Good day, and welcome to the AcelRx's Third Quarter 2019 Conference Call. This call is being webcast live on the events page of the Investors section of AcelRx's website at acelrx.com. This call is the property of AcelRx, and any recording, reproduction or transmission of this call without the expressed written consent of AcelRx is strictly prohibited. As a reminder, today's call is being recorded. You may listen to webcast replay of this call by going to the Investors section of AcelRx's website. I would now like to turn the call over to Raffi Asadorian, AcelRx's Chief Financial Officer. Please go ahead, sir.

Thank you for joining us this afternoon. Earlier today, we reported our third quarter 2019 financial results and provided an update on our commercial launch of DSUVIA 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 are Vince Angotti, our Chief Executive Officer; and Dr. Pam Palmer, our Chief Medical Officer. Also with us today is Dr. Charles Lee, a Board-certified plastic surgeon locally here in San Francisco, using DSUVIA in a surgical suite with patients requiring various plastic and cosmetic procedures. 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 AcelRx. Please refer to our press releases 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'll now turn the call over to Vince.

Thank you, Raffi. Good afternoon, everyone. We appreciate you taking the time to join our call today. We're pleased to share the progress of the launch, including some details around the continued acceleration of healthcare institutions' access to DSUVIA, as well as providing another opportunity for you to hear from a healthcare practitioner experiencing the benefits of DSUVIA in his practice. As we've said previously, the initial phase of the DSUVIA launch is focused on education and awareness to achieve positive formulary reviews and REMS certifications, which sets the stage for DSUVIA's future adoption in our targeted healthcare institutions. 2019 objectives established to measure the success of the DSUVIA launch, 125 formulary approvals and 125 REMS-certified facilities, underscore this focus. I'm pleased to communicate that we're well on our way to having a successful DSUVIA launch as we've already achieved formulary approval for DSUVIA's use at 105 facilities and surpassed our REMS certifications objective two months early with 130 facilities now certified. We also expect to achieve our objective of 125 formulary approvals by year-end. And as a reminder, this compares to 43 formulary approvals and 51 REMS-certified facilities announced last quarter. Q3 was the first full quarter with our 40 hospital account managers on board, and we've seen strong acceleration in our access metrics since they've joined. We expect the momentum of formulary approvals and certified facilities to continue as the level of engagement with healthcare institutions continues to expand and reach new highs each week. As an example, the majority of the REMS certifications completed since our last call, occurred just in October. Our disciplined approach utilizing a staged launch, initially with only 15 hospital account managers, allowed us to understand the process and speed of review at different types of institutions, the perspectives of each key decision…

Thank you, Vince. It is with great pleasure today that I introduce to you Dr. Charles Lee, who's a Board-certified plastic surgeon locally here in San Francisco, who is utilizing DSUVIA to manage acute pain in his surgical suite for patients undergoing various plastic and cosmetic procedures. Dr. Lee is the Chief of Plastic and Reconstructive Surgery and Director of Microsurgery at St. Mary's Medical Center in San Francisco; Associate Clinical Professor of Plastic and Reconstructive Surgery, University of California, San Francisco; as well as the Assistant Director of Reconstructive and Microsurgery Fellowship at UCSF. The following information is intended for investors, not healthcare professionals or patients. Before we hand it over to Dr. Lee, I will cover some safety information for DSUVIA. DSUVIA is a Schedule II controlled substance that may only be dispensed to adult patients in a certified medically-supervised healthcare setting for the management of acute pain severe enough to require an opioid analgesic and for which alternative treatments are inadequate. Risks include life-threatening respiratory depression, addiction, abuse, misuse, cytochrome P450 3A4 interaction, and risk from associated use with benzodiazepines or other central nervous system depressants. The most commonly reported adverse reactions are nausea, headache, vomiting, dizziness, and hypotension. AcelRx ensures proper use of DSUVIA via physician education and the DSUVIA Risk Evaluation and Mitigation Strategies or REMS program. DSUVIA is only available to facilities that are part of the DSUVIA REMS program. Facilities that administer DSUVIA must be able to manage acute opioid overdose, train relevant staff on DSUVIA, and implement policies and procedures to ensure the appropriate administration of DSUVIA. Full safety information and the black box warning for DSUVIA can be found at dsuvia.com. Now I would like to hand the call over to Dr. Lee to share his observations while using DSUVIA to manage his surgical patients’ acute pain.

