the control group. OBAS is a validated seven-item tool that assesses pain intensity, adverse effects, and patients' satisfaction with analgesia. The limitations of the study include that Dissuvia was not compared to an active comparator, so please refer to our May 13th press release for the full poster and study results. And for more information, including important safety information and black box warnings, please visit Dissuvia.com. Many physicians, particularly plastic and orthopedic surgeons, are extremely sensitive to patient satisfaction, given that the vast majority of their practice is elective surgeries with a surgical volume that is about to increase more than it has in years to address the COVID backlog. We look forward to sharing more clinical data from the ongoing studies as it becomes available. Pillar four is our focus on business development, and we continue to make progress in advancing multiple ongoing discussions from both an out-licensing and in-licensing standpoint that we believe will add value to the company by enhancing our product portfolio. This does not replace our priority with Desuvia, but potentially provides our commercial team with additional sales opportunities on the same call. And on the operations front, our contract manufacturer has taken possession of the automated packaging line, which is currently being installed at their facilities here in the U.S. We remain on track with our previously disclosed timeline to have initial commercial batches being produced in the third quarter of 2022. We also expect the regulatory batches that would be produced before this time will be able to be sold. We're excited to finally get this phase of operations moving as we prepare for increased orders from the Department of Defense, as well as our commercial customers. We expect this will significantly reduce our cost of sales. Finally, before handing the call over to Rafi, I'd like to provide an update on the FDA warning letter. We've submitted our response and have had excellent dialogue with the FDA to ensure a proper closeout is received. We believe we've addressed all the points raised with the exception of finalizing the corrective action for the Dishuvia banner ads that were run back in 2019. The two alternatives being evaluated as a corrective action for this are to include a dear doctor letter on the DSUVIA website or to run corrected banner ads without the tongue in tongue tagline and other minor adjustments. Once this is cleared and resolved, we expect the FDA to issue a closeout letter. I'll now hand the call over to Rafi to take you through the first quarter financial results.

Thank you, Vince. Despite the continued COVID headwinds in the first quarter, we strongly improved our financial position, ending the quarter with $67.3 million in cash while also reducing our senior debt to $19.1 million at the end of the quarter. The remaining long-term liabilities principally relate to the accounting for the sale of the Zalviso royalty liability, which is non-recourse to the company. The obligation is only payable from royalties received on sales of Zalviso. If there are no royalties received, then there is no repayment required. Revenues consisted mainly of product sales, and worth $0.5 million in the quarter, a 32% increase over the first quarter of 2020. Again, despite the negative impact from the pandemic restricting access and limiting elective surgeries, which was experienced across the sector. As Vince mentioned, we are beginning to see restrictions eased with an expectation that the trend will continue and a reduction in the high backlog of elective surgeries will have a favorable impact on Vesuvia sales. Gross profit remained negative as the revenues have not exceeded the fixed overhead costs. However, this gap was reduced in the quarter as the higher sales led to an improvement in the gross margin compared to Q1 2020. We're excited that the automated packaging line is finally being installed and look forward to the efficiencies expected to be realized as volumes ramp. Operating expenses or combined SG&A and R&D expenses were $8.6 million in the first quarter of 2021 compared to $14.7 million in 2020. Excluding stock-based compensation, first quarter 2021 cash operating expenses were $7.5 million. The reduction in operating expenses were driven by focusing our resources on high-priority territories. We expect to remain around this same level of cash operating expenses during the rest of the year. We continue to remain prudent with our cash and control our spending as the Desuvio launch progresses into new specialty areas and further penetrates hospitals and ASCs. Finally, as mentioned last quarter, we expect to have an out-licensing transaction completed for Desuvio in the near term. I'll now turn the call back over to Vince.

Thanks, Rafi. So in summary, in Q1, we strongly improved our financial position, have continued to engage in the support of key studies that we believe will further demonstrate the studious differentiation through opioid stewardship and patient satisfaction, and we remain committed to business development transactions from both an out-licensing and an in-licensing standpoint. As a result, we feel that we are well-positioned for the post-COVID setting. And I'd like to open the line for any questions you might have. Debbie, operator, please.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brandon Foulkes with Cantor Fitzgerald. Please go ahead.

Hi, thanks for taking my questions. Maybe firstly, can you just elaborate in terms of your comments on April being the best commercial month to date? Where are you seeing growth there? Any color would be very helpful. And then secondly, maybe just sort of at a high level strategically, Vince, in the past, you've talked about business development. What's your current thinking and sort of urgency? Obviously, it's been a different environment the last 12 months, but I'd love to get your update there. Thank you. Sure, Brandon.

