Welcome to the AcelRx First Quarter 2018 Conference Call. This call is being web cast live on the event stage of the Investors section of AcelRx's web site at acelrx.com. This call is the property of AcelRx and any recording, reproduction or transmission of this call without the express written consent of AcelRx is strictly prohibited. As a reminder, today's call is being recorded. You may listen to a web cast replay of this call by going to the investors section of AcelRx's web site. I would now like to turn the call over to John Saia, AcelRx General Counsel. Please go ahead.

Thank you, Danielle. Thank you for joining us this afternoon. Earlier today, we reported our first quarter 2018 financial results in our press release. Separately this morning, we also reported the successful resubmission of our DSUVIA NDA. These releases and a slide presentation accompanying this call are available in the Investors section of our web site. With me today are Vince Angotti, our Chief Exec Officer; Dr. Pam Palmer, our Chief Medical Officer; and Raffi Asadorian, our Chief Financial Officer. Before we begin, I'd remind listeners that during the course of this call, we will make forward-looking statements within the meaning of the Federal Securities laws. These forward-looking statements involves risks and uncertainties, regarding operations and future results of AcelRx. In addition to the company's periodic current and Annual Report filed with the Securities and Exchange Commission, please refer to the text of our press release, for a discussion of the risks associated with such forward-looking statements. I’ll now turn the call over to Vince Angotti. Vince?

Thank you, John, and welcome to the AcelRx team. Good afternoon everyone and thank you for joining us today. I am very pleased to highlight our continued progress this year, including both DZUVEO CHMP positive opinion in Europe, and our NDA resubmission for DSUVIA. Today we will highlight in more detail, the achievements during the quarter and recent period. Remind you our upcoming milestones in 2018; provide an update on our first quarter financial results. We began the quarter with a constructive Type A FDA meeting in January, to discuss their two primary points in the CRL. One, safety at the at the daily maximum dose in the proposed label; and two, suggested modifications to the directions for use. There is much thought and effort that went in preparing for this meeting, and we believe this paid off for the positive meeting outcome that provided us with a clear path towards resubmission of the DSUVIA NDA without having to perform another clinical trial. As a reminder, we lowered the maximum daily dose of DSUVIA in the proposed label from 24 tablets to 12 tablets, which is supported by existing safety data from our completed clinical trials. The supervised [indiscernible] is more clinically relevant, and we believe this satisfies the FDA's first point raised in the CRL around the safety of DSUVIA at daily maximum dose. Secondly, as announced last month, we adopted all of the FDAs recommendations for the directions for use and completed the human factor study to validate the effectiveness of the revisions. We believe this study had a successful outcome in validating the revised directions for use, given there were no dropped tablets during the study. The outcome of the study leads us to believe, that we have also satisfied the second point in the CRL. So…

Thank you, Vince, and good afternoon everyone. The first quarter, much like last quarter, was managed conservatively from a financial perspective, as we continue to hold on ramping up commercial resources prior to a potential PDUFA date for DSUVIA. We will continue to manage our cash prudently with the goal of ensuring we have adequate financial resources, as we move down the path of obtaining approval for our product candidates. We ended the third quarter with $51.2 million in cash and investments, which was a decline of $9.3 million from the end of last year. Our cash use was driven mainly by our cash operating expenses incurred of $6.5 million plus another $2.3 million of debt service in the quarter. Our first quarter revenues of $300,000 decreased from the first quarter last year, due to lower ZALVISO shipments to Grünenthal, as they continue to work down the inventories purchased for their initial launch and through early 2017. As indicated last quarter, we expect these reduced revenue levels throughout the year, despite continued growth in Grünenthal's ZALVISO sales. As a reminder, these collaboration revenues do not have a significant impact on our cash flows in the near term, since a significant portion of European ZALVISO royalties and milestones were already monetized with PDL in 2015. Our combined G&A and R&D expenses net of stock based compensation expense were $6.5 million in the first quarter of 2018, which was in line with the $6.6 million in the fourth quarter of 2017 and a reduction from the $10 million incurred in the first quarter of 2017. The decline from Q1 2017 was mainly attributed to lower ZALVISO related development costs, which were incurred in 2017. Operating expenses were the main driver of our cash flows, and will continue to be in the near term. Looking forward, we continue to expect our quarterly pre-commercialization net cash burn to remain in the $10 million to $11 million range, prior to pre-launch preparation costs, which we expect will ramp in the fourth quarter of 2018, if DSUVIA is approved by our anticipated PDUFA date. This includes approximately $2 million to $2.5 million per quarter of debt service. We will provide further cash flow guidance, as we get closer to a potential DSUVIA approval date. With that, let me turn the call back over to Vince.

