case 5:14-cv04416-lhk document 28 filed 04/17/15 page 1 of...

Case 5:14-cv04416-LHK Document 28 Filed 04/17/15 of 67

BRODSKY & SMITH, LLC EVAN J. SMITH (242352) 9595 Wilshire Boulevard Suite 900 Beverly Hills, CA 90212 Telephone: 877-534-2590 Fax: 310-247-0160 esmithbrodsky-smith.com

Counsel for Rick L. Colyer and Liaison Counsel for the Class

BROWER PIVEN A Professional Corporation

YELENA TREPETIN 1925 Old Valley Road Stevenson, Maryland 21153 Telephone: (410) 332-0030 Facsimile: (410) 685-1300 trepetinbrowerpiven.com

Counsel for Rick L. Colyer and Lead Counsel for the Class

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF CALIFORNIA

ADAM ZHAMUKHANOV, Individually

No. 5:14-CV-04416-LHK and on Behalf of All Others Similarly

CLASS ACTION

Situated, 18

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Plaintiff, V.

ACELRX PHARMACEUTICALS, INC., RICHARD A. KING, TIMOTHY E. MORRIS, and JAMES H. WELCH,

Defendants.

AMENDED CLASS ACTION COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS

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Amended Class Action Complaint For Violations Of The Federal Securities Laws 5:1 4-CV-044 1 6-LHK


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Lead Plaintiff Rick L. Colyer and additional Plaintiff Harry Zweifel (collectively,

2 "Plaintiffs"), by and through their attorneys, allege the following upon information and

3 except as to those allegations concerning Plaintiffs, which are alleged upon personal

4 I Plaintiffs' information and belief is based upon, among other things, their counsel'

5 investigation, which includes without limitation: (a) review and analysis of regulatory if

6 made by AcelRx Pharmaceuticals, Inc. ("AcelRx" or the "Company") with the United S

7 Securities and Exchange Commission ("SEC"); (b) review and analysis of press releases

8 media reports issued by and disseminated by AcelRx; (c) review of other publicly avail

9 information concerning AcelRx; and (d) consultation with an expert who has a compreher

10 understanding of the requirements for submitting new drug applications ("NDA(s)") for di

11 devices, and combination products and has approximately thirty years of experience dealing

12 the U.S. Food and Drug Administration ("FDA") related to matters that include clinical

13 regulatory issues in connection with Investigational New Drug Applications ("ND(s)"), NI

14 Premarket Approval Applications, and Biologics License Applications, as well as pre-IND

15 pre-NDA meetings and advisory committee meetings.

16

NATURE OF THE ACTION AND OVERVIEW

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1. This is a class action on behalf of those who purchased or otherwise

18 AcelRx's common stock and/or call options, or sold/wrote AcelRx's put options

19 September 30, 2013 and July 25, 2014 inclusive (the "Class Period"), seeking to pursue

20 under the Securities Exchange Act of 1934 (the "Exchange Act").

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2. AcelRx is a specialty pharmaceutical company focused on the development

22 commercialization of innovative therapies for the treatment of acute and breakthrough pain.

23 Company plans to commercialize its product candidates in the United States and license

24 development and commercialization rights to its product candidates for sale outside of the Ur

25 States through strategic partnerships and collaborations.

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3. Since AcelRx's inception, the Company has primarily focused on

27 development of Zalviso (sufentanil sublingual tablet system), formerly known as

28 Sufentanil NanoTab PCA System or ARX-0 1. According to the Company, "[t]he success of o



1 business depends primarily upon our ability to develop, receive regulatory approval for am

2 commercialize Zalviso for the management of moderate-to-severe acute pain in adult patients ii

3 the hospital setting. We have not marketed, distributed or sold any products to date." Further

4 according to the Company, any delay in approval for Zalviso may negatively impact its stoci

5 price, harm its business operations, and prevent it from commercializing Zalviso, generatin

6 revenues and achieving profitability.

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4. On September 30, 2013, the Company announced that it submitted an NDA to

8 FDA for Zalviso, AcelRx's lead product candidate.

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5. On December 2, 2013, the Company announced that the FDA had accepted

10 Company's NDA for Zalviso.

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6. The Company's proposed indication for Zalviso is for the management

12 moderate-to-severe acute pain in adult patients in the hospital setting. Zalviso consists

13 sufentanil tablets delivered by the Zalviso System, a needle-free, handheld,

14 pain management system (collectively, "Zalviso").

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7. Although widely used, the current standard of care for patients with

16 operative pain, intravenous patient-controlled analgesia ("IV PCA") has been shown to

17 harm and inconvenience to patients following surgery because of the side effects of moi

18 the invasive IV needle route of delivery and the inherent potential for programming and d

19 errors associated with the complexity of infusion pumps.

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8. AcelRx touted Zalviso to potential investors as the solution to the

21 associated with traditional post-operative IV PCA. By offering a high therapeutic index

22 through a non-invasive route of delivery, Zalviso, according to the Company, had the potential

23 be the new standard of care for patient-controlled analgesia.

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9. However, unbeknownst to investors during the Class Period, as detailed

25 the Company submitted the NDA despite knowing that there was a significant defect with

26 Phase 3 Device (defined herein) that was used in the Phase 3 trials of Zalviso that caused

27 Phase 3 Device to malfunction during the course of those trials. These so-called optical

28 errors (also known as analgesic gaps or as device malfunctions) caused dispensing erro

Amended Class Action Complaint For Violations Of The Federal Securities Laws 5:1 4-C V-0441 6-LHK 2


1 whereby the medication would not dispense such that the patient was unable to take 1

2 medication and/or the cartridge holding the medication within the Phase 3 Device would have

3 be disposed of and replaced before all of the medication had been used, constituting a cost iss

4 and a disposal issue (particularly in light of the medication being a narcotic). So, in addition

5 Defendants being aware during the Class Period of the undisclosed (to investors) optical syst

6 errors, Defendants knew, but also failed to disclose to investors before or during the CL

7 Period, that before the Class Period, Defendants had worked on and developed a modification

8 the Phase 3 Device to eliminate or reduce the frequency of the optical system errors ("Modifi

9 Phase 3 Device").

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10. Despite warning investors before and during the Class Period that if

11 modification to the Phase 3 Device was made, such modification might cause a delay in ti

12 commercialization of Zalviso due to additional testing required by the FDA, Defendants ab

13 knew when those warnings were given during the Class Period that a modification to the Phase

14 Device was not just theoretical but that such a modification had already been made and that ti

15 potential material negative consequences of such a modification, a delay in ti

16 commercialization of Zalviso, and therefore a delay in any potential revenue therefrom, too w

17 not just theoretical. As a result of the optical system error issues and the pre-modified defecth

18 Phase 3 Device being submitted as part of the Company's NDA, the Company would have 1

19 conduct additional tests in order to generate sufficient additional data for the FDA to be satisTh

20 that the Modified Phase 3 Device interacted appropriately with the medication, that any increa

21 in the rate of successful delivery did not create unanticipated safety or efficacy issues, and th

22 there were no unanticipated negative consequences from the use of Zalviso with the Modifi

23 Phase 3 Device in a clinical setting. Such additional tests would delay Zalviso's regulatoi

24 approval and, if approved, the timeline for commercialization and realization of revenue, whi

25 is of paramount importance to investors.

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11. On July 25, 2014, after the market closed, AcelRx announced that it had recei

27 a Complete Response Letter ("CRL") from the FDA regarding its NDA for Zalviso.

28 to the Company, the FDA requested additional information on the Zalviso System to ensu



1 proper use of the device, including the provision of bench data demonstrating a reduction in

2 incidence of optical system errors, changes to the Instructions for Use for the device,

3 additional data to support the shelf life of the product.

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12. On this news, shares of AcelRx declined $4.44 per share, nearly 41%, to close

5 July 28, 2014, at $6.39 per share, on unusually heavy volume.

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JURISDICTION AND VENUE

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13. The claims asserted herein arise under Sections 10(b) and 20(a) of the

8 Act (15 U.S.C. §§ 78j(b) and 78t(a)) and Rule lob-S promulgated thereunder by the SEC (1

9 C.F.R. § 240. lOb-5).

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14. This Court has jurisdiction over the subject matter of this action pursuant to

11 U.S.C. §§ 1331 and 1337 and Section 27 of the Exchange Act (15 U.S.C. § 78aa).

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15. Venue is proper in this Judicial District pursuant to 28 U.S.C. § 1391(b)

13 Section 27 of the Exchange Act (15 U.S.C. § 78aa(c)). Substantial acts in furtherance of th

14 alleged fraud or the effects of the fraud have occurred in this Judicial District. Many of the act

15 charged herein, including the preparation and dissemination of materially false and/or misleadin

16 information, occurred in substantial part in this Judicial District. Additionally, AcelRx'

17 principal executive offices are located within this Judicial District.

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16. In connection with the acts, transactions, and conduct alleged herein,

19 directly and indirectly used the means and instrumentalities of interstate commerce, including

20 United States mail, interstate telephone communications, and the facilities of the

21 Global Market.

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PARTIES

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17. Plaintiff Rick L. Colyer ("Lead Plaintiff') purchased AcelRx's common stock

24 reliance on Defendants' false and misleading statements and omissions of material facts and/c

25 the integrity of the market for AcelRx's securities at artificially inflated prices during the Clas

26 Period and suffered economic loss and damages when the truth about AcelRx that wa

27 misrepresented and omitted during the Class Period was revealed to the market. Lead Plaintiff

28 Certification with a listing of his transactions is attached hereto as Exhibit A.


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18. Plaintiff Harry Zweifel ("Plaintiff," and with Lead Plaintiff, "Plaintiffs'

2 purchased AcelRx's common stock in reliance on Defendants' false and misleading stateme

3 and omissions of material facts and/or the integrity of the market for AcelRx's securities

4 artificially inflated prices during the Class Period and suffered economic loss and damages wi

5 the truth about AcelRx that was misrepresented and omitted during the Class Period

6 revealed to the market. Plaintiff's previously filed Certification with a listing of his transactli

7 is reattached hereto as Exhibit B.

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19. Defendant AcelRx is a Delaware corporation with its principal executive

9 located at 351 Galveston Drive, Redwood City, California 94063. It was originally incorporate

10 as SuRx, Inc. on July 13, 2006, but the name was changed on August 13, 2006. AcelRx'

11 common stock has been trading on the NASDAQ Global Market under the symbol "ACRX

12 since its IPO on February 11, 2011. NASDAQ is a well-developed, efficient market fc

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securities.