Thank you, Dr. Palmer. Hello, I'm Dr. Charles Lee. As you heard, I'm a Board-Certified Plastic and Reconstructive Surgeon in San Francisco. I am being reimbursed for my time to speak to you today, otherwise I am not a paid consultant or speaker with AcelRx. There are approximately 7,000 board-certified plastic surgeons here in the US, and the number of cosmetic and plastic procedures performed is increasing annually. Surgical and procedural suites that are not within a hospital are becoming a much more common venue for many of our plastic and cosmetic surgeries. Patients often like having more minor surgeries, such as low-volume liposuction in a convenient, friendly and cost-effective environment. And many patients don't want to be fully sedated or go under general anesthesia for more minor surgeries. These procedures are performed without an anesthesiologist and often without an IV have been coined as awake surgery in our specialty. We administer a low dose, oral sedative to relieve anxiety prior to the procedure, since we, unfortunately, as surgeons, do create acute pain at levels of four out of 10 and higher, and opioid analgesic is often required. Local anesthetics are also a critical part of performing these surgeries. However, the infiltration can be painful, therefore there is a need for systemic analgesia such as that provided by an opioid. I was first intrigued by DSUVIA due to its rapid onset of action within 15 minutes, without requiring an IV. I don't start IVs in my awake surgery patients and a sublingual opioid approach seemed tailor-made to my practice. Over the years, I have found that many of my patients are interested in having surgeries performed under conscious sedation, instead of general anesthesia, and I have performed a wide variety of surgical procedures safely in this manner. However, inadequate analgesia…

Thanks, Dr. Lee, for sharing your experience with DSUVIA, and I hope those remarks provide a perspective on yet another real-world application of DSUVIA. As you know, Dr. Lee will be available during the Q&A portion of today's call as well. Before handing the call over to Raffi, since we've had various questions on the military's use of DSUVIA, I want to provide an update on this as well as Zalviso. As a reminder, Department of Defense was a key partner helping in the development and funding of DSUVIA. Broad adoption across the Department of Defense takes time since it's a very large organization, but it's certainly progressing and we expect we can provide further information on this in the near future. I can confirm that military treatment facilities or the military hospitals are included in our formulary approvals and the military has purchased and is using DSUVIA. With regards to Zalviso, on September 17, the FDA held a public meeting on a proposed risk benefit framework for new opioid approvals. There were no new resolutions from this meeting, but the participants provided input to the panel. While we believe Zalviso fits well with the proposed risk benefit framework, since the agency appears to be in process of updating its policy regarding opioid approvals and as previously canceled or postponed the Advisory Boards for two other upcoming opioid reviews, we'll continue to hold the Zalviso NDA resubmission to more clarity when a proposed policy is made available. Well, that's it. Raffi, will now take you through the financials.

Thank you, Vince. Our attention to cash management during this initial launch period remains strong. We ended the third quarter of 2019 with $80.4 million in cash and short-term investments. Our net cash outflow for the third quarter was $11.1 million, which was driven mainly by our $10.7 million of cash operating expenses or combined R&D and SG&A expenses, excluding stock-based compensation. This compared to $11.2 million of cash operating expenses for the second quarter of 2019. Combined R&D and SG&A expenses, inclusive of stock-based compensation for the third quarter of 2019, totaled $12 million compared to $8.8 million for the third quarter of 2018. We continue to focus on investing in the most impactful areas of driving the launch and remain prudent in overall cash spending. Revenues for the third quarter of 2019 were $0.6 million, reflecting $0.5 million in sales of Zalviso to our European partner and $0.1 million of revenues from the sale of DSUVIA. We continued our focus on facilitating healthcare institutions' access to DSUVIA, the success of which is evident by our increased number of formulary approvals and REMS-certified facilities. We expect to increase our focus on driving DSUVIA demand within approved facilities next year, as we leverage the access gained in 2019. DSUVIA gross to net sales percentage in the third quarter was 28% compared to 35% expected for the year. Our year-to-date September gross to net sales percentage was 31% with the variation driven mainly by customer mix. We expect to provide updated guidance on 2020 operational launch metrics and financials on our year-end call. With that, let me turn the call back to Vince.