Thanks Raffi. It's a great start to the year, with positive momentum on the regulatory front, in both the U.S. and Europe. We are optimistic about the upcoming milestone with an expected DSUVIA NDA acceptance by the FDA in the near term, and PDUFA date later this year. We are acutely aware of the need for new acute pain treatment options to medically supervised settings, to remain focused on completing the necessary steps to get the NDA approval, and we intend to keep a positive momentum, and look forward to updating you throughout 2018. I'd now like to open the line up for any questions you might have. Operator?

[Operator Instructions]. The first question comes from Randall Stanicky of RBC Capital Markets. Please go ahead.

Great. Thanks guys. Hey Vince, if we fast forward to the DSUVIA approval, how are you guys, at least at this point, thinking about the commercial strategy, in terms of number of reps, target accounts, and then specifically, have you guys made the decision as to whether you would go CSO or build out your own salesforce?

Yeah, I will just jot down the notes. So the question was, as we get approval, we fast forward number of reps, accounts, and whether we'd commercialize on our own or not?

Yeah. I mean, the overall commercial strategy?

Yeah. So let me just remind you the size of the market, and where we are going to focus moving forward. I mean, it's a big market in the U.S. for DSUVIA. The target patient market of approximately 92 million adults in the U.S. alone suffering from moderate-to-severe acute pain in medically supervised settings. For us, our initial target for DSUVIA will likely be the emergency department, where we estimate roughly 18 million patients of receiving an IV for pain only. So obviously, something that we can help address moving forward. We believe that DSUVIA is obviously an efficient replacement for these ER nurses and doctors, let alone a non-invasive nature of the sublingual tablet. In addition to that, Randall, we will be targeting outpatient surgery patients, where we believe the profile of DSUVIA fits well within the needs of the hospital to quickly move patients to discharge. So when you think about that, and we look at the size and the number of accounts in the U.S., we are targeting accounts on our profile based off of a couple of different criteria, ER business, as well as outpatient post-op visits. Obviously, applicable to our market. When we look at those accounts and we consider the average size of historical U.S. institutional sales teams, the number around 60, give or take a little bit more or less, that's likely a number we would work to, but in a step-wise fashion. We probably start in the first couple of quarters with 10 to 15 sales reps, issue our communication and messaging, execution, is pinned down with an average build to 60 over the course of the year to a year and a half, pending the results. And with that being said, that's when we would build, obviously as I am mentioning internally, as opposed to forming a CSO.

Have you considered looking at co-promo situation where you could find a partner who could perhaps go elsewhere, in the other part of the market that you are not looking at?

Yeah. That would certainly be something we'd entertain. We see ourselves as a hospital company and sales teams moving forward. In the event that there is medically supervised settings, where our product could have proper distribution, based off those setting outside of the hospital, that would make a lot of sense for us.

Okay. And then, just moving on, a question; what are your expectations for the advisory committee meeting? Give a sense of where the focus will be?

It's a good question, and we are already preparing for that advisory committee today, as well as, really graduating from our preparation that had begun last year, earlier in the year, as we are anticipating potentially getting wanted to be notified, that we weren't. Well, there is always going to be the clinical and safety profile that's important in this particular market, and is systematically compared to the current standards of care. So I think that would be an important component for the AdCom moving forward. I do think they will want to understand the risk management program, moving forward with our particular product in the opioid setting that's to be expected and highlighted moving forward. So those are the things primarily we are preparing for. Moving forward, our clinical data is obviously and our safety and efficacy is very strong. We will highlight aspects of our launch program and the distribution restricted to those that would qualify for receiving our product, and those would likely be the main focus moving forward.