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20. Defendant Richard A. King ("King") was, at all relevant times, Chief

15 Officer ("CEO") and a director of AcelRx. Defendant King was the CEO since May 2010. H

16 was also President since May 2010. On November 5, 2014, the Company announced hi

17 departure. On December 16, 2014, the Company announced that it had entered into a separatioi

18 agreement with defendant King on December 15, 2014, and defendant King would remaii

19 employed with the Company as CEO until the earliest of the following events: (i) the date th

20 Company hires a new CEO; or (ii) the Board requests his resignation; or (iii) March 31, 2015

21 From April 2009 until May 2010, defendant King acted as an independent consultant to

22 number of private and public biotechnology and venture capital companies. From October 200

23 to April 2009, defendant King served as President and General Manager of Tercica, Inc.,

24 biotechnology company that was acquired by Ipsen, SA in 2008, and from February 2008 t

25 October 2008, defendant King served as President and Chief Operating Officer of Tercica, Inc.

26 and from February 2007 until February 2008, he served as Chief Operating Officer of Tercica

27 Inc. From January 2002 to October 2006, defendant King served as Executive Vice President o

28 Commercial Operations of Kos Pharmaceuticals, Inc., a pharmaceutical company that w

Amended Class Action Complaint For Violations Of The Federal Securities Laws 5:1 4-CV-044 1 6-LHK 5


1 acquired by Abbott Laboratories, a global, broad-based health care company, in 2006. F

2 January 2000 to January 2002, Defendant King served as Senior Vice President of Commei

3 Operations at Solvay Pharmaceuticals, a pharmaceutical company that was acquired by Alii

4 Laboratories in 2009. From April 1992 to January 2000, defendant King held various marke

5 positions at SmithKline Beecham Pharmaceuticals, now known as GlaxoSmithKline, a gl

6 pharmaceutical company. Defendant King holds a B.Sc. in Chemical Engineering f

7 University of Surrey and an M.B.A. from Manchester Business School. According to

8 Company's SEC filings, Defendant King's extensive experience as an executive officer of pi

9 pharmaceutical companies and his knowledge of the day-to-day operations of AcelRx pro

10 him with the qualifications and skills to serve as a director. During the Class Period, defen

11 King signed materially false and/or misleading SEC filings and was quoted in materially I

12 and/or misleading press releases.

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21. Defendant Timothy E. Morris ("Morris") was, at all relevant times,

14 Financial Officer ("CFO") of AcelRx. Defendant Morris has served as CFO since March

15 2014. Prior to joining the Company, from November 2004 to December 2013, defendant Mc

16 served as Senior Vice President Finance and Global Corporate Development, Chief Finan

17 Officer of VIVUS, Inc. a biopharmaceutical company, overseeing finance, corpo

18 development, IT, human resources, legal, and investor relations functions. Defendant Mc

19 graduated cum laude with a B.S. in Business with an emphasis in Accounting from Califo

20 State University, Chico, and is a Certified Public Accountant. During the Class Per

21 defendant Morris signed materially false and/or misleading SEC filings.

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22. Defendant James H. Welch ("Welch") was, at all relevant times, CFO of

23 Defendant Welch has served as the CFO since October 1, 2010. His departure from t

24 Company was effective as of March 24, 2014, but according to an agreement, he would rem

25 as a consultant for a period of time. From June 2006 until September 2010, defendant Wel

26 served as Chief Financial Officer and Corporate Secretary for Cerimon Pharmaceuticals,

27 biopharmaceutical company. Defendant Welch served as Vice President, Chief Financial Offic

28 and Corporate Secretary for Rigel Pharmaceuticals, Inc., a drug development company fro:



1 October 2000 until May 2006, and as Vice President, Finance and Administration for Rige

2 Pharmaceuticals, Inc. from May 1999 until October 2000. From June 1998 until May 1999

3 Defendant Welch served as an independent consultant at various companies. Defendant Weld

4 served as Chief Financial Officer of Biocircuits Corporation, a company focused on developin

5 immunodiagnostic testing systems from February 1997 until June 1998, and from June 199:

6 until February 1997, he served as Corporate Controller of Biocircuits Corporation. Defendan

7 Welch holds a B.A. in Business Administration from Whitworth College and an M.B.A. fron

8 Washington State University. During the Class Period, defendant Welch signed materially fals

9 and/or misleading SEC filings.

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23. Defendant Pamela P. Palmer ("Palmer") was at all relevant times, a director

11 Chief Medical Officer and co-founder, since July 2005. Defendant Palmer has been on faculty

12 the University of California, San Francisco since 1996 and a Clinical Professor of Anesthesi

13 and Perioperative Care. Defendant Palmer was Director of UCSF PainCARE-Center fc

14 Advanced Research and Education from 2005 to 2009, and was Medical Director of the UCSI

15 Pain Management Center from 1999 to 2005. Defendant Palmer has been a consultant c

16 Omeros Corporation, a biopharmaceutical company, since she co-founded that company in 199L

17 Defendant Palmer holds an M.D. from Stanford University and a Ph.D. from the Stanfor

18 Department of Neuroscience. According to the Company's SEC filings, defendant Palmer'

19 extensive clinical and scientific experience in the treatment of acute and chronic pain as well a

20 historical knowledge of the Company provides her with the qualifications and skills to serve as

21 director. During the Class Period, defendant Palmer signed a materially false and/or misleadin

22 SEC filing. Defendant Palmer also signed the patent application in August 2013 as one of th

23 inventors.

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24. Defendants King, Morris, Welch, and Palmer are collectively referred

25 I hereinafter as the "Individual Defendants." AcelRx and the Individual Defendants are referred

26 herein collectively as "Defendants."

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25. During the Class Period, the Individual Defendants, as senior executive

28 and/or directors of AcelRx, were privy to confidential and proprietary information


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1 AcelRx, its operations, products, finances, financial condition, and present and future busine:

2 prospects. The Individual Defendants also had access to material adverse non-public informatk

3 concerning AcelRx, as discussed herein. Because of their positions with AcelRx, the Individu

4 Defendants had access to non-public information about its business, finances, products, market

5 conversations, and connections with other corporate officers and employees, attendance

6 management and board of directors meetings and committees thereof and via reports and 0th

7 information provided to them in connection therewith. Because of their possession of su

8 information, the Individual Defendants knew or recklessly disregarded the fact that adverse fac

9 specified herein had not been disclosed to, and were being concealed from, the investing public.

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26. The Individual Defendants are liable as direct participants in, and as

11 conspirators, with respect to the wrongs complained of herein. In addition, the Indi

12 Defendants, by reason of their status as senior executive officers and/or directors

13 "controlling persons" within the meaning of Section 20 of the Exchange Act and had the

14 and influence to cause the Company to engage in the unlawful conduct complained of I

15 Because of their positions of control, the Individual Defendants, directly or indirectly, con

16 the conduct of AcelRx's business and its public statements.

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27. The Individual Defendants, because of their positions with the Company

18 controlled and/or possessed the authority to control the contents of its reports, press releases

19 presentations to securities analysts and, through them, to the investing public. The Indivi

20 Defendants were provided with copies of the Company's reports and press releases all

21 herein to be misleading prior to or shortly after their issuance, and had the ability

22 opportunity to prevent their issuance or cause them to be corrected. Thus, the Indivi

23 Defendants had the opportunity to, and did, commit the fraudulent acts alleged herein.

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28. As senior executive officers and/or directors and as controlling persons of

25 publicly-traded company whose securities were, and continue to be, registered with the

26 pursuant to the Exchange Act and its common shares trade on the NASDAQ Global

27 under the ticker symbol "ACRX," the Individual Defendants were, and continue to be,

28 by the federal securities laws, and had a duty to disseminate promptly accurate and


Case 5:14cw04416LHK Document 28 Red 04/17115 of 67

1 information with respect to AcelRx's financial condition and performance, growth, open

2 financial statements, business, products, markets, management, earnings, and present and

3 business prospects; and to correct any previously issued statements that had become mat

4 misleading or untrue, so that the market price of AcelRx's securities would be based

5 I truthful and accurate information. The Individual Defendants' misrepresentations and

6 during the Class Period violated these specific requirements and obligations.

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29. The Individual Defendants are liable as participants in a fraudulent scheme

8 course of conduct that operated as a fraud or deceit on purchasers of AcelRx securities

9 disseminating materially false and misleading statements and/or concealing material adv

10 facts. The scheme: (i) deceived the investing public regarding AcelRx's business, operations

11 management, as well as the intrinsic value of AcelRx's securities, and (ii) caused Plaintiffs

12 members of the Class to purchase AcelRx securities at artificially inflated prices.

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CLASS ACTION ALLEGATIONS

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30. Plaintiffs bring this action as a class action pursuant to Federal Rule of

15 Procedure 23(a) and (b)(3) on behalf of a class, consisting of all those who purchased

16 otherwise acquired AcelRx's common stock and/or call options, or sold/wrote AcelRx's p

17 options between September 30, 2013 and July 25, 2014, inclusive and who were damag

18 thereby (the "Class"). Excluded from the Class are Defendants, the officers and directors oft]

19 Company, at all relevant times, members of their immediate families and their leg

20 representatives, heirs, successors or assigns and any entity in which Defendants have or had

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controlling interest.

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31. The members of the Class are so numerous that joinder of all members

23 impracticable. Throughout the Class Period, AcelRx's securities were actively traded on I

24 NASDAQ. While the exact number of Class members is unknown to Plaintiffs at this time a

25 can only be ascertained through appropriate discovery, Plaintiffs believe that there are hundrc

26 or thousands of members in the proposed Class. Millions of AcelRx shares were traded publi

27 during the Class Period on the NASDAQ. As of July 21, 2014, AcelRx had 43,377,078 shares

28 common stock outstanding. Record owners and other members of the Class may be


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1 from records maintained by AcelRx or its transfer agent and may be notified of the pendency

2 I this action by mail, using the form of notice similar to that customarily used in securities

3 I actions.

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32. Plaintiffs' claims are typical of the claims of the members of the Class as

5 I members of the Class are similarly affected by Defendants' wrongful conduct in violation

6 federal law that is complained of herein.

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33. Plaintiffs will fairly and adequately protect the interests of the members of

8 Class and have retained counsel competent and experienced in class and securities litigation.

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34. Common questions of law and fact exist as to all members of the Class

10 predominate over any questions solely affecting individual members of the Class. Among

11 questions of law and fact common to the Class are:

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(a) whether the federal securities laws were violated by Defendants' acts

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alleged herein;

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(b) whether statements made by Defendants to the investing public during

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Class Period misrepresented or omitted material facts about the business, operatli

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products, and prospects of AcelRx;

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(c) whether Defendants knew or recklessly disregarded that their sta

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were false and misleading;

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(1) whether the price of AcelRx securities was artificially inflated; and

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(g) the extent of damage sustained by Class members and the

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measure of damages.

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35. Plaintiffs intend to rely, in part, upon the presumptions of reliance created by

23 I United States Supreme Court in connection with the reliance element of their claims and

24 I claims of the other Class members under Sections 10(b) and 20(a) of the Exchange Act

25 I therefore, individual questions regarding reliance do not predominate. In particular, with

26 Ito Defendants' material omissions alleged herein, reliance by Plaintiffs and the other members

27 the Class is presumed. With respect to Defendants' affirmative misrepresentations

28 herein, reliance by Plaintiffs and the other members of the Class is presumed under the


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1 the-market doctrine, because, at all relevant times, the market for AcelRx securities was

2 I for the following reasons, among others:

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(a) AcelRx's securities met the requirements for listing, and were listed

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actively traded on the NASDAQ, which is a highly-efficient, open, developed,

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automated market, free of manipulation;

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(b) As a regulated issuer, AcelRx filed periodic public reports with the

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and the NASDAQ;

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(c) AcelRx regularly communicated with public investors via estab]

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market communication mechanisms, including through regular disseminations of

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releases on the national circuits of major newswire services and through other

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ranging public disclosures, such as communications with the financial press and

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similar reporting services; and

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(d) AcelRx was followed by numerous securities analysts and inves

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market professionals.

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36. As a result of the foregoing, the market for AcelRx securities rapidly absorbed

16 publicly material information regarding AcelRx and that information was reflected in the price

17 I AcelRx securities.

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37. Plaintiffs and other members of the Class purchased AcelRx securities bets'

19 the time that Defendants made the material misrepresentations and omissions alleged herein

20 when the truth was revealed to the public.