Thanks, Raffi. So to summarize, we continue to strongly believe DSUVIA's benefits and long-term success in the market as well as its ability to change the standard of care for acute pain management in medically-supervised settings. We're pleased with the progress we've made to-date and with the increased access to DSUVIA made possible by our new hospital account managers added just this past July. And as you heard from Dr. Lee, DSUVIA is a differentiated, non-invasive solution for the management of acute pain, and we expect continued success in expanding its use by healthcare professionals. In addition, we'll continue to responsibly manage our cash. And I'd like to open the line for any questions you may have. Operator?

Thank you. We will now begin the question-and-answer session. [Operator Instructions] And our first question will come from Brandon Folkes of Cantor. Please go ahead.

Hi, this is Brian [ph] on for Brandon. Congrats on the quarter. I was wondering if you could provide some color on the usage of DSUVIA in hospitals versus ambulatory surgical centers? Thanks.

Sure. So, of the mix of approvals today, about 25% to 30% of them are hospitals and it is a mix. We have some that have isolated it for the PACU, for perioperative analgesia associated with those same-day surgery patients. We have some use in the ER oftentimes for the patients that are difficult to stick. So those have been the two majorities of use, but it is diverse beyond that. We also have a burn center, actually has recently put on a formulary, and a wound center, and we also have two EMS systems that recently became REMS-certified. So, while it's being used in the expected areas in the hospital, what we're finding is that the diversity of interest in it goes beyond that for those different settings I just mentioned. Does that help, Brian?

Yes, it does. And if you could just expand on it a little bit, if you could just share any of the feedback you've received from hospitals and P&T committees and physicians? Thanks.

Yes, let me give you a little bit about the process and what we're seeing in the use of the drug. And, of course, I get, usually the goods on the use of the drug. So, let's be honest, it will be a little bit biased. But the process for the hospitals, it's interesting, so -- they will often go through the P&T committee as you might imagine and then in a subsequent month or two, they'll confirm that decision based off the clinical review and the voting members of the P&T within MEC, a Medical Executive Committee. So, it's often a two-step process, at least we're finding with us in the hospitals based on meeting and review. Once that occurs, and we've mentioned it in the script here is then we focus on the use moving forward, and that's coming up into 2020. And by use, we mean now they're establishing certain protocols for areas of use, so in the PACU which patients to be used on, which types of surgeries, when it's dosed, and how many doses are in the ER something similar. And our MSLs are often involved with that protocol. Then we'll have our sales representatives go in for the training, doing services such as a couple of weeks ago, I think it's about three weeks now, we trained 200 people in an ER in one of the institutions in the US, so it required three shifts worth of training for the different shift workers coming in, in that emergency room. So, that's been the process, it takes a little bit of time in the hospitals, it moves faster in the ASCs. But I can tell you and I think you heard it from Dr. Hutchins on our last call and you heard it from Dr. Lee today, the drug is delivering on its promise in analgesia. We're finding the timing the dose to the PK profile and the acute pain, and the most common feedback we're getting is one dose. Very rarely are we finding that the users of the product thus far have to go beyond one dose, even in different circumstances with demographics of patients, etc. Dr. Lee, you've seen one dose for all your different types of patients as well.

That's correct.

