AcelRx Pharmaceuticals, Inc. — Q2 2019 Form 10-Q
Entity note: The filing identifies the registrant as AcelRx Pharmaceuticals, Inc. (Nasdaq: ACRX), not Talphera, Inc. The quarter ended June 30, 2019; the filing was signed August 5, 2019.
Business context and reporting period
AcelRx is a specialty pharmaceutical company developing and commercializing treatments for acute pain in medically supervised settings. DSUVIA received U.S. FDA approval in November 2018 and launched commercially in Q1 2019. Zalviso is marketed in Europe by Grünenthal but has not been approved in the United States; AcelRx was still evaluating when to resubmit its U.S. application. DZUVEO, the European brand for DSUVIA, had European approval, but AcelRx had not secured a commercialization partner there.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $0.94 million | $0.82 million | $1.21 million | $1.16 million |
| Net product sales | $0.06 million | — | $0.10 million | — |
| Operating loss | $13.36 million | $7.15 million | $25.68 million | $15.42 million |
| Net loss | $12.41 million | $10.54 million | $26.09 million | $22.13 million |
| Net loss per share | $0.16 | $0.20 | $0.33 | $0.43 |
Revenue remained small relative to costs. Q2 cost of goods sold was $1.81 million against $0.94 million of total revenue, implying a negative gross contribution before other operating expenses. Management also expected negative gross margins on Zalviso supplied to Grünenthal for the foreseeable future. Selling, general and administrative expense increased 187% in Q2 to $11.33 million, primarily from DSUVIA launch-related personnel and programs; research and development expense declined 65% to $1.16 million.
- Cash, cash equivalents and short-term investments totaled $91.55 million at June 30, 2019, down from $105.72 million at December 31, 2018. Current assets were $96.82 million and current liabilities $8.29 million.
- Six-month operating cash use was $25.56 million, compared with $13.78 million in 2018. Investing activities used $10.25 million; financing activities provided $12.90 million.
- At June 30, long-term debt was $23.77 million, with no current portion reported. The company also reported a $94.13 million liability related to its sale of future royalties. Total liabilities were $133.53 million, exceeding total assets of $115.11 million; stockholders’ deficit was $18.42 million.
- Management said existing capital resources were expected to fund operations through at least the end of Q3 2020, while cautioning that resources likely would not fund operations through the point of self-sustaining revenue.
Material changes versus the prior comparable period
- DSUVIA generated its first reported product sales in 2019, but sales were only $55,000 in Q2 and $102,000 for the first half.
- Net loss widened year over year, while loss per share narrowed because the weighted-average share count rose substantially (78.9 million versus 51.8 million in Q2).
- Higher commercial launch spending drove SG&A growth; lower development activity and the shift of personnel toward commercialization reduced R&D expense.
- On May 30, AcelRx borrowed $25 million from Oxford Finance and used approximately $8.9 million to repay its prior Hercules facility. Net proceeds after costs and accrued interest were $15.9 million. The new loan bears interest at 6.75% plus the greater of 30-day LIBOR or 2.50%, is interest-only through July 2020, and matures June 1, 2023. It is secured by substantially all assets other than intellectual property, which is subject to a negative pledge.
- The company’s estimate of future payments under the PDL royalty monetization was revised downward. This drove a Q2 non-cash interest income benefit and reduced reported net loss by $2.7 million for both the quarter and first half; it does not represent operating cash generation.
Outlook, risks and unusual items
- Management expected continued operating losses and negative operating cash flows until DSUVIA gained market acceptance and produced significant revenue. It expected 2019 SG&A to increase versus 2018 as commercialization continued.
- A high-volume automated DSUVIA packaging line was expected to be qualified for product packaging beginning in 2020; management anticipated it could materially lower cost of goods sold from 2020 onward.
- Zalviso’s U.S. NDA had not been resubmitted. The FDA could require further work, restrict any approval to post-operative patients, or find device-error and inadvertent-dispensing results unacceptable. June 2019 FDA draft opioid benefit-risk guidance added regulatory uncertainty.
- In July 2019, after quarter-end, the company said the FDA had identified a deficiency in the API manufacturer’s drug master file that needed to be addressed before the related submission could be approved. A single qualified API supplier and limited manufacturing backup create supply risks.
- The Oxford loan requires at least $5 million of unrestricted cash in controlled accounts and contains restrictive covenants and default provisions. A qualifying $45 million financing or partnering inflow before June 30, 2020 could allow an extension of the interest-only period by one year.
- DSUVIA distribution is limited by a REMS program to certified medically supervised settings. Other risks include opioid-related regulatory scrutiny or litigation, competition, reimbursement and formulary access, reliance on third-party manufacturers, and the need for additional capital. The filing reported no current material legal proceedings.
- The PDL royalty liability is subject to significant estimation uncertainty. A contingent gain of approximately $29 million was described as potentially recognizable only upon realization at the end of the arrangement; it was not current cash or recognized income.
Most important facts for investors to verify
- Confirm the intended issuer: the supplied filing is for AcelRx Pharmaceuticals, Inc., not Talphera, Inc.
- Track DSUVIA adoption, sales, reimbursement and launch costs against the very low reported product revenue.
- Check cash burn and financing needs against management’s stated runway. One risk-factor passage refers to resources through Q2 2020, while the liquidity discussion states at least Q3 2020.
- Monitor the FDA’s response to the Zalviso resubmission and the API-manufacturer deficiency disclosed after quarter-end.
- Review Oxford loan compliance, the $5 million minimum cash covenant, maturity and prepayment terms, and potential dilution from available ATM capacity and warrants.
- Assess the assumptions behind the revised PDL royalty estimates and any eventual contingent gain separately from operating performance and liquidity.