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38. Plaintiffs are thus entitled to a presumption that all purchasers of

22 securities during the Class Period suffered similar injury because they paid inflated prices

23 their AcelRx securities in reliance on Defendants' material misrepresentations and/or omis

24 and/or in reliance on the integrity of the prices for AcelRx securities, and suffered econ

25 losses when the price of AcelRx securities declined in value in direct, proximate

26 consequential response to the disclosure that revealed the truth.

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39. A class action is superior to all other available methods for the fair and

28 adjudication of this controversy since joinder of all members is impracticable. Furthermore,



the damages suffered by individual Class members may be relatively small, the expense

burden of individual litigation make it impossible for members of the Class to indivi

redress the wrongs done to them. There will be no difficulty in the management of this action

I a class action.

SUBSTANTIVE ALLEGATIONS

The Limitations of the Current Standard of Care (IV PCA)

40. AcelRx is a specialty pharmaceutical company focused on the development

commercialization of innovative therapies for the treatment of acute and breakthrough

According to the Company's Form 10-K for the year ended December 31, 2014, filed on

13, 2015 ("2014 Form 10-K"):

According to the 2014 Decision Resources Acute Pain Report, or 2014 DR Report, the acute pain market (represented by treatments for post-operative pain, acute musculoskeletal pain and cancer breakthrough pain) in the United States, Europe and Japan realized 2013 revenues of $12.7 billion, and is expected to reach approximately $13.3 billion by 2023. Opioid analgesic use dominates the management of acute pain, representing 44% of the 2013 market, and is projected to grow to 46% of the 2023 market. Post-operative acute pain treatment in the United States is projected to grow significantly in the 2013 to 2023 period, from management of 13.8 million procedures in 2011 to 16.0 million procedures in 2023, a 1.5% CAUR. Despite its size, this market remains underserved. Studies report that up to 75% of patients experience inadequate pain relief after surgery. Inadequate pain relief can lead to decreased mobility, which increases the risks of other medical complications, including deep vein thrombosis and partial lung collapse, and can result in extended hospital stays.

41. As noted by AcelRx, "epidural catheters delivering local anesthetic are

and have a significant risk of lower extremity weakness and tethering the patient to a pu

attached to an IV pole, creating multiple mobility impediments and fall risks; nerve blocks of

lower extremities (e.g., femoral nerve blocks) are also invasive and create weakness and

risks; oral multimodal analgesia is not patient-controlled, is nurse-intensive and suffers fr

slow onset of action."

42. The current and longtime standard of care for patients experiencing

severe acute pain in the hospital is IV PCA treatment, typically utilizing morphine

hydromorphone. While the IV PCA does allow patient control over their pain medication,

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1 are deficiencies associated with the current use of IV PCA that can negatively impact pa

2 safety, well-being and recovery. These include drug-related side effects associated

3 morphine or hydromorphone, complications associated with IV delivery, and medic

4 delivery errors typically associated with misprogramming of the complex IV PCA pumps.

5 example, peripheral IV catheters are associated with infection risks (such as bacteremia

6 phlebitis) as any break in the skin carries a risk of infection. Further, traditional IV PCA red

7 mobility of a patient, which can impair the patient's ability to recover, as post-operative pat:

8 are tethered to an IV infusion pump with a line in the arm, preventing ambulation.

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43. The most significant issues associated with IV PCA are the potential

10 programming errors and analgesic gaps.

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(a) Programming errors. Many IV PCA medication errors are the result

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human factors such as programming errors. Medication errors can be classified into

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major categories: human (operator) errors and equipment errors (malfunctions).

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complex processes and equipment associated with IV PCA setup, programming

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administration are a significant source of preventable medication errors. Such errors

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potentially harmful to patients, time-consuming for hospital staff and costly

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healthcare providers.

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(b) Analgesic gaps. Analgesic gaps are interruptions in analgesic delivery

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cause ineffective post-operative pain management. In general, opioid medications c

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provide short, intermediate, or long acting analgesia, depending upon the speci

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properties of the medication and whether it is formulated as an extended release dn

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Likewise, the effectiveness of an opioid is dependent upon its administration, whetl

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orally, by injection, via nasal or oral mucosa, intravenously, or otherwise. Althou

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opioids are strong analgesics, they do not provide complete, continuous analgesia.

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post-surgical settings, opioids are administered pro re nata or "as the circumstar

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arises," meaning the dosage is not scheduled, rather the decision to administer is left

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the nurse or caregiver when the patient feels pain. In this context, "patient control]

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analgesic" is the ability of a patient to self-administer an opioid. Analgesic gaps a



specific periods of time when pain management is inadequate, that is, when a patient h

unable to self-administer the drug at the onset of pain.

44. As detailed in the 2014 Form 10-K, the problems with IV PCA are

I documented:

According to published literature, the estimated annual error rate is 407 errors per 10,000 people treated with IV PCA in the United States. Published analysis of MEDMARX from 2000 to 2005 reveals that IV PCA errors represent a four-fold higher relative risk of harm compared to all other medication errors. The most recent published analysis of the FDA MAUDE database reports that 5% of IV PCA operator errors reported during a two-year index period, from 2002 to 2003, resulted in patient deaths. Approximately 56,000 adverse events were reported to the FDA between 2005 and 2009, prompting 70 Class II recalls of infusion pump devices that could cause temporary or reversible adverse effects and 14 Class I recalls of infusion pump devices that could cause serious injury or death. These issues with infusion pumps have resulted in the issuance of new draft guidance by the FDA, significantly increasing the data required to be submitted by IV PCA pump manufacturers to address safety problems.

45. For this reason, AcelRx's pitch to potential investors centered around

having been "designed to address the limitations of IV PCA."

How Zalviso Works

46. Zalviso is an investigational, pre-programmed, non-invasive system to

hospital patients with moderate-to-severe acute pain to self-dose with sufentanil

tablets to manage their pain.

47. Zalviso allows patients to self-administer sublingual sufentanil NanoTabs

Company's proprietary, non-invasive sublingual dosage form) and provides the record-

attributes of a conventional IV PCA pump while intending to avoid some of the issues, such

programming errors and analgesic gaps, associated with conventional IV PCA use.

48. The drug component of Zalviso utilizes sufentanil, an opioid with a

therapeutic index 1 with minimal respiratory depressive effects relative to its analgesic

Sufentanil demonstrates high cardiac stability and minimal pharmacokinetic differences based

1 The therapeutic index is the ratio of the effective dose versus the lethal dose. In animal studi the therapeutic index for sufentanil was approximately 100 times larger than fentanyl and 3 times larger than morphine.


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age, liver or kidney function, yet rapid redistribution from plasma following IV

I and short duration make it less than ideal for IV PCA. On the other hand, its

properties make it ideal for a sublingual (under the tongue) delivery like Zalviso. The sufeni

doses for Zalviso are pre-loaded into a cartridge that is loaded into the device. Once

cartridge is loaded into the device, a priming capsule is discharged by the nurse, signaling

the device is ready for the patient's use, and also locking the cartridge within the device.

49. Zalviso combines sufentanil sublingual tablets with a pre-programmed,

PCA device that enables simple patient-controlled delivery of sufentanil sublingual tablets in tF

hospital setting. It allows patients to self-administer and provides record-keeping attributes of

conventional IV PCA pump. The following components are included as part of the Zalviso:

disposable dispenser tip; a disposable dispenser cap; an adhesive thumb tag; a cartridge of 4

sufentanil sublingual 15 mcg tablets (approximately a two-day supply) in a disposable radi

frequency identification and bar-coded cartridge; a reusable, rechargeable handheld controller;

tether; and an authorized access card.

50. Scheduled drugs such as that used by Zalviso must be secured and have

dose access control and tracking mechanisms when they are under patient control in a hospi

setting. Accordingly, as further described in the Company's 2014 Form 10-K, Zalviso has t

following safety features: (a) an authorized access card, which is a wireless system access k

for the healthcare professional; (b) a wireless, electronic, adhesive thumb tag that acts as

single-patient identification key; (c) pre-programmed 20-minute lock-out to avoid overdosir

(d) NanoTab singulation, or dispensing, motion that eliminates runaway motor delivery risk;

a security tether that is designed to prevent theft and misuse; and (f) fully automated inventc

record of NanoTabs usage.

51. To set up Zalviso, the nurse or healthcare professional turns on the controller

follows the simple step-by-step instructions on the color graphical user interface screen

2 Sufentanil is highly lipophilic which provides for rapid absorption in the fatty cells (or muc tissue) found under the tongue and for rapid transit across the blood-brain barrier to reach mu-opioid receptors in the brain.


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I below: (a) retrieve the NanoTab cartridge from secure drug storage; (b) lock the cartridge

dispenser into the controller; and (c) set up the secure patient access system, which is

of a security tether and a wireless, electronic, adhesive thumb tag that acts as a

identification key.

52. The device requires the patient to wear an RFTD-embedded bandage on

thumb designed to prevent unauthorized diversion of the sufentanil. To use Zalviso, the pati

would: (a) confirm that the green indicator light is illuminated, meaning the device is available

dose; (b) place dispenser tip under tongue and push the large button on the controller, whi

dispenses a single NanoTab; (c) remove the device from mouth upon hearing a tone confirmi

delivery of the NanoTab; and (d) see the blue indicator light illuminate, indicating no new dc

can be dispensed for the next 20 minutes.

53. Throughout the Class Period, the Company specifically trumpeted its

to the TV PCA and claimed, among others, that Zalviso "eliminate [d] the risk of TV

analgesic gaps":

Zalviso is an investigational pre-programmed, non-invasive, handheld system that allows hospital patients with moderate-to-severe acute pain to self-dose with sublingual sufentanil microtablets to manage their pain. Zalviso is designed to address the limitations of TV PCA by offering:

A high therapeutic index opioid - Zalviso uses the high therapeutic index opioid sufentanil. It offers hospitalized adult patients with moderate-to-severe acute pain the potential for effective patient-controlled analgesia with a low incidence of drug-related side effects.

A non-invasive route of delivery - The sublingual route of delivery used by Zalviso provides rapid onset of analgesia, and also eliminates the risk of TV-related analgesic gaps and TV complications, such as catheter-related infections in TV PCA treated patients. Tn addition, because Zalviso patients do not require direct connection to an TV PCA infusion pump through TV tubing, Zalviso allows for ease of patient mobility.

.

A simple, pre-programmed PCA solution - Zalviso is a pre-programmed PCA system designed to eliminate the risk of infusion pump programming errors.

54. Indeed, the Company repeatedly proclaimed that Zalviso "provid[ed] a

safety, efficacy and tolerability profile, potentially enabling Zalviso to become a new standard


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1 care for moderate to severe acute pain control via patient controlled analgesia."

Zalviso Is a Drug and Device Combination

55. Zalviso is a considered a combination product by the FDA with both drug

device components.

56. According to the FDA website, combination products are "therapeutic

diagnostic products that combine drugs, devices, and/or biological products." Combinatic

products raise "challenging regulatory, policy, and review management challenges" because th

involve "components that would normally be regulated under different types of regulatoi

authorities, and frequently by different FDA Centers."' Under Section 503(g)(1) of the Feder

Food, Drug, and Cosmetic Act (FD&C Act), a combination product is assigned to a center wi

primary jurisdiction for pre-market review and post-market regulation. The lead center is bas

on determining the primary mode of action of the combination product or other defirn

regulatory criteria when the primary mode of action cannot be determined with reasonab

certainty. The combination product is in many instances regulated under one marketir

application, which includes the information to support approval of both the drug and the device.