Yes. So it just continues to be confirmed. And importantly, what we have continued to hear is that the clarity of the patients remains as we expected it to occur, meaning cognitive -- the cognition remains clear. And so, those are the keys that we've heard that you hope would happen based off clinical trials, but on real practice you want to come to fruition. So we're seeing the limited dosing, because it's all that's needed and clarity of the patients following that dosing. Did that further answer your question, Brian?

Yes, it did. Thanks for your time.

You're welcome. Thank you.

Our next question will come from Ed Arce of H.C. Wainwright. Please go ahead.

Hi, everyone. Thanks for taking my questions, and congrats on the progress in the quarter. First question is for Dr. Lee. I think you had mentioned in your remarks, Dr. Lee, that you’ve treated about 15 patients so far. And I'm just wondering a couple questions, given your brief experience so far seems to be pretty positive, would you expect to continue to expand the type of procedures that you would use DSUVIA for? And then the other question is, I was intrigued by the differential in pain that you had mentioned of pain scales of five to eight prior to and zero to one after administration. Wondering if -- how you view that as compared to other sorts of products you've used, even invasive analgesic? Thanks.

Yeah. So, let me address the types of procedures that you had asked about. So, my current range is -- is pretty broad. Liposuction, facelifts, doing vein ablations to blepharoplasty is a pretty broad range. I do foresee myself actually expanding my procedure list to add some breast procedures such as breast lifts and even potentially breast augmentation. So, I think the range of procedures is still quite broad and can be further broadened. The pain scale, I have to say, yes, it is significant. I've never had patients ever describe an abdominal liposuction procedure as just getting a little belly massage. And as I said, the case that really made me realize how powerful it was in terms of controlling pain was the liposuction procedure on the male gynecomastia patient, which is suctioning fat from the male chest, which historically, I can tell you, I have used additional tumescent anesthesia, local anesthesia with trying to give additional time and all those things, still be quite a discomfort and painful procedure and to have someone who actually said he had a pain level of one for that procedure. So, that was quite remarkable, and I would say that I -- that has been the consistent results that I have had with all of my DSUVIA patients. I have tried other pain PO pain opiates such as Vicodin or Percocet and they really didn't work very well. It was inconsistent pain control, and the side effects were significant such as nausea and vomiting, which I actually had during the procedure, and that was actually quite difficult to manage. So, I really steered away from the oral opiates such as Vicodin and Percocet.

Great. Thank you. Thank you for that, Dr. Lee. And perhaps a follow-up for Vince. Perhaps, just thinking through the 130 or so formulary approvals that you've achieved so far, how does that fit and how does that mesh with the different types of facilities that you are approved? Or in other words, the different kinds of plans, be it local, regional, state, or what have you, that are being approved on formulary? Thank you.

Yeah. So, it's actually a 130 REMS and 105 approvals, just for clarification. And it's the diverse, so well, 25% to 30% are the hospitals and they -- are in different areas of the hospitals, depending on the champion for that particular hospitals I mentioned previously, might be ER for one hospital, and might be the PACU for another hospital, and might be both for another hospital. We have found, just in general, that the hospitals are moving slower than the balance of the approvals being the ASCs. And in the ASCs, it's become very diverse. And when I say ASCs, let me just be careful, we're categorizing kind of all other in ASCs, so whether that would be Dr. Lee, whether that would be your classic ASC, like a specialty surgery hospital where they're doing just mostly orthopedics, whether it's one that takes all different comers and disciplines, they tend to move faster with the DSUVIA. And there is not one particular area of use to-date that we see more often than another, it often depends on the champion for that ASC, which brings me to I think a final point to help with this Ed. When we target the ASCs, the 1,100, and it's evolved from 600 just a few months ago, we have a diligent process, it looks really at two or three things. The first is the types of procedures they're doing and are they relevant for match for acute pain or the management of acute pain for DSUVIA. The second is beyond those types, we rank them based off of the volume. And then once we've got those relevant types in volume, we map a amount and proximity to our current 40 sales representatives. So that limits a fair amount that might be in the white space. And that takes us down from thousands of ASCs to about 1,100 we're looking at. And we don't have a bias on one procedure to another, it just has to -- we have to know that it creates relevant pain condition for DSUVIA treatment. And we try to anchor those around those hospitals that are our core targets outside of the ASC. So that's the process we're using. The data on ASCs is not great relative to historical procedures, disciplines, etc. So we use just the best data we can find, and it's turning out that as we go into when we often get referrals to another. So, I hope that helps answer your question. There's not a perfect model for which ASC versus another, meaning these procedures only, it's very diverse in collection, and many ASCs do different procedures either within or separately from one another.

