Welcome to the Acelrx Second Quarter 2020 Conference Call. This call is being webcast live on the Events page of the Investors section of Acelrx' website 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 webcast replay of this call by going to the Investors section of Acelrx' website. I would now like to turn the conference over to Raffi Asadorian, Acelrx' Chief Financial Officer.

Thank you for joining us this afternoon. Earlier today, we announced our previously previewed second quarter 2020 financial results 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. 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, and good afternoon, everyone. I hope you and your families are remaining safe and healthy, and we certainly appreciate you joining our call today. On today's call, we'll describe the progress we've made toward achieving our strategic objectives of: one, advancing the use of DSUVIA throughout the Department of Defense. Two, expanding our business in large customer channels through partnerships. Three, dedicating our internal sales team to the hospital and ambulatory surgery center settings; and four, in-licensing or acquiring additional products. Objectives 1 and 2 allow for near-term growth without a significant Acelrx commercial investment. While objectives 3 and 4 will take a bit more time, but are expected to have a significant return. We've made solid progress, both in the second quarter and more recently, towards achieving these strategic objectives and building our foundation for growth despite the impacts from the COVID-19 pandemic. This progress is highlighted by our successful Milestone C approval in April, that opens the door for purchases from the U.S. Army as well as our recent distribution and promotion agreement with Zimmer Biomet for DSUVIA for the management of acute pain in adults during dental and oral surgeries. Now as mentioned on our last call, in 2Q, we received Milestone C approval with the U.S. Army, for DSUVIA placement in all of the U.S. Army sets, kits and outfits or SKOs associated with future deployments. This approval was the high case and our internal projections with preliminary expectations at initial stocking orders from the U.S. Army SKOs alone will approximate $30 million over the next 3 years. We expect to know more about initial year orders for Army SKOs in the third quarter as the Department of Defense is going through its budgeting process for its fiscal year that begins on October…

Thank you, Vince. We continue to remain prudent with our cash as we launch DSUVIA. We ended the second quarter with $43.7 million in cash and short-term investments, which represents a change of $9 million in the first quarter of 2020. Our net cash outflow for the quarter was driven mainly by our $7.3 million of cash operating expenses or combined R&D and SG&A expenses, excluding stock-based compensation, or $8.4 million, including stock comp. The operating expenses in the quarter included a net benefit of $0.5 million from the receipt of a breakup fee from the Tetraphase acquisition, net of expenses incurred related to the transaction in the quarter. This compared to $11.2 million of cash operating expenses in the second quarter of 2019 or $12.5 million, including stock-based compensation. Decrease in operating expenses in the second quarter of 2020 was primarily due to a reduction of $1.9 million in DSUVIA-related commercialization expenses, and a $1.7 million reduction in personnel costs. We continue to focus on investing in the areas that will have the most positive impact on the launch and remain prudent in our overall cash spending. Revenues for the second quarter of 2020 were $2.9 million compared to $0.9 million in the second quarter of 2019. Approximately $2.6 million of the revenue recognized in the second quarter of 2020 was attributable to the recognition of previously deferred revenues related to our collaboration agreement with [indiscernible]. Our high-volume packaging line that is expected to be installed and operational at our contract manufacturer early next year has been delayed due to travel restrictions from COVID. We hope these restrictions will be eased later this year, paving the way for final acceptance of the equipment, which will significantly reduce our cost of production once commercial production is running on this line.…

Thanks, Raffi. So to summarize, we have successfully built 2 foundational pillars for further profitable growth with the DoD and with the Zimmer Biomet dental partnership. Leveraging this success while continuing our push into the hospital and ASC markets as we're able to demonstrate the economic and health care benefits of DSUVIA with real-world data will generate long-term value for our shareholders. As you previously heard, the early feedback from the health care practitioners dosing to suit is positive, we look forward to the publications about the data showcasing DSUVIA in the perioperative setting. I'd now like to open the line up for any questions you might have. Operator?

[Operator Instructions]. Our first question today will come from Brandon Folkes of Cantor Fitzgerald.