57. Differences in regulatory pathways for each component can impact the

processes for all aspects of product development and management, including preclinical

clinical investigation, marketing applications, manufacturing and quality control, adverse

reporting, promotion and advertising, and post-approval modifications.

58. Issues relating to the design and manufacture of the device exponentially

the complexity of the FDA approval process and make the already difficult path to approval

more treacherous. For example, as the FDA has explained:

B. Manufacturing considerations

Manufacturing, scale-up, and quality management 17 are important considerations during the development of a combination product. Manufacturing methodologies affect both premarket development and postmarket regulation. FDA encourages consideration of the manufacturing issues posed by the scientific and technical

http ://www.fda.gov/CombinationProducts/AboutCombinationProducts/.


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aspects of the drug, biological product, and device constituent parts, and of the combination product as a whole. FDA also encourages developers to carefully consider the effect of the manufacturing methods on the interaction of the constituent parts. For example, the stability of a combination product as a whole may be different than that of the separate constituent parts. Certain drug or biological product constituent parts may be altered or destroyed by terminal sterilization techniques. For constituent parts that use aseptic manufacturing techniques, developers are encouraged to implement manufacturing techniques to ensure aseptic control for the combination product.

During premarket investigation, once the preclinical and clinical studies begin, any potential change in the manufacturing process for the drug, biologic, or device constituents or for the combination product may affect the safety or effectiveness of the combination product as a whole. For example, changes in concentration, inactive ingredients, software, or in the methods to combine two constituent parts, could affect the performance characteristics of the combination product.' When applying cellular constituent parts to a device, the performance characteristics may vary with the time and methods used for cellular incubation before application to the device constituent. Additionally, the applicable device constituent design controls would consider anticipated manufacturing changes during investigational development. In order to address such manufacturing considerations, it may be necessary to develop new manufacturing techniques, in-process testing, testing specifications, and other characterization methods to assess changes in the constituent parts and for the combination product as a whole. For certain developmental changes, additional bridging studies (in vitro, preclinical, or clinical) may be appropriate.

In addition to considering manufacturing changes that may occur during premarket development, FDA also recommends early consideration of anticipated postmarket manufacturing changes for the combination product or its constituent parts. FDA encourages manufacturers to establish arrangements with the manufacturers of constituent parts to maintain sufficient awareness of manufacturing changes in constituent parts that may occur during the premarket or postmarket period Such awareness could help to ensure continued safety and effectiveness of the combination product by ensuring that the potential impact of a manufacturing change is evaluated in a manner appropriate for the stage of combination product development As appropriate, these postmarket manufacturing changes may require careful review, validation and prior approval before marketing. For some products, it may be helpful to develop post-approval change protocols for further discussion with the Agency.

59. In other words, any changes or modifications to the device once the sponsor

commenced preclinical and clinical studies can gravely impact the timeline for obtaining

All emphasis in bold/italics/underline added unless otherwise noted.


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approval. For example, changes to the design of the device can necessitate additional

or clinical testing that can indefinitely delay a regulatory submission.

60. For this reason, the FDA strongly encourages early and frequent

between the sponsor and the FDA with respect to the development of the device:

VII. EARLY INTERACTION AND COMMUNICATION WITH FDA

FDA strongly encourages early communication and discussion between developers, FDA review components and, as appropriate, OCP. Early dialogue allows developers to obtain initial feedback on the kinds of preclinical and clinical testing that may be necessary. Such communication may identify critical issues for product development and help to ensure an efficient development and approval process. Further, early and frequent communication provides the opportunity for FDA to establish its intercenter review team and to develop the appropriate scientific expertise to facilitate timely and efficient reviews of any future submissions.

CBER, CDER and CDRH provide guidance on milestone/collaboration meetings throughout the development process and submission of investigational and marketing applications. Pre-investigational (pre-IND and pre-IDE) meetings are particularly useful for discussing innovative combination products. Pre-marketing application meetings are also helpful to discuss application content, as well as the sequence and timing of modular applications or when more than one marketing application will be submitted for the combination product. Guidance on how to arrange developmental meetings can be obtained on the CDER, 18 CBER 19 and CDRH 20 websites.

The lead center should be contacted to schedule meetings in accordance with the procedures and milestones applicable to the lead center. We encourage developers to request participation from relevant review components from both the lead and consulting Centers, where appropriate. In addition, OCP is available formally or informally to address jurisdictional, developmental, premarket review, and postmarket concerns.

61. Accordingly, the proper design of the device was of paramount importance

AcelRx's timeline for applying for and receiving FDA approval. Any modifications to the

3 Device could prove costly and require additional testing that could delay FDA consideration.

AcelRx's Prior Modification to the Zalviso Device

62. On September 30, 2013, the Company announced that it had submitted the

for Zalviso, which was accepted for filing on November 26, 2013 (which was announced

December 2, 2013). Both the drug and device components were required for review as part


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1 the Company's NDA submission.

2

63. The NDA submission for Zalviso was based on data from seven Phase 1

3 I three Phase 2 clinical trials, and three Phase 3 clinical trials.

4

64. According to the FDA's website, every new drug, device or combination

5 I has been the subject of an approved NDA before U. S. commercialization. The NDA

6 is how a company formally proposes that the FDA approve the new drug, device or coi

7 product for sale and marketing in the U. S. "The documentation required in an NDA is

8 to tell the [product's] whole story, including what happened during the clinical tests, what

9 ingredients . . . are, the results of the [] studies, how the [product] behaves in the body, and I

10 it is manufactured, processed and packaged."

11

65. The Company's Phase 3 clinical development program had consisted of ti

12 trials. Throughout 2012 and 2013, the Company initiated and reported results from these ti

13 Phase 3 clinical trials. The first study was a comparative study between Zalviso and

14 traditional IV PCA morphine for post-operative pain. The second study was a randomize

15 double-blind trial to evaluate the efficacy and safety of the Zalviso System, in comparison to

16 placebo and rescue morphine treatment in patients with moderate-to-severe pain after c

17 abdominal surgery. The third study was an efficacy and safety study like the second study,

18 this time with patients treated for post-operative pain after knee or hip replacement surgery.

19

66. The Phase 3 trials implemented for Zalviso were:

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IN I I I .I I( ) N Ii) I()P-

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I I'.1l 11 tili ll:.gI)Jl)i'I( l)ll)(il)i'lill IIli'..lI

April 2012—November 2012

March 2012—May 2013

August 2012—April 2013

Active comparator 3 trial (1AP309)

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8 Double-blind, placebo-controlled,

9 abdominal surgery trial (1AP310)

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12 Double-blind, placebo-controlled,

13 orthopedic surgery trial (IAP311)

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Compared to the current standard of care, IV PCA morphine, in patients with post-operative pain following open-abdominal surgery or major orthopedic surgery.

Compared the safety and efficacy to placebo delivered via the device for the management of moderate-to-severe post-operative pain after open abdominal surgery.

Compared the safety and efficacy to placebo delivered via the device for the management of moderate-to-severe post-operative pain after elective unilateral total knee or hip artbroplasty.

Non-inferiority. Demonstrated the ability to produce comparable patient satisfaction with post-operative pain control, faster onset, and reduced incidence of oxygen desaturation with post-operative pain control to IV PCA with morphine

Produced superior post-operative pain control compared to placebo. The only statistically significant difference in adverse events was pruritus in the sufentanil

Was effective and well-tolerated in the management of moderate-to-severe post-operative pain after major orthopedic surgery. Related adverse events were similar to placebo with the exception

17 67. The Zalviso device that was used in the Company's Phase 3 trials (the "Phase

18 Device") however, was not the same device that the Company had used in the prior Phase 2

19 (the "Phase 2 Device"). As detailed herein, in between the completion of the Company's

20 2 trials and the commencement of the Company's Phase 3 trials, AcelRx made subst

21 modifications to the Phase 2 Device.

22 68. Specifically, as disclosed in passing in the Company's pre-Class Period

23 with the SEC, the "Phase 3 [D]evice is an upgraded version of the Phase 2 [D]evice,

24 enhanced features, including a color graphical user interface screen, security features to

25 only the patient to use the device and prevent unauthorized access to the drug, and imp

26 industrial design for hospital use."

27 69. Ensuring that the device the Company intended to commercialize was free

28



errors was of paramount importance to the Company. As such, the existence of any

issues or complications with the design or function of the Phase 3 Device was

I information to investors.

70. AcelRx was acutely aware that issues with the Phase 3 Device could

delay the timeline for the potential FDA approval of Zalviso and therefore delay the timeline I

the potential generation of revenue from the commercialization of Zalviso. Prior to the Cla

Period, while the Company was in the process of preparing to file its NDA for Zalviso, ti

Company purported to warn investors that a delay in the potential for FDA approval and,

approved, generation of revenue from the sale of Zalviso, could occur in the event the Phase

Device needed to be modified. To allay any investor concerns about this purportedly potenti

issue, in connection with its risk disclosure, AcelRx reassured investors by claiming to ha'

conducted "multiple" tests to validate the design of the Phase 3 Device:

The Zalviso device we have used in our Phase 3 clinical trials and plan to use commercially has more features than the device used in Phase 2, including additional software. We have conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factors studies, which have informed the design of the Zalviso device and we plan to conduct additional Human Factors studies prior to submitting the planned NDA for Zalviso. However, we cannot predict if the Phase 3 device will be fully functional or ready for commercial use. If we need to modify the Phase 3 device, we may incur higher costs and experience delay in regulatory approval and commercialization of Zalviso. Furthermore, if the changes to the device are substantial, we may need to conduct further clinical trials in order to have the commercial device approved by the FDA.

71. Shortly after the start of the Class Period and following the submission of

Company's NDA, the Company modified its purported risk warning. Importantly, the Compan

again affirmatively signaled that there were no issues of concern that had arisen with the Phase

Device during the Phase 3 trials by again claiming they had extensively validated the Phase

Device and indicating that the Phase 3 Device was the "intended commercial device:"

Related to the Zalviso device, we have conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factors studies, and have manufactured for and completed Phase 3 clinical trials using the intended commercial device. If, due to regulatory request or commercial demand, we need to modify the Phase 3 device, we may incur higher costs and experience delay in regulatory approval and/or commercialization of Zalviso. Furthermore, if the identified changes to the device are substantial, we may need


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to conduct further clinical trials in order to have the commercial device approved by the FDA.

2 The Design Defect in the Phase 3 Device and the Existence of Optical System Errors

3

4 72. Unbeknownst to investors, there was a substantial defect with the Phase 3

5 that caused the device to malfunction at a significant rate.

6 73. On July 25, 2014, after the markets closed, the Company shocked investors

7 it disclosed that it had received a CRL from the FDA in response to AcelRx's NDA for Zah

which raised issues in connection with the NDA for Zalviso. Of the three issues raised in 8 9 CRL, the most significant was a request for additional information/data from Ace

10 demonstrating a reduction in the incidence of so-called optical system errors.

11 74. This marked the very first time that AcelRx ever disclosed the existence of

12 Phase 3 Device's optical system errors. As set forth below, Defendants have acknowledged

13 admitted that they had been aware of this issue since the Phase 3 trials (i.e., late 2012 or earl

14 2013).