That's great. Thanks Vince for that extra detail.

And the next question will come from Chris Howerton of Jefferies. Please go ahead.

Hi guys. This is Syed here in for Chris. I had a couple questions. First one was, and I'm sorry that I don't know this, but of the 130 REMS-certified facilities and the 105 formulary approvals, is that -- are those a 105 approvals in those 130 REMS facilities, or is that an overlap? Or are there kind of like facilities that are certified, but are not approved yet?

Yeah. It's not a perfect overlap. We have close to 60% of the approved facilities are also REMS-certified. It's interesting though, oftentimes the REMS are lead indicator for the approvals that are coming moving forward, but it's fluid. I'll give you an example. Just recently, we had a large ASC system approve it, and while we've got one or two REMS certifications in it, we've got another 20 plus to go. So you're not going to find a perfect match as you go, but what we have found just in general is that the REMS are typically a lead indicator of the approvals to come. So not a perfect match.

Got it. Okay. And then in terms of like these approvals that you're getting, what -- what gives you confidence that this is going to trend or translate into revenues for DSUVIA, like are they being certified because there is a certain like promised DSUVIA usage? Or you know, I just want to -- like to know like what gives you confidence in revenue transition there.

Yeah, there is no promise. They're coming to us wanting to be certified because of their interest in use of the product. So it's really -- we'll go on, educate them and then I'll ask us to be certified more times than not. And that comes with some commitment from them just based off being REMS-certified facilities. That means, obviously you have to qualify to access the drug, but also means you're going to submit yourself to audits moving forward. And we're very clear with them in the fact that the signing up for it, I think it's telling us obviously that it's worth it for them moving forward.

Got it.

Most often what we're getting is it's going to be used as first-line pain management for any particular procedure. But, yeah, there is no promises. We think it's going to translate into use, because they see an unmet need. In the ASCs what they see is efficiency in use, and trying to keep their schedules daily on par, because the drug's delivering on its promise of efficacy and you heard that from Dr. Lee today, you heard that from Dr. Hutchins before. Very different than you might hear formulary approvals or commitments with other products, I don't know whether it's antibiotics is something else that might go in a hospital. We see a lot of formulary approvals just to have it on the shelf, but maybe not a lot of use because they're not put in first line. For us, we expect it to be in first line. And I think the number one reason is the drug's delivering, and it's filling an unmet need that they haven't been able to fill before. And we always thought, I reiterate it one more time, that it was the non-invasive nature of the drug, which you heard from Dr. Lee and even Dr. Hutchins last time is important, but the pharmacokinetic profile of this drug that they can achieve with other acute pain opioids those are operated -- indicated for acute pain are really making it a differentiating factor. The one dose, it's economic, it's efficient, and that's been the real difference maker. It's a very fair question, because it is a process in these institutions, but I think having these REMS-certified institutions and committing to audits moving forward would tell you that there is a genuine interest.

Got it. Great. And I think I tend to agree there as well. Okay. So the last question that I had was a gross to net question. I think in the third quarter, you said the gross to net was 28%. Just curious to know like where do you see that trending over the next several quarters for DSUVIA?

Yeah, we'll stick with our expectations of a 35% gross to net, but as you've seen that we've tracked favorably to that every quarter, and it really has to do with the customer mix, who is using the product. But we'll stick with 35% for now.