Congratulations on progress in the quarter. Just 3 from me today. So could you just elaborate on the market opportunity for the Zimmer deal? I think you talked about 7 million procedures. How many of those procedures do you think are suitable for DSUVIA? And then currently, where are you seeing use in DSUVIA? And any new areas during the quarter, placing orders or seen use of the product? And then lastly -- sorry, I'm going to ask the question. I know you've sort of insinuated that you will update us down the line. But with the recent opioid approval, does this change your thinking on Zalviso? Or what can you say at this stage?

So I'm going to have Pam answer those questions. The first one is the Zimmer Biomet opportunity. Just in general, we said about 7.5 million procedures eligible for DSUVIA, but Pam, maybe you can give examples of what those procedures are.

Sure. Yes. So third molar extractions, otherwise known as wisdom teeth extractions, dental implants, bone grafting. There's a number of dental and oral surgery procedures that are commonly performed by oral surgeons and dentists that use IV opioids, and we're really looking to replace IV opioids in that market.

Brandon, so answering directly your question is all of those 7.5 million procedures are addressable DSUVIA procedures. It's not all dental and oral procedures. That's the estimate of what DSUVIA can be addressing.

The second part of that question, Brandon, if recall, was where is DSUVIA currently see it currently being used. Again, I'll defer to Pam. She's been work with various specialists around the country.

Sure. DSUVIA being used in ambulatory surgery settings. It's being used in procedural suites, adjacent to physicians' offices. It's being used in emergency rooms. So we're seeing a lot of DSUVIA use in short-term settings, also some interesting medical supervised settings such as fertility clinics, which often have to do painful procedures and currently use IV opioids in that setting, they're finding DSUVIA to be a very nice noninvasive alternative. We also are seeing oral surgery typically as well as some ENT procedures. So again, medically supervised settings covers a wide swath of medical specialties, and we're happy that they've seen the benefits of DSUVIA in each of those different areas.

Pam, can you also comment briefly on how you're seeing the CV used in the short-term settings, in particular, for the same-day surgeries and the timing of the dose and why?

Yes, the majority of folks using DSUVIA now are giving it preoperatively, about 15 to 20 minutes prior to incision as they know it takes 15 minutes to reach that sort of therapeutic concentration. And 90%, 95% of the time, they're using just a single dose. We know from our PK as well as our clinical trials that we get about 3 to 4 hours of analgesia with a single dose. And in those settings, that's really all they need. So it's looking like a very nice replacement for the IV injectable clear liquid opioids with just a single dose.

And I reiterate, beyond what Pam said, we're spending our time as a company with our resources in those short-term or the same-day surgery settings within the hospital or ASCS, what Pam mentioned before regarding oral surgery, dental surgery use, there's plastic surgery use. There's fertility clinic use those other uses really help reinforce our strategy because they're large -- they're diffused, they're not centralized, our strategy to partner with others to penetrate those markets exactly as we did with Zimmer Biomet. That was a component 2 of your question, Brandon. I think Component 3 was Zalviso. And Pam, can you comment on that one as well, as we're continuing to study the regulatory parameters.

Yes. I think it's still early. We've not really had a definitive framework from the FDA yet on their evaluation of new opioid products. It's unclear whether all the ceradine was approved under an old framework and sort of grandfathered in. And so we're really waiting for more clarity from the FDA and specifically the DAP division. On a specified frame of two sort of evaluate new opioid submissions.

I think the good news in that approval is that they're clearly seeing and recognize the importance of opioids in these medically supervised settings, and that continues to give us comfort moving forward. Brandon, I hope that answered the 3 components of your question.

It does. Do you mind if ask one more, and I apologize -- you just trigged something else. Just in terms of the feedback you received from physicians using the product. Is the onset of action and duration of effect being reported in practice, similar to what we saw in the clinical trials? And then I'll come back on the queue, I promise.

Absolutely. The audit of action is very consistent. Again, the sublingual route of administration avoids the first path effect that you -- meaning it doesn't go to the stomach, and then they have to be absorbed and metabolized by the liver, which makes it very erratic onset. That's why oral opioid medications don't really work quickly or that consistently. So from a sublingual onset standpoint, it is very consistent. And the duration of action is interesting. It's actually a little bit longer than our clinical trial, we did not have a lot of multimodal analgesia when you're going up against placebo, you try to keep those studies quite clean. So in the real-world setting, we've had reports that the duration of analgesia can even last beyond the 3 to 4 hours. And it has a very nice offset tail, meaning that it provides a very comfortable level of analgesia through to discharge with just that single dose.