15 75. As described by the Company after the Class Period, the device has an

16 sensor in the dispensing portion of the device. When a new NanoTab cartridge is inserted ii

17 the controller by a nurse, a placebo priming capsule must first be ejected to properly prepare I

18 dispensing mechanism. This priming cap has two holes that are read optically if the primi

19 capsule is dispensed and signals to the nurse that the cartridge containing the tablets is full a

20 has not been tampered with. Tablets are also similarly read or detected by the optical syste

21 Any failure to read the priming capsule or the tablet results in an optical error. if the control

22 determines that the priming capsule did not eject, the system will error out, requiring the nurse

23 insert/load a new cartridge.

24 76. The optical system is intended to act as a safety mechanism to

25 inappropriate dosing, including a failure of the medication to dispense. Because the device

26 designed to lock for a set period of time between doses, the optical system ensures that I

27 system has been initialized correctly and functions properly. The optical system is import

28 because, among other reasons, it is intended to prevent situations where a patient does i


23


receive their dose (due to a device malfunction) and the nurse mistakenly thinks that the

has received the dose (in which case, the patient would be without any pain medication while

device remains locked).

77. As the Company has subsequently admitted, these optical system errors

significant because they are actually analgesic gaps from a dispensing failure. In other

patients are unable to receive the intended pain medication/treatment because of

malfunctioning device:

I think the [FDA] wanted us to go ahead and try to make some improvements there. From their standpoint, they view this as what's known as an analgesic gaps on a patient, any time its patient control dose, if the patient went to get a dose and for whatever reason the dose wasn't available, they would consider that as analgesic gap.

78. Similarly, defendant King recently acknowledged:

As a reminder, the two key issues related to the Zalviso NDA review that the agency asked us to address in the CRL, were to reduce the high-single digit rate of system errors observed in the Phase 3 program related to analgesic gaps.

79. These optical system errors (causing analgesic gaps from the Phase 3

malfunctions), as defendant King admitted, were not a minor issue as the errors occurred at

"high-single digit rate" (i.e., between 5% and 9.99%). Despite being asked several times

the actual error rate, Defendants have consistently evaded disclosing the precise error rate.

80. Generally, the FDA is likely to deem any error risking patient safety, like a

to receive necessary medication, particularly if, like here, the error rate is in excess of 5%,

statistically significant. As defendant King admitted (during the July 25, 2014 conference call

any analysis of the error rate was a unique question about the functionality of the Phase 3 Devic

and not a question of whether it was comparatively acceptable. For example, in response to

question, defendant King stated:

[Analyst: Yes, thanks for taking my question. I guess first on the optical error rate, has there been any guidance from the Agency or any prior precedence with other devices or products where they have asked for certain threshold on optical error rate?

[defendant King: None that I'm aware of This is a system that is incorporated


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into our technology which is specific to our technology. So I am unaware of any other request.

2

3 81. The high-single digit error rate was also qualitatively material. As one of

4 primary false and/or misleading claims that AcelRx made was that Zalviso "eliminate[

5 analgesic gaps, the existence of the optical system error issue (i.e., analgesic gaps) \S

6 undoubtedly material. Moreover, the crux of the Zalviso story was its ability to solve I

7 analgesic gap issues that plague IV PCA. Moreover, the existence of the error was qualitativ

8 material in light of the fact that the Company had modified the Phase 2 Device in the middle

9 their clinical program and any new issues arising with the Phase 3 Device could be devastati

10 for the timing of the potential regulatory approval of Zalviso.

11 82. Since disclosing the existence of the optical system errors for the first time

12 July 25, 2014, the Company has repeatedly admitted that the errors had been apparent

13 known since the Phase 3 trials (i.e., since late 2012 or early 2013). As defendant King

14 acknowledged, "Optical system errors were noted in the clinical trial setting." In fact, defen

15 Morris conceded during a September 10, 2014 conference that "we did recognize that happ

16 in the clinical setting." It would have been impossible for the Defendants to disavow

17 knowledge of this issue as defendant Palmer candidly admitted that "[certainly we collected

18 data that related to system failures."

19 83. In fact, during a July 28, 2014 conference call to discuss the CRL, defendant

20 twice conceded that they had been aware of the issue and had viewed it as a "commercial i

21 that defendant King candidly admitted "we were addressing." In other words, defendant

22 conceded that the Company knew that even if Zalviso managed to get approval, the Con

23 would have to modify the device because of the high volume of cartridges/product that

24 need to be replaced.

25 84. In addition to conceding that the optical system error had been seen in the Phase

26 trials, Defendants have conceded that the issue was so prevalent that they had set out to

27 out the root cause of the issue and seek a solution. For example, during the September 10, 201L

28 conference call, defendant Morris admitted:


25


TIM MORRIS: Sure. We did see in our clinical studies an optical system error. What an optical system error is it's really a failsafe. It is really meant that if there are some issues with the delivery of the tablet through the end of the dispenser that the system will error out, the nurse will have to be called and they will have to change the cartridge.

So we did recognize that happened in the clinical setting. Our engineers had kind of set about looking at the root cause of that We determined it was some friction points that were internal to the push rod and some friction points that were in the dispenser channel itself.

The engineers have made a modification to that It's really just a change in the geometry and the addition of some special features inside of the dispensing channel, and we think we can greatly reduce this optical system error.

We have done some preliminary bench testing. We think that will be sufficient to address the concerns. We know we can correlate the bench tests with the experience we saw in human clinical studies.

So my sense is, while we haven't been given a specific target rate, we know we can significantly reduce that and we also think that will be sufficient with the Agency. We do want to confirm that with them, though, so my sense is that was probably the biggest issue that they had during their review.

85. It is clear that the Defendants, in addition to knowing about the issue

approximately early 2013, had already spent a considerable amount of time working to

the issue at the time they first disclosed the problem on July 25, 2014.

86. Remarkably, when the Company disclosed receiving the CRL and disclosed

optical system error issue on July 25, 2014, defendant King was able to fully describe

engineering issue that had caused the problem with the dispensing device and indicate that

Company had already identified a "fix" that it was "testing." For example, defendant 1<

explained in detail:

Okay, so the fix actually relates to the nature of the dispenser. The optical errors from what we can see are caused by a dispenser -- the push rod that sticks to the hub of the dispenser when dispensing the sufentanil tablets. So by reducing the friction of that dispenser against the hub, we believe that we can effectively reduce the optical error rate to a very low rate indeed.

So that is our goal. It is a fix associated with the dispenser component of the device. That is already underway and, in fact, we are beginning testing with that dispenser.

87. Two weeks later, on an August 11, 2014 conference call, defendant

confirmed that the Company had already implemented the fix: "we have already modified


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1 device." Defendant Morris confidently stated that the Company had completed both the

2 I and the modification:

3

So we don't think there is anything else left to do on the design or modification of the device itself. We think that the change is going to be sufficient to address

4 that optical error rate.

5 88. The fact that by July 25, 2014, Acelrx had admittedly (i) identified the root

6 (ii) designed a solution/modification to the Phase 3 Device; and (iii) actually modified the Ph

7 3 Device, strongly indicates that the Company had been working, since before the beginning

8 the Class Period, for many months (if not years) to address the Phase 3 Device's optical syst

9 error problem:

10 (a) The problem involved a complex mechanical issue with one of the Phase

11 Device's core components. As the Company has described, the cause of the problem

12 "friction points that were internal to the push rod and some friction points that were in

13 dispenser channel itself" The dispenser, along with the push rod, are central to

14 delivery of the drug and central to the Phase 3 Device's locking mechanism.

15 (b) The modifications identified by the Company were not insignificant

16 involved complex modifications. As defendant Morris described, "[The modification

17 are] really just a change in the geometry and the addition of some special features insid

18 of the dispensing channel, and we think we can greatly reduce this optical system error.

19 Changes to the geometry of the dispensing device are inherently substantial as the

20 involve a physical alteration to the device's delivery mechanism.

21 (c) In connection with AcelRx's device, the Company maintains an

22 patent and intellectual property portfolio. These voluminous filings confirm the obviou

23 fact that the Zalviso is an incredibly complex device which has taken the Company year

24 to develop and create. Given this complexity as well as the breadth of the Company'

25 patent portfolio, the mere act of designing (let alone prototyping, validatin

26 implementing, and establishing quality control programs therefor) any modifications t

27 the device would require significant amounts of time.

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(d) Finally, given the vast regulatory issues in connection with seeking

2

approval, as well as the host of unique issues that accompany modifying a

3

drug/device product, the Company's design and implementation of a modification to

4

Phase 3 Device had to have taken a substantial amount of time and careful

5

Significantly, on July 25, 2014 when AcelRx disclosed the CRL (as well as the existen

6

of the optical system error problem and a solution), the Company confidently claim

7

they could resubmit their NDA by the end of 2014.

8

89. A review of the Company's patent filings confirms that, as far back early 201

9 AcelRx had been dealing with modifications to the dispenser to address friction issues relating t

10 the push rod. For example, a patent amendment from May 2013 to U.S. Application Serh

11 Number 13/416,236 reflects changes/additions in the language that appear to be related to

12 friction issue:

13

the delivery member including an elongate protrusion slidably disposed within the channel, an edge of the elongate protrusion configured to limit movement of

14

the delivery member relative to the housing in the distal direction .

15

90. The fact that AcelRx included this information in a patent amendment is

16 indication that the Company viewed these modifications as valuable and

17 improvements.

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91. In August 2013, the inventors of this patent application (including

19 Palmer, the Company's Director and Chief Medical Officer) each signed a declaration

20 their review of the "specification, including the claims, as amended."

21

92. This abrupt change in patent strategy is reflected in all of Company's

22 patent filings in 2013.

23

93. U.S. Patent 8,357,114, issued January 22, 2013, included novel claim

24 focused on "the push rod being sufficiently flexible to assume the S-shape of the dclii

25 passage as the push rod is moved." U.S. Patent Application Serial number 13/744,448, f

26 January 18, 2013, included novel claim language focused on a device "configured to engage

27 first portion of the pusher to limit movement of the pusher."

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94. Individually, these patent filings in the first half of 2013 demonstrate that ti

Amended Class Action Complaint For Violations Of The Federal Securities Laws 5: 14-CV-04416-LHK 28


Company had prioritized solutions to (i) limiting the movement of the push rod in its hous:

and (ii) the flexibility/rigidity of the push rod. Further, these patent filings demonstrate that

Company believed these solutions to be of sufficient value to justify accelerated pa

application allowances.

95. In the aggregate, the concerted effort represented by this flurry of patent filings

the first half of 2013 demonstrates that the Company was aware of the friction-related

associated with their push rod by January 2013.

96. None of these amendments were required by the U.S. Patent Office.

Company voluntarily and drastically limited the scope of their patent claims before rushing

narrower claims to issuance. This concerted effort indicates that the Company was aware

problems associated with their push rod, believed they had engineered a solution, and valued t

solution enough to make securing patents on it a priority in the first half of 2013.