Thank you. So for question one, elaborate on April as the best to date. I can tell you that in April, we had the highest number of boxes to end users and unique orders for any given month since launch. That even includes when we had 40 cells represented over a year ago. You know, it was interesting to watch the first quarter as the hospitals in particular were really focused on the vaccinations as they should be in operations relative to the distribution of those vaccinations. So we started to see the momentum actually start to pick up a little bit in March with March representing about 50% of our total orders for the first quarter in commercial. So you could see the first couple months when the hospitals in particular focused on the vaccinations and their operations, it was relatively light in quantity of orders or amount per order, but really started to pick up in March and we had our best month ever in April. So that was exciting to see from a leading indicator standpoint. We also remain on track for our goal of 615 formularies by the end of the year, and they have ramped up in pace in the last couple of months as well. And we believe that it'll be further upticking of that in the second half of this year as things become even more open. That was question one, Brennan. Question two, I believe, was strategically from business development, our current thinking and our urgency. We've always had a high sense of urgency. I think it was evident by our M&A move last year, early in the year. We've continued to prospect for different business development opportunities, whether on the larger strategic opportunity like we tried last year or from a product basis, both from an in-licensing and out-licensing perspectives. We're confident that we can monetize Vesuvia, particularly in other territories outside the U.S. and Europe in particular, is targeted to be completed this year, and we feel comfortable that can be achieved. We also have the opportunity, we believe, for opportunistic acquisitions of products that can help build our portfolio moving forward, eventually to allow our sales team to have multiple sales calls or multiple product deliveries on any particular institutional sales call. Rafi, is there anything you'd like to add to that?

Nope, I think you got it.

A high sense of urgency, I think, should be your takeaway, Brandon, but without being ignorant to proper business agreements.

Great. Thank you very much. Thank you, Brandon.

The next question comes from Michael Higgins with Leidenberg Thalmann. Please go ahead.

Hey, guys. Good to talk with you again here. You've got in your press release a real nice list of the studies, the pilot studies, pharmacoeconomic reviews, et cetera. Just curious what ending you may be in in that effort. This is certainly a big boost in the adoption compared to what you had at launch, but just curious to see how many more we should look for over the coming years next.

Pam, I'll refer to you to comment on the pilot studies and kind of how you see timing moving forward and the importance of these data outputs.

Sure. Yeah, so we've got a number of investigator-initiated trials ongoing. And, you know, they're definitely enrolling well, but by the time they analyze the data and write it up, it's definitely going to probably be the latter half of the year to get most of that data out and published. There are also studies going on, though, that aren't via IITs that we know of, so it'll be exciting to have some of that more near-term data come out as well. You know, in general, you know, whether it's anecdotally or through the published papers, we're really seeing this consistent lowering of oral opioid use perioperatively, faster discharge times, you know, really, like we say, that Dysubia is becoming the opioid that is opioid sparing, and I think that's a really important point that is consistent across all these studies, and we look to see that also, hopefully, from these IITs, as that really feeds into the opioid stewardship protocols that a lot of these institutions are adopting.

Hey, Pam, can you comment on the diversity of the orthopedic trials that we also have underway or are supporting?

Exactly. And I think, as Vince mentioned during the call, the key thing about orthopedic cases is that a lot of them are elective. And so patients can really shop their doctor, and they want to go to doctors who are using the latest techniques and the latest approaches to treat pain, et cetera. So we're really excited. We've got a couple of spine surgeries that are either ongoing or are in the queue. We've got a couple of total joint surgeries as well from that standpoint. And so, yes, orthopedics is a huge focus, some plastics as well. And then we've got IITs are always sort of leading commercialization in that it looks into new areas that we're not necessarily going after right now. So sickle cell, you know, ophthalmologic surgery is really exciting areas that we're also seeing these IITs being requested from. So it'll be fun to go into those new areas as well.

That's great, guys. I appreciate all that color. If you can comment on if this is a – and it seems to be an ongoing effort in the next couple of years.

Yeah, from a timing standpoint, yeah.

Yeah, so the absolute – Yeah, so the bottom line is, is these are – They're rolling admissions, so as they're submitted in and we assess them, and we approve some, we don't approve others, and then they go through contracting. So it's a bit of an approach to each of them, and so they will be rolling enrollment for all of these different things, and we definitely expect this to go on for the next few years because there's so many different indications. The CV label is so broad that even these on-label utilizations are quite, varied and very interesting.