Got it. And then on DZUVIO in Europe, your approval is going to go up pretty quickly. Two part question, have you started talking to partners, and then question and maybe this is for Raffi or yourself, is that an opportunity to bring in some cash to help to fund the U.S. launch?

Yeah. I will comment on the first part, and then Raffi will add some color on the second part. We normally don't talk about business development discussions, but as you can imagine, we have always had the strategy of monetizing this product and making available through a partner in Europe, that's not our competence. Our competence is U.S. commercialization. Those conversations have been ongoing and continue to move forward, especially with the CHMP positive opinion right now. And when we think about a partner, obviously, we are going to be interested in someone, that is really going to have capacity and focus for this product moving forward with a history of commercial leadership and navigating the pricing wars of the European market. Raffi, maybe you can comment on the latter half.

Great. And I think the importance for us and partners, obviously someone that is going to be able to -- the best that we can find to commercialize this product, from a financial perspective, the terms of that are obviously very important. But we have nailed those down with the partners we are in discussion with, but that's certainly a factor in the financial terms, what's upfront as well as the royalty structure on the backend, which is important to us as well.

Especially with the size of this market.

Yeah, that's right.

Okay. Then my last question. Vince, you mentioned in one of your responses to my questions, you are a hospital company. That's a strange point, when you talk about AcelRx, you are clearly getting close to the finish line here on the first part, with another coming. As you think about the next three to five years, strategically, what is the buildup of the platform? Is it a hospital company that's going to have connectivity into the hospital base looking to add products or are you going to focus on pain and move outside the hospital? What should investors think about the businesses, as you think about the next three to four to five years?

That's a great question, and it would be on the former that you mentioned. We believe that we are a hospital company that today's platform is built off of our sublingual sufentanil tablets. It just so happens, we have got two products built off of that fundamental platform. But because we have confidence in distribution, education through MSLs, as well as sales representative penetration into these accounts. We believe that's the right platform to continue to leverage that infrastructure, as opposed to building new infrastructure in the retail markets outside of the hospital.

Got it. Okay. Great. Thanks guys.

Thank you, Randall. We appreciate it.

The next question comes from Roger Song of Jefferies. Please go ahead.

Thank you. Congrats on the resumption of DSUVIA and the positive opinion. So I only have one question about this resubmission. So can you just kind of generally comment, what are the key data or evidence, such as PKR safety data, are included in this NDA submission for DSUVIA? Thank you.

Thank you Roger for asking the question. We will try to trim it down and focus it more on how we are answering the CRL responses that we'd be comfortable, since that was fairly focused in the FDA's response to us, Pam?

Sure. The FDA was interested in safety of maximal dosing and following maximal dosing, as well as very clear directions for use for delivering the tablet sublingually with the single dose applicator. Regarding the maximal dose, we have a nice Type A meeting with the FDA in January, and we agreed to reduce the maximal dosing from a theoretical dosing of 24 tablets. We never expected anyone to dose that much, certainly clinically no one dose that high, but we reduced it to 12 tablets in 24 hours, which is much more consistent with our clinical trials. And certainly, in this era of drug abuse concern, we have to make sure that we are not giving more drug than we need to. We also happen to have [indiscernible] data on that exact number, 12 doses. We reached steady state after approximately five to seven doses of the drug. So you know, even when they dose beyond that, you are not going to be seeing higher plasma levels. We wanted to make sure that the FDA was comfortable with patient numbers of both DSUVIA and ZALVISO patient numbers, that supported that new lower maximal dose of 12 tablets in 24 hours, so that's a big part of the submission safety data around that. And then of course, the second part is the human factors, risks that we alluded to in our press release today.

Is that helpful Roger?

Yeah, it's definitely kind of very helpful. Just one last question; for the human factor test, will you share with investors the results or it's pretty standard, it's just positive results in general?