97. Further, the Company's Quarterly Report on Form 10-Q filed with the SEC

August 11, 2014 opaquely confirmed that the Company had actually made

modifications to the Phase 3 Device prior to receiving the CRL or disclosing the optical

error issue to investors:

Related to the Zalviso device, we have conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factors studies, and have manufactured for and completed Phase 3 clinical trials using the intended commercial device. As mentioned above, the CRL from the FDA contains a request for additional information on the Zalviso System to ensure proper use of the device. The request includes provision of data demonstrating a reduction in the incidence of optical system errors which require premature drug cartridge change requirement. We have made modifications to the design of the Zalviso device subsequent to the original submission of the Zalviso NDA, which we plan to include as a part of our resubmitted NDA. We do not believe these design modifications would require additional Phase 3 clinical trials, if we are required to further modify the Zalviso device, we may incur higher costs and experience delays in the approval and ultimate commercialization of Zalviso. Furthermore, if the identified changes to the device are substantial, we may need to conduct further clinical trials in order to have the commercial device approved by the FDA.

98. Indeed, what is apparent is that at the time of the NDA submission, the

had already spent extensive time and resources addressing the optical system error issue.


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Company had already tasked its engineers or manufacturers to investigate the root cause of

issue, and to determine a solution for the friction problem. The Company knew the optical

issue bore such a significant weight so as to be dispositive of the Company's NDA

I for Zalviso. Furthermore, the Company candidly admits that the optical system error issue

certainly not a mere overnight fix, as it would require additional bench testing to ensure that

modification in fact corrects the friction issue that was identified by its engineers.

99. The FDA evaluates NDAs, including for drugs, devices and

products, based only on data. Thus, if the FDA receives an NDA for a combination pro(

indicating an intention to market the combination product using a device different from

which generated the data in the Phase 3 trials, the FDA will require additional data using

Modified Phase 3 Device, including bench and human factors or clinical data to evaluate, am

other things, the existence of new malfunctions, the extent to which the drug interacts with

device, and any safety concerns from an increase in the rate of drug delivery due to any reduc

in, in this case, optical system error rates.

Materially False and Misleading Statements Issued Duriiw the Class Period

100. The Class Period begins on September 30, 2013. On this day, AcelRx filed

Form 8-K, which was signed by defendant Welch, announcing that it had submitted its NDA foi

Zalviso to the FDA. The Form 8-K attached a press release, entitled "AcelRx Pharmaceuticab

Submits New Drug Application to the FDA for Zalviso." In the press release, the Company

in relevant part, stated:

AcelRx Pharmaceuticals, Inc. . . . today announced that it submitted a New Drug Application (NDA) to the U.S. Food and Drug Administration (FDA) for Zalviso (sufentanil sublingual microtablet system). Zalviso is a patient-activated, non-invasive analgesic system, which delivers 15 mcg sufentanil per dose as needed for pain control, subject to a 20 minute lockout period between doses. The proposed indication for Zalviso is the management of moderate-to-severe acute pain in adult patients in the hospital setting. The NDA submission is based primarily on data from a Phase 3 registration program that included two double-blind randomized placebo-controlled clinical trials, one conducted in patients following major abdominal surgery, the other in patients following major joint replacement surgery. Additionally, a Phase 3 open-label active-


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comparator trial was conducted in patients following either major abdominal or orthopedic surgery, comparing Zalviso to the current standard of care, intravenous patient-controlled analgesia (IV PCA) with morphine Zalviso successfully achieved the primary efficacy endpoints for each of these studies. Treatment-emergent adverse events were typical of opioid usage post-operatively, were generally mild-to-moderate in nature, and were similar in both active- and placebo-treatment groups for the majority of adverse events.

"The Zalviso NDA submission represents a major milestone for AcelRx as we seek FDA approval for our first product candidate based on our proprietary sublingual sufentanil formulation and our delivery system technology," stated Richard King, president and CEO of AcelRx. "Based on the results of our clinical trials, we believe Zalviso has demonstrated an ability to achieve rapid onset of pain relief, thereby enabling patients to manage their moderate-to-severe acute pain effectively over 48 to 72 hours post-surgery. if approved by the FDA, Zalviso could provide hospitals and patients with an attractive alternative to the current standard of care, specifically IV PCA-delivered opioids."

* * *

About Zalviso

Zalviso is an investigational pre-programmed, non-invasive, handheld system that allows hospital patients with moderate-to-severe acute pain to self-dose with sublingual sufentanil microtablets to manage their pain. Zalviso is designed to address the limitations of IVPCA by offering:

* * *

A non-invasive route of delivery - The sublingual route of delivery used by Zalviso provides rapid onset of analgesia, and also eliminates the risk of IV-related analgesic gaps and IV complications, such as catheter-related infections in IV PCA treated patients. In addition, because Zalviso patients do not require direct connection to an IV PCA infusion pump through IV tubing, Zalviso allows for ease of patient mobility.

. A simple, pre-programmed PCA solution - Zalviso is a pre-programmed PCA system designed to eliminate the risk of infusion pump programming errors.

* * *

Forward Looking Statements This press release contains forward-looking statements . . . . These forward-looking statements are based on AcelRx Pharmaceuticals' current expectations and inherently involve significant risks and uncertainties. AcelRx Pharmaceuticals' actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include . . . . other risks detailed in the "Risk


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Factors" and elsewhere in AcelRx Pharmaceuticals' U.S. Securities and Exchange Commission filings and reports, including its Quarterly Report on Form 1 0-Qfiled with the SEC on August 12, 2013.

101. One of the risk disclosures in the August 12, 2013 Form 10-Q for the

quarter of 2013 stated, in relevant part, the following:

The Zalviso device we have used in our Phase 3 clinical trials and plan to use commercially has more features than the device used in Phase 2, including additional software. We have conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factors studies, which have informed the design of the Zalviso device and we plan to conduct additional Human Factors studies prior to submitting the planned NDA for Zalviso. However, we cannot predict if the Phase 3 device will be fully functional or ready for commercial use. IJwe need to modify the Phase 3 device, we may incur higher costs and experience delay in regulatory approval and commercialization of Zalviso. Furthermore, if the changes to the device are substantial, we may need to conduct further clinical trials in order to have the commercial device approved by the FDA.

102. The statements contained in bold/italics in the September 30, 2013 press

(which incorporates the risk disclosures from the August 12, 2013 Form 10-Q) were

false and/or misleading when made because Defendants failed to disclose that:

(a) The Company had submitted the NDA for Zalviso based on data from the Phase trials despite knowing that there was a substantial and existing defect with the Phase 3 Devi that caused the device to malfunction at a significant rate. These optical system errors (that ti Company never disclosed and admittedly had been aware of since the Phase 3 trials) occurred a substantial rate in excess of 5%;

(b) Contrary to Defendants' positive statements about the Phase 3 Device and comparable benefits of Zalviso to TV PCA, including the claim that Zalviso "eliminates the of TV-related analgesic gaps," the Phase 3 Device suffered from a defect that, itself, c& analgesic gaps. As the Company admits, the high-single digit rate of optical system er observed in the Phase 3 trials included errors that led to analgesic gaps;

(c) The optical system errors seen in the Phase 3 trials were such a substantial issi that the Company had, before the Class Period, already set out to figure out the root cause at had already designed, and amended their patent to reflect, a modification to the Phase 3 Device;

(d) The optical system errors occurred at a substantially high enough rate such ti the issue would almost certainly draw careful scrutiny from the FDA and it was very likely ti the FDA would require the Company to conduct trials sufficient to generate data sufficient demonstrate the safety and effectiveness of the Modified Phase 3 Device before the FDA wot approve Zalviso;


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(e) Despite claiming to have conducted multiple Design Validation, SoftM Verification and Validation, Reprocessing and Human Factors studies in connection with Phase 3 Device, and having completed Phase 3 trials using the Phase 3 Device then intended commercialization, the Company was aware of the defects with the Phase 3 Device that wc require the Company to modify the device for commercialization; and

(f) By submitting the NDA for Zalviso, the Company was representing to investo that Defendants believed that the NDA could be approved based on data included with ti NDA. 5 Even though the Company's NDA was submitted based on the Company's Phase 3 dat the Defendants were aware that the Phase 3 Device had been modified in an attempt to preve: or reduce the frequency of optical system errors and that the NDA included no data for ti Modified Phase 3 Device Defendants intended to commercialize. Consequently, Defendan were aware during the Class Period that, without data relating to the use of the Modified Phase Device Defendants intended to commercialize, the FDA would not approve the NDA.

103. On November 5, 2013, AcelRx issued a press release entitled,

Pharmaceuticals Reports Third Quarter 2013 Financial Results." In the press release,

Company, in relevant part, stated:

"With the submission of our NDA at the end of September for ZalvisoTM, AcelRx has commenced activities related to an anticipated U.S. commercial launch," stated Richard King, president and CEO of AcelRx. "We also continue to actively participate in key medical meetings worldwide to increase awareness of the results from our completed Zalviso Phase 3 clinical trials among a broad audience of medical professionals involved in pain treatment. Having appointed our Chief Commercial Officer last quarter, we are working diligently to prepare Zalviso to be well positioned for launch in the US market, subject to regulatory approval."

* * *

Review of Recent Accomplishments and Corporate Update On September 27, 2013, AcelRx submitted an NDA to the FDA for Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting. The NDA submission is based primarily on data from a Phase 3 registration program that included two double-blind, randomized, placebo-controlled clinical trials, one in patients following open abdominal surgery and the other in patients following hip or knee replacement surgery. An additional open label active comparator trial was conducted in patients following major abdominal or orthopedic surgery that compared Zalviso to intravenous patient

5http://www.fda.gov/Drugs/DevelopmentApprovalProcess/HowDrugsareDevelopedandApprove d/ApprovalApplications/default.htm ("When the sponsor of a new drug believes that enougi evidence on the drug's safety and effectiveness has been obtained to meet FDA's requirement for marketing approval, the sponsor submits to FDA a new drug application (NDA)"). This alsc extends to devices and combination products. Amended Class Action Complaint For Violations Of The Federal Securities Laws 5: 14-CV-04416-LHK 33

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1 controlled analgesia, or IVPCA, with morphine.

* * *

Forward Looking Statements This press release contains forward-looking statements . . . . These forward-looking statements are based on AcelRx's current expectations and inherently involve significant risks and uncertainties. AcelRx's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include . . . other risks detailed in the "Risk Factors" and elsewhere in AcelRx's U.S. Securities and Exchange Commission filings and reports, including its Quarterly Report on Form 1 O-Q filed today with the SEC on November 5, 2013.

104. On November 5, 2013, AcelRx filed its Quarterly Report with the SEC on

10-Q for the third quarter of 2013. The Company's Form 10-Q, signed by defendant Welch

certified by defendants King and Welch, reaffirmed the Company's statements previousl

announced that day. The Form 10-Q stated, in relevant part, the following:

Zalviso is an investigational pre-programmed, non-invasive, patient-activated, handheld analgesic system that allows hospitalized patients with moderate-to-severe acute pain to self-dose with sublingual sufentanil NanoTabs to manage their pain. Zalviso is designed to address the limitations ofIVPCA by offering:

* * *

A non-invasive route of delivery: The sublingual route of delivery used by Zalviso provides rapid onset of analgesia, therefore eliminating the risk of IV-related analgesic gaps and IV complications, such as catheter-related infections in IV PCA treated patients. In addition, because patients are not tethered to IV tubing and a pump for pain relief, Zalviso allows for ease of patient mobility.

A simple, pre-programmed PCA solution: Zalviso is a pre-programmed PCA system designed to eliminate the risk of pump programming errors.