That is great to hear. Thanks. I appreciate it. It almost feels like we're just launching the product in the second half of last year with this new data and that it continues to build. And we feel like we're well positioned in particular for orthopedics moving forward because it's estimated, when we look at the data, that there's a backlog of more than a million, if you can imagine that, total joint and spine surgery cases by mid-2022. and that the country may need up to 16 months to work through the backlog of that orthopedic care. Three of the top four inpatient elective surgeries annually are orthopedic. So we've got a significant amount of different diverse orthopedic studies we're supporting, hopefully to help them work through this backlog with proper patient care, but through efficiency with Vesuvia as well. So we're excited about the positioning of the product moving forward.

That's really great, Keller. I appreciate that. One other question would be, if you can give us an update on the size of the marketing force right now, where that sits, if you can give us some support in terms of its overall cost and how you see that playing out. You've got a lot of great information. The next step, of course, is getting it out there, and that can happen a variety of ways, but one of which is the sales force. Thanks.

Yeah, so our sales team remains fairly tight. We're very cost-conscious, and we did that last year moving into COVID to be sure we conserved cash and really focused on hyper-targeting of certain markets. We've got 15 sales representatives with Accelerex that are employed. We've got an additional 10 we've got to co-promote with La Jolla, who really focuses more on hospitals as opposed to the ASDs or plastics or anything of that matter. In our 15 rep territories, we focus on all of it, those hospitals, the adjacent ASCs, and to a lesser extent, plastics. But plastics has been coming on strong lately. In the fourth quarter of last year, we started an experiment with two virtual sales representatives and virtual sales calls and virtual educational programming. And it appears that the plastic surgery discipline is is very adaptable to that type of setting and makes decisions fairly quickly. So the very efficient, very efficient small team of two virtual sales representatives that have follow-up from our team and virtual programming, we're seeing Plastics really start to take the lead, believe it or not, in some of the most recent approvals. In addition to that, we've got three federal team members that really focus on training the military. for preparation for use of the product when it's deployed in the field, and a couple of national accounts people. So we're fairly tight from that perspective. We also have a small team of fewer than five medical science liaisons that are out there working with the key opinion leaders, receiving the calls about the IITs, taking them to headquarters to have them vet, and then going back and working with them on what might be or might not be appropriate for these studies and the product. That's our team. It's fairly tight.

That's great. I appreciate it. Thanks, guys.

The next question is from Ed Arce with HC Wainwright. Please go ahead.

Hi, everyone. Thanks for taking my questions. Congrats as well on the latest progress through this quarter. First question is... you know, going back to the, uh, the comments, uh, at the top of your release about month, the, the, the April month being the strongest to date. Um, as you, you know, uh, as you and everyone else looks at, you know, sort of the light at the end of the tunnel, um, in terms of COVID restrictions and all of that, um, could you discuss, um, how, um, uh,

I think I lost you there, Ed. Yeah, I think he got cut off, Vince.

Okay. Yes, somehow he did get cut off. I'm so sorry. Yeah, he's disconnected.

Oh, no. I can just give some brief commentary to where I think he was heading in this direction, and that was April being the strongest month and outlook on COVID moving forward. As I mentioned earlier from Brandon's question, April was a strong month for us in that it was our highest number of commercial boxes to end users and our highest number of unique orders since we launched the product just a couple years ago. And this is with an even more tight sales team. The second half of March was very strong for us as well. So those are the leading indicators that we see where things are starting to open up. I can tell you that a good chunk of the orders in the first quarter were came from ASCs and plastics. And while the hospitals were ordering in frequency, the size of the orders were a little bit less simply because they were seeing fewer patients during their focus time on the vaccinations and rolling out COVID operations. And we expect that now that the vaccinations are continuously improving in the U.S. to continue to loosen up. And in the second half of the year, fingers crossed, without a resurgence, getting back to normal operations for COVID moving forward, with everyone, including hospitals and ASCs, looking for better efficiencies to make up for the lost revenue during this COVID period of time. And we think we can help with that based on the data that continues to be produced. So I'm hoping that that helps answer Ed's question.

And I apologize that he got dropped.

This concludes our question and answer session. I would like to turn the conference back over to Vincent Gotti for any closing remarks.

Thank you, Debbie. Again, we appreciate everyone joining us today and for your interest in continuing support of AccelerEx. Again, we believe we're very well positioned for future growth while continuing controlled expenses, expand our data set and body of evidence, and looking forward to share more with business development here in the near and distant future. So thank you for joining us. Much appreciated. Thank you Debbie.

This conference has now concluded. Thank you for attending today's presentation. You may now disconnect.