I think I'd call it relatively standard. It took some time because we had -- we didn't want to initiate the study without having input from the FDA, that is starting a study and coming back with a protocol revision, where we'd have to restart it. So with that being said, we won't share all the details of it, but I think it's an important opportunity to just study, and we commented on our script today, is that it resulted in no drop tablets. But that's not the only thing that's measured in such study. I could imagine it's the directions for use, so any particular step in that DFU or directions for use, is assessed and measured, whether it's opening the foil package, whether it's taking the lock off of the SDA itself, or whether it's visually confirming that the tablets in the sublingual space, all culminating in, of course having it properly administered sublingually under the tongue, without any dropped tablets. And in general, a few other steps; obviously, we have had success in order to culminate with having tablets under the tongue without any drops. So we consider it a very successful trial, and we wouldn't have resubmitted unless we thought otherwise.

Great. And once again, thank you.

Thank you, Roger.

Next question comes from Michael Higgins of Ladenburg Thalmann. Please go ahead.

Thanks operator. And I want to extend my congratulations as well guys, you have [indiscernible] to very positive event, since weeks and months. So congrats. Raffi, couple of questions for you if I could; if you look into the 2018 towards the end of the year, how should we look for the R&D spend to look, considering you are not running out of trials at this point, but you may have some other items that may drop in the R&D line?

Yeah Michael, I think -- and thanks for that by the way. I mean, R&D, I would expect it's going to continue, as you have seen it in the last couple of quarters, we don't expect it to increase. Our studies are done, right, with the two existing product candidates, for the rest of 2018, we are not expecting any increase in that.

Okay. That's helpful. And given your comments on the marketing outlook and so forth, how does the SG&A line look now till year end?

So similar. Until ramp up commercialization or pre-commercialization resources, which we expect to happen in Q4 after our PDUFA date, we expect pretty much the same thing in Q2 and Q3, as you have seen in Q4 2017 and Q1 2018. So pretty flat until we start our pre-commercialization ramp.

Okay. Pretty helpful. And just one last follow-up; how many people are a part of your marketing budget now and how might that change, starting Q4 2017?

Well this is Vince. We were pretty thin. We have done some strategic hires that we mentioned in the past. We got a head of sales and two RSDs that fit in our sales organization right now, as they are continuing to evaluate the strategy moving forward. All three with experience in hospitals and pain management as a therapeutic area. We thought just two or three in market access, as we are ramping up for supply chain in both the traditional retail, that's meaning wholesalers as well as DoD markets. And then we have one marketer, that -- we have a tight marketing team, and outside of commercial, you just have a very light MSL team consisting of one with a public consultant. So we continue to remain very tight, and lean in our operating structure and focus point that we have final comfort on approval.

Vince, very helpful. Sorry, your answers are spawning more questions I guess, not that it's confusing, but you mentioned DoD, if I recall right from years past, there is agreements with other countries' defense departments, such that the [indiscernible] group may also be included in your ability to sell the drug? Not that it's included in your DoD contract for a product to be acquired. But can you look to other countries to acquire your product, post-approval in the United States?

Well I think you are referencing, when you say other countries, you mean through the Department of Defense, is that what you are referring to?

Yeah. I think that's how that mechanism worked, it was new to all of us when we first heard it, and haven't heard much on that point since. So just wondering inside the U.S., what kind of buying you may have?

So other than for -- obviously, we are talking about Department of Defense. There is no individual countries that are specific to identify that we would be marketing to, if you want to call it that. But through NATO, if -- there is an opportunity through NATO that would be covered under that existing agreement. But right now, that's not the focus right now. Obviously, anything through for DZUVIO in Europe would be covered in separate agreements for Europe. That we do not have currently.

Okay. Any revenues that would come in, if it came in through a partner, you would have royalty on that, the revenues on that?

Yes. That's the expectation.

Okay. All right. Very helpful. Thanks guys.

Thank you, Michael.

This concludes our question-and-answer session. I would now like to turn the conference back over to Mr. Vince Angotti for closing remarks.

Thank you, operator. Thank you all for joining us today for your continued support and interest in AcelRx. We have some very strong momentum in 2018, and we look forward to updating you on our continued progress with upcoming milestones throughout the year. Thank you.

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