Great. Thanks for taking the questions.

Our next question will come from Michael Higgins of Ladenburg Thalmann. Please go ahead.

Hi guys. Thanks for taking the questions. Also, as I'm juggling calls, I'm busy right here. So let me know if this has been discussed and that can move on. But question for Dr. Lee, your comments on the male patient particular are really striking. You mentioned previously the pain levels are five to eight. I assume it was with an opioid, and if so, if you could describe what you're replacing DSUVIA with will be helpful? Thanks.

Right. So previously I was -- so I'm always using tumescent, some sort of local anesthetic. In that particular case, I typically gave a patient a low-dose anxiolytic like a PO or a oral Valium. And then as I said -- as I mentioned, I tried to use of a Vicodin or a Percocet as a tablet form and it just wasn't giving me adequate pain control. But since DSUVIA -- and having used DSUVIA, it has made a significant change in the pain profile during the procedure, where, again, patients are extremely comfortable, very minimal pain. I mean a reduction of pain score in over half -- half of reduction in pain score, certainly weighed down much lower. So that's really been the impressive part of using the DSUVIA. Does that answer your question a little bit?

Yeah, absolutely. It's really impressive versus what you've normally been using. So that's great to hear. Thank you. Question for you, Vince. You mentioned military has purchased a drug, is that in Q4, is that happened in the last 35 days or so, or does that happened in Q3?

Yeah, that was a purchase in Q3, and we're working with them, as I said, on the broader application of it moving forward. It's a process and most people aren't familiar with how these things work, but in the Department of Defense and it's just for simplicity sake, you could actually Google this and look it up without giving too much detail, because it's really their business. But they follow a standard process, I mean they need to complete the required Milestone C meeting. And the Milestone C meetings are public in definition on the web as well. But that Milestone meeting review happens at the end of what they call an EMD or engineering and manufacturing development phase of the defense acquisition process. Fancy terminology for their collaboration in execution of the project. And its purpose is to make really a recommendation or seek approval to enter in the production and deployment phase of what that -- the product of that production was. And so that's where we are now. I can't tell you the exact timelines, that's their timelines. Do we expected early in the year? We did. But it's -- we're staying close to them as they're finishing out this project in this Milestone C meeting moving forward. That's about the best of the detail I can give you. With that said, certain units of the military, including the military treatment facilities, they are allowed to use it without that Milestone C meeting. So if it's an MTF or a hospital, they can order it and a few of them have, as well as other branches of the military. So we'll stay in close contact with the military moving forward, it's at their pace, it's at their discretion and we'll keep you posted as we move forward.

Thanks. Yeah, I'll give you background, and I'm sure I understand the process pretty well in there. Hurry up and wait [indiscernible] coming home here again. One final one, if you can give us an update on the IV opioid shortage and how that's impacting formulary discussions? Thanks.

Yeah. It depends on the day or week that they're experiencing those shortages. A year or two ago they were having significant issues with that where they were clearly looking at DSUVIA just to get it in and I have in stock as a just in case. I can tell you one thing that has been made public is that the DEA is constraining quotas on certain opioids moving forward. Some of those clearly are competitors in these markets. The good news for us is we have our DEA quota set already for '20 -- for this year as well as moving forward. So we're in good shape with our supply, and I expect that you'll see institutions in the field start to experience intermittent supply challenges in the future based off of those constrained supplies by the DEA.

That's helpful. Thanks guys.

This concludes our question-and-answer session. I would like to turn the conference back over to Vince Angotti for any closing remarks. Please go ahead.

Thank you, operator. Just to summarize, we continue to strongly believe in DSUVIA's benefits and long-term success in the market, as well as its ability to change the standard of care. We want to thank you all for joining us today and your continued support of AcelRx. We're pleased with the progress thus far and we'll continue with our disciplined execution of the launch plan, while managing our cash resources prudently. And we look forward to sharing the continued success of our launch moving forward, and appreciate your interest in our company. That concludes our call, operator. Thank you.

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