On September 27, 2013, we submitted a New Drug Application, or NDA, to the FDA, for Zalviso. Assuming the FDA files our NDA in the fourth quarter of 2013, we anticipate receiving a Prescription Drug User Fee Act, or PDUFA, review goal date in the third quarter of 2014, and assuming successful approval of our NDA by the FDA at that time, we anticipate launching the commercial sale of Zalviso in the first quarter of 2015.

The 505(b) (2) NDA submission for Zalviso is based on a development program that includes data from three Phase 3 clinical trials, including two placebo-controlled efficacy and safety trials and one open-label active comparator trial, in which Zalviso was compared to IV PCA morphine Zalviso successfully achieved the primary efficacy endpoints for each of these trials.


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* * *

Related to the Zalviso device, we have conducted multiple Design Validation, Software Verification and Validation, Reprocessing and Human Factors studies, and have manufactured for and completed Phase 3 clinical trials using the intended commercial device. If, due to regulatory request or commercial demand, we need to modify the Phase 3 device, we may incur higher costs and experience delay in regulatory approval and/or commercialization of Zalviso. Furthermore, if the identified changes to the device are substantial, we may need to conduct further clinical trials in order to have the commercial device approved by the FDA.

105. The statements from November 5, 2013 in bold/italics above were materially

and/or misleading when made because Defendants failed to disclose that:






(f) By submitting the NDA for Zalviso, the Company was representing to invest that Defendants believed that the NDA could be approved based on data included with the NE Even though the Company's NDA was submitted based on the Company's Phase 3 data, Defendants were aware that the Phase 3 Device had been modified in an attempt to prevent


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reduce the frequency of optical system errors and that the NDA included no data for th Modified Phase 3 Device Defendants intended to commercialize. Consequently, Defendant were aware during the Class Period that, without data relating to the use of the Modified Phase Device Defendants intended to commercialize, the FDA would not approve the NDA.

106. On December 2, 2013, AcelRx issued a press release entitled, "Zalviso TM

Drug Application Accepted for Filing by FDA." In the press release, the Company, in

part, stated:

AcelRx Pharmaceuticals, Inc. . . . today announced that the Zalviso Tm New Drug Application (NDA) was accepted for filing by the FDA on November 26, 2013. The acceptance for filing of the NDA indicates the FDA has determined that the application is sufficiently complete to permit a substantive review.

"We are extremely pleased with the filing of our NDA for Zalviso, representing achievement of another critical milestone for AcelRx," stated Richard King, president and CEO of AcelRx. "Zalviso, if approved, will provide hospitalized patients with a non-programmable, non-invasive, patient-controlled treatment option for the management of moderate-to-severe acute pain with a rapid onset of pain relief compared to the commonly used, intravenous patient controlled analgesia systems that typically utilize morphine."

The NDA, submitted on September 27, 2013, seeks approval for the marketing and sale of Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting. The NDA submission is based primarily on data from a Phase 3 registration program that included two double-blind randomized placebo-controlled clinical trials, one conducted in patients following major abdominal surgery, the other in patients following major joint replacement surgery. Additionally, a Phase 3 open-label active-comparator trial was conducted in patients following either major abdominal or orthopedic surgery, comparing Zalviso to the current standard of care, intravenous patient-controlled analgesia (IVPCA) with morphine Zalviso successfully achieved the primary efficacy endpoints for each of these studies. Treatment-emergent adverse events were typical of opioid usage post-operatively, were generally mild-to-moderate in nature, and were similar in both active- and placebo-treatment groups for the majority of adverse events.

About Zalviso

Zalviso is an investigational pre-programmed, non-invasive, handheld system that allows hospital patients with moderate-to-severe acute pain to self-dose with sublingual sufentanil microtablets to manage their pain. Zalviso is designed to address the limitations of IVPCA by offering:

* * *

A non-invasive route of delivery - The sublingual route of delivery used


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by Zalviso provides rapid onset of analgesia, and also eliminates the risk of IV-related analgesic gaps and IV complications, such as catheter-related infections in TV PCA treated patients. Tn addition, because Zalviso patients do not require direct connection to an TV PCA infusion pump through TV tubing, Zalviso allows for ease of patient mobility.

A simple, pre-programmed PCA solution - Zalviso is a pre-programmed PCA system designed to eliminate the risk of infusion pump programming errors.

* * *

Forward Looking Statements

This press release contains forward-looking statements . . . . These forward-looking statements are based on AcelRx's current expectations and inherently involve significant risks and uncertainties. AcelRx's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include . . . other risks detailed in the "Risk Factors" and elsewhere in AcelRx's U.S. Securities and Exchange Commission filings and reports, including its Quarterly Report on Form 1 0-Qfiled with the SEC on November 5, 2013.

107. The statements from the December 2, 2013 press release in bold/italics

(which incorporates the risk disclosures from the November 5, 2013 Form 10-Q) were

false and/or misleading when made because Defendants failed to disclose that:




(d) The optical system errors occurred at a substantially high enough rate such ti the issue would almost certainly draw careful scrutiny from the FDA and it was very likely ti the FDA would require the Company to conduct trials sufficient to generate data sufficient


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demonstrate the safety and effectiveness of the Modified Phase 3 Device before the FDA approve Zalviso;


(f) By submitting the NDA for Zalviso, the Company was representing to investo that Defendants believed that the NDA could be approved based on data included with the ND Even though the Company's NDA was submitted based on the Company's Phase 3 data, ti Defendants were aware that the Phase 3 Device had been modified in an attempt to prevent reduce the frequency of optical system errors and that the NDA included no data for ti Modified Phase 3 Device Defendants intended to commercialize. Consequently, Defendan were aware during the Class Period that, without data relating to the use of the Modified Phase Device Defendants intended to commercialize, the FDA would not approve the NDA.

108. On March 5, 2014, AcelRx filed a Form 8-K, signed by defendant W

attaching a press release, dated March 3, 2014, entitled, "AcelRx Pharmaceuticals

Fourth Quarter and Full Year 2013 Financial Results." In the press release, the Company,

relevant part, stated:

"AcelRx made strong progress in 2013 with the successful completion of the ZalvisoTM (sufentanil sublingual NanoTab system) Phase 3 program, the filing and acceptance of the NDA for Zalviso, the execution of a commercial partnership agreement with Grunenthal for Zalviso that covers Europe and Australia, and agreement with FDA on a Phase 3 program for ARX-04, an investigational single-dose sublingual sufentanil NanoTab for moderate-to-severe acute pain," stated Richard King, president and CEO of AcelRx. "As we begin 2014, we are advancing our U.S. commercial capability and preparing for a potential Zalviso approval in third quarter of 2014. We are also readying Zalviso for MAA filing in Europe, and preparing to initiate a Phase 3 clinical program for ARX-04 in the second half of this year."

* * *

Review of Recent Accomplishments and Corporate Update

The Zalviso New Drug Application (NDA) was accepted for filing by the FDA on November 26, 2013. The acceptance indicates the FDA has determined that the application is sufficiently complete to permit a substantive review and the FDA has subsequently confirmed a PDUFA action date of July 27, 2014. The NDA seeks approval of Zalviso for the management of moderate-to-severe acute pain in adult patients in the hospital setting.


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* * *

Forward Looking Statements

This press release contains forward-looking statements. . . . These forward-looking statements are based on AcelRx's current expectations and inherently involve significant risks and uncertainties. AcelRx's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include . . . other risks detailed in the "Risk Factors" and elsewhere in AcelRx's U.S. Securities and Exchange Commission filings and reports, including its Quarterly Report on Form 1 0-Qfiled with the SEC on November 5, 2013.

109. The statements from March 3, 2014 press release in bold/italics above

incorporates the risk disclosures from the November 5, 2013 10-Q, detailed above)

materially false and/or misleading when made because Defendants failed to disclose that:






(f) By submitting the NDA for Zalviso, the Company was representing to in' that Defendants believed that the NDA could be approved based on data included with the


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Even though the Company's NDA was submitted based on the Company's Phase 3 data, th Defendants were aware that the Phase 3 Device had been modified in an attempt to prevent c reduce the frequency of optical system errors and that the NDA included no data for th Modified Phase 3 Device Defendants intended to commercialize. Consequently, Defendant were aware during the Class Period that, without data relating to the use of the Modified Phase Device Defendants intended to commercialize, the FDA would not approve the NDA.

110. On March 17, 2014, AcelRx filed its Annual Report with the SEC on Form 1

for the 2013 fiscal year. The Company's Form 10-K was signed and certified by defendants

and Welch (and signed by defendant Palmer), and reaffirmed the Company's

previously announced on March 3, 2014. The Form 10-K stated in relevant part the following:

Based on the successful results of our Phase 3 clinical program for Zalviso, we submitted a New Drug Application, or NDA, for Zalviso in September 2013 and, in December 2013, we announced that the US Food and Drug Administration, or FDA, accepted for filing the Zalviso NDA. In addition, the FDA has established a Prescription Drug User Fee Act, or PDUFA, action date of July 27, 2014 for AcelRx's Zalviso NDA. Assuming successful approval of our NDA on or around the PDUFA action date, we anticipate generating the first commercial sales of Zalviso in the United States in the first quarter of 2015.

The 505(b) (2) NDA submission for Zalviso is based on a development program that includes data from seven Phase 1 studies, three Phase 2 clinical trials, and three Phase 3 clinical trials. The Phase 3 trial program included two placebo-controlled efficacy and safety trials and one open-label active comparator trial, in which Zalviso was compared to IVPCA with morphine Zalviso successfully achieved the primary efficacy endpoints for each of these trials.

* * *

As noted above, assuming successful approval of our NDA on or about the PDUFA action date, we anticipate launching the commercial sale of Zalviso in the United States in the first quarter of 2015.

* * *



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111. The statements from March 17. 2014 Form 10-K in bold/italics above

materially false and/or misleading when made because Defendants failed to disclose that:






(f) By submitting the NDA for Zalviso, the Company was representing to investo that Defendants believed that the NDA could be approved based on data included with the ND though the Company's NDA was submitted based on the Company's Phase 3 data, ti Defendants were aware that the Phase 3 Device had been modified in an attempt to prevent reduce the frequency of optical system errors and that the NDA included no data for ti Modified Phase 3 Device Defendants intended to commercialize. Consequently, Defendan were aware during the Class Period that, without data relating to the use of the Modified Phase Device Defendants intended to commercialize, the FDA would not approve the NDA.

112. On May 8, 2014, AcelRx issued a press release entitled, "AcelRx

Reports First Quarter 2014 Financial Results." Tn the press release, the Company, in

part, stated:

"In the first quarter of the year, we have focused on preparation for commercialization of Zalviso both in the U.S. and Europe. This includes working with the FDA on the Zalviso NDA ahead of the July 27, 2014 PDUFA


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action date, building our commercial capabilities in anticipation of approval of Zalviso in the U.S., and working with our European commercial partner Grunenthal to prepare the MAA, including meeting with the EU regulatory authorities ahead of the anticipated MAA filing in the middle of this year," stated Richard King, president and CEO of AcelRx. "Our principal pre-commercial activities year to date in the U.S. consist of raising awareness of Zalviso through medical meeting attendance and data presentation, completion of market sizing and segmentation work leading to sales force sizing and territory definition, and adding personnel with commercial experience. We look forward to the continuation of these efforts....