Yes. I think the general feedback beyond what Pam said is that it's absolutely delivering on the messages we've communicated that onset the duration. And as doctors have mastered their art with it, bringing it forward in the short-term surgeries and procedures has been the absolute key, bringing it forward, meaning when they dose it. And their timing the PK to the acute pain to really maximize the product. And it's really allowing to use 1 dose, which I think has been the largest surprise to all of them.

And if I could add, I think one of the most remarkable things we hear about is the lack of side effects. I mean, in the PACU, the important time to discharge is sort of a composite measure, you have to have your adverse events under control, and you also have to have your pain under control to be discharged. So the thing that I love about sort of time to PACU discharge, is it really is a way to look at both [indiscernible] and safety at the same time as well as making sure of safety, your patients, including your elderly patients, don't have any cognizant impairment, and that's a huge part. So one of the things we're hearing back in stage from the customers is that, that preoperative dose is carrying them through the operation through the PACU, many times, additional medications are not acquired at all, and they're able to discharge them more quickly because they do not have the side effects from the typical live injectable opioids that they're often seen.

Brandon?

Very helpful.

Thank you.

Our next question today will come from Michael Higgins of Ladenburg Thalmann.

My questions have been asked.

Our next question today will come from Evan Seigerman of Crédit Suisse.

A follow-up on the Zimmer Biomet deal. What feedback have you gotten from dentists regarding using the product in office. Are they comfortable storing it and kind of all the necessary infrastructure that they would have to have by having the opioids in stock. I know that they do use various drugs in the office, but just add in another one. And then kind of you had mentioned business development. Any thoughts as to what you're looking for in terms of a target product profile or even more broadly speaking, what type of patient population? How should we be thinking about that?

Sure. Well, relating to the oral surgeon. So we've never marketed to them and we sort of received a number of inbound queries when it first was approved because they saw the obvious benefits. The -- we are only REM certifying and supplying it to oral surgeons and IV sedation dentists. So that means they already have approval and already have the locked C2 storage and all the necessary oxygen and medications to treat respiratory depression due to opioids. So these are very savvy surgeons who already know how to use IV opioids. And they certainly see the advantage of a rapid onset and extended duration sublingual tablet that avoids them having to stop their procedure and redose their IV opioids, which they typically have to do multiple times to out of procedure. So they clearly see the benefit and that's again why Zimmer saw the benefit as well. They know these surgeries very well. They know the benefit that DSUVIA can use.

Yes. And Evan, just to reiterate, why go with Zimmer and we mentioned these other specialty markets, they're large markets, but we don't have a large enough sales force to penetrate like these partners have as well as the relationships that they've built up compared to what we have. So we want to focus on the hospital ambulatory surgery center markets with the partners that are already in these -- we're calling them specialty markets. They're specialty for us, but not for others. But with partners that are already in that space with established relationships with large sales forces. And that leads into, I think, the second component of your question, Evan, which was target product profile as we look at business development opportunities moving forward. So for us, the biggest key is efficiency. Meaning as the call patterns within these medically supervised settings where we currently deploy our resources. We want to keep them focused where they currently are. So whether it's the hospital or the ASC or the anesthesiologists and the office suites, et cetera. We want to continue to target those. The actual therapeutic area is less relevant for us. It's more of where they are located for use of these products. Account overlap is critical, and we'll be opportunistic on a moving forward. One of the common themes through all that other than the efficiency is going to be something that's very late term or already on the market. We're not looking for long-term R&D projects.

Ladies and gentlemen, this will conclude our question-and-answer session. At this time, I'd like to turn the conference back over to Vince Angotti for any closing remarks.

Thank you, operator, and thank you all for joining us today and for your continued support of Acelrx. We feel we're very well positioned for future growth, and we look very much forward to sharing more developments as they occur. So please be safe, and we look forward to giving you updates as they happen. Thanks.

The conference has now concluded, and we thank you for attending today's presentation. You may now disconnect your lines.