* * *

Forward-Looking Statements

This press release contains forward-looking statements. . . . These forward-looking statements are based on AcelRx's current expectations and inherently involve significant risks and uncertainties. AcelRx's actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, other risks detailed in the "Risk Factors" and elsewhere in A celRx 's U.S. Securities and Exchange Commission filings and reports, including its Annual Report on Form 10-Kfiled with the SEC on March 17, 2014.

113. On May 8, 2014, AcelRx filed its Quarterly Report with the SEC on Form

for the 2014 fiscal first quarter. The Company's Form 10-Q, signed by defendant Morris

certified by defendants King and Morris, reaffirmed the Company's statements

announced that day. The Form 10-Q stated, in relevant part, the following:

The New Drug Application, or NDA, for Zalviso, is currently under review by the U.S. Food and Drug Administration, or FDA. The proposed indication for Zalviso is for the management of moderate-to-severe acute pain in adult patients in the hospital setting. The current standard of care for patients with moderate-to-severe pain in the hospital is intravenous, or IV, patient-controlled analgesia, or IV PCA, which has been shown to cause harm and inconvenience to patients following surgery because of the side effects of commonly used IVPCA opioids, the invasive IV needle route of delivery and the inherent potential for programming and delivery errors associated with the complexity of infusion pumps.

* * *

Based on the successful results of our Phase 3 clinical program for Zalviso, we submitted an NDA for Zalviso in September 2013 and, in December 2013 we announced that the FDA accepted for filing the Zalviso NDA. The FDA has established a Prescription Drug User Fee Act, or PDUFA, action date of July 27,


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2014 for the Zalviso NDA. Assuming successful approval of our NDA on or around the PDUFA action date, we anticipate generating the first commercial sales of Zalviso in the United States in the first quarter of 2015.

The 505(b) (2) NDA submission for Zalviso is based on a development program that includes data from seven Phase 1 studies, three Phase 2 clinical trials, and three Phase 3 clinical trials. The Phase 3 trial program included two placebo-controlled efficacy and safety trials and one open-label active comparator trial, in which Zalviso was compared to IVPCA with morphine. To date, the Zalviso safety database includes more than 600 patients. Zalviso successfully achieved the primary efficacy endpoints for each of these trials.

* * *

We base this expectation on our current operating plan, that assumes an NDA approval in the third quarter of 2014, and a Zalviso commercial launch in the first quarter of 2015.

* * *


114. The statements from May 8, 2014 in bold/italics above were materially

and/or misleading when made because Defendants failed to disclose that:



(c) The optical system errors seen in the Phase 3 trials were such a substantial issu that the Company had, before the Class Period, already set out to figure out the root cause an had already designed, and amended their patent to reflect, a modification to the Phase 3 Device;


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(f) By submitting the NDA for Zalviso, the Company was representing to investo that Defendants believed that the NDA could be approved based on data included with the ND Even though the Company's NDA was submitted based on the Company's Phase 3 data, ti Defendants were aware that the Phase 3 Device had been modified in an attempt to prevent reduce the frequency of optical system errors and that the NDA included no data for ti Modified Phase 3 Device Defendants intended to commercialize. Consequently, Defendan were aware during the Class Period that, without data relating to the use of the Modified Phase Device Defendants intended to commercialize, the FDA would not approve the NDA.

THE COMPANY DISCLOSES THE OPTICAL SYSTEM ERRORS

115. On July 28, 2014, AcelRx filed a Form 8-K, signed by defendant Morris,

attached a July 25, 2014 press release, which was filed after the market closed, entitled,

Pharmaceuticals Receives Complete Response Letter from FDA for New Drug Application

ZalvisoTM." In the press release, the Company, in relevant part, stated:

AcelRx Pharmaceuticals, Inc. . . . today announced that the U.S. Food and Drug Administration (FDA) has issued a Complete Response Letter (CRL) for the Company's new drug application (NDA) for Zalviso (sufentanil sublingual tablet system). The Company is currently reviewing the FDA's comments and requests contained in the CRL and plans to discuss these requests with the FDA.

The CRL contains requests for additional information on the Zalviso System to ensure proper use of the device. The requests include provision of bench data demonstrating a reduction in the incidence of optical system errors which require premature drug cartridge change, changes to the Instructions for Use for the device, and additional data to support the shelf life of the product. We believe some of the requests have been addressed in amendments to the NDA that have been submitted prior to the receipt of the CRL but, as acknowledged by the FDA, have not been reviewed. There is no guarantee that the information previously provided to the FDA will be adequate to address the issues in the CRL. Additional bench testing will be required and human factors testing may be required to address certain items in the CRL. There were no requests to conduct additional human clinical studies.


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"We believe we can satisfy all of FDA's requests in the CRL and resubmit the NDA by the end of 2014, although we will have more clarity on the process and timing after our conversation with FDA," said Richard King, president and CEO of AcelRx. "We are confident in the Zalviso development program and will work closely with the FDA to address the Agency's concerns as outlined in the CRL to ensure that healthcare professionals and patient communities will have access to Zalviso."

116. On July 28, 2014, AcelRx held a conference call regarding the CRL in

defendants Morris and King participated. In regard to the optical system errors, defendant

made the following statements:

The CRL contains [a] request for additional information mainly related to the ZALVISO device and the proper uses of the device by patients and healthcare professionals. The request include[sJ, one, that we provide the FDA with data that demonstrates a reduction in the incidence of Optical System errors. Optical System errors are fail safe, but require the replacement of the drug cartridge or the entire system in order to proceed. Optical System errors when noted in the clinical setting, these errors occurred at lower rates and had no impacts on the outcome of the Phase III trials. We've made improvements to the system design and believe these improvements will address the FDA's concerns. We plan to collect additional bench date on the improved design to be included in the re-submission.

* * *

Similar to the information relating to shelf life, we submitted several amendments to the NDA and we believe some of the request[s] identified in the CRL are already addressed in these amendments. These amendments were submitted to the NDA prior to the recedes of the CRL and the FDA noted in the CRL that several amendments have not yet been reviewed. However, we cannot guarantee that the information previously provided by the FDA will be adequate to address the issues in the CRL. We do know that the improved system will require additional bench testing, we believe that this anticipated bench testing is straightforward Additionally, human factors testing maybe required to address certain items in the CR11 and we expect to have additional clarity after we meet with the FDA. Importantly, there were no request to conduct additional human clinical studies and none are contemplated at the present time. We believe we can satisfy all of the FDA's request in the CRL and resubmit the NDA by the end of 2014 and discussions with the FDA should offer more clarity on both process and timing.

* * *

Thanks, Mario. Let's talk a little bit about optical errors then. And for those who have seen the device, you recall that a priming cap is ejected to ensure the drug can't which is not been tamped with [sic], as probably cap has two holes that are read optically as the cap is dispensed, tablets are also similarly read by the Optical


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System. Any [sic] read the priming cap or the tablet results in an optical error. So the optical error is a fail-safe mechanism to ensure patients do not get does [sic] inappropriately. In case of an optical error, a new cartridge is often required. So optical errors are not dangerous, but rather [they are al built-in safety feature, design[ed] to ensure proper dispensing of tablets from untampered cartridges. On the question of Class I or Class II submission, our sense is and we believe our responses to be what we believe our response to the CRL, the amendments previously submitted have not yet been reviewed by the FDA, will address many of the FDA's concerns. It's difficult for us to understand at this stage whether this will ultimately result in a Class I or Class II submission. The Class II submission typically is if there is clinical data that has been requested by the FDA. Obviously, we have not seen any clinical request from the FDA. So we believe it's likely to be a Class I submission. The challenge for us is that [the] description really relates to drugs and drug[s] specifically, with a drug device combination [it] is not necessarily clear, which category of re-submission that the application will fall into. So we'll obviously just explore that and get further clarification from the FDA when we meet with them subsequent to our request for a meeting.

* * *

Okay. So, the fix actually relates to the nature of the dispenser. And the optical errors from what we can see are caused by a dispense [sic], the push rather sticks to the hub of the dispenser, when dispensing the Sufentanil tablets. So by reducing the friction of that dispenser against the hub, we believe that we can effectively reduce the optical error rate to a very low rate indeed So that's our goal, it's a fix associated with the dispenser component of the device, that's already underway and in fact we're beginning testing with that dispenser.

* * *

So firstly, what does the optical error rate have to get down to, it's not clear to be honest with you, we didn't think of it as being a retro issue to be honest, we thought it's being a commercial issue that we were addressing. So that part of the focus and also it will be a point of clarification with the FDA.

* * *

The two, the Optical System errors as I said earlier, we felt was more of a commercial issue and a regulatory issue.

* * *

Okay. So in terms of timeline, and obviously this is still going to be subject to th meeting with the FDA for clarification. As we can look at the request from the agency looking at what we see is required human factors assessment, modifications to the IFT and device modifications to the dispenses [sic] side of things, we're comfortable witi timeline of year-end this year for submission back to the agency. I like []to subject [] tha [to the] meeting with the FDA for confirmation. In terms of the misplaced tablets and th optical errors. The optical error side of things, there is no reference in the CRL to concert


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with diversion, remember the system, the optical system itself is designed to manag against that particular issue and it's indeed doing exactly that, due to the nature of th system, it sometimes errors out, erroneously and I'd say that error rate is modest, it ' single digits and load [sic], still has a desire to improve upon that that we think that w can respond to, but no, the design of the optical system is to mitigate against diversion.

* * *

On your optical errors what's required there is additional bench testing and the way to think about this is something that we can do internally, we can do it in our engineering lab. This is mechanical testing to load the dispensers up, looking closer with product and essentially press the button and record error rate. So it's something that can be done relatively quickly, if the question is, will that be efficient, how much of it needs to be done. We think it's something that's very manageable and that something that we can do without too much effort.

* * *

[Biren Amin, Analyst]: Yeah, thanks for taking my question. I guess first on the optical error rate, has there been any guidance from the agency or any prior [precedents] with other devices or products where they've asked for certain threshold on optical error rate.

[Defendant King: No, not, unaware of, this is a system that's incorporated into our technology, which is specific to our technology. So I'm not aware of any other request.

117. Because of the revelations on July 25, 2014, the Company's securities

from a closing price of $10.83 per share on July 25, 2014, to a closing price of $6.39 per share

July 28, 2014, a decline of nearly 41% on unusually heavy trading volume of over 15

shares.

POST-CLASS PERIOD DEVELOPMENTS

118. On August 11, 2014, AcelRx issued a press release entitled,

Pharmaceuticals Reports Second Quarter 2014 Financial Results." In the press release,

Company, in relevant part, stated:

AcelRx Pharmaceuticals, Inc. (Nasdaq: ACRX), (AcelRx), a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acute and breakthrough pain, today reported financial results for the three and six months ended June 30, 2014. On July 25, 2014, AcelRx announced that the U.S. Food and Drug Administration (FDA) issued a Complete Response Letter (CRL) for the Company's new drug application (NDA) for Zalviso, (sufentanil sublingual tablet system). Since the


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receipt of the CRL, AcelRx has been working on a reply and intends to meet with the FDA to discuss the items contained in the CRL.

"We were disappointed with the receipt of a Complete Response Letter for Zalviso and we look forward to meeting with the FDA to clarify the items included in the CRL and to discuss our planned response," stated Richard King, president and CEO of AcelRx. "We have spoken to the FDA and plan to meet with them by the end of September 2014. We anticipate we can refile the Zalviso NDA before the end of 2014, pending the outcome of the meeting with the FDA. We remain confident in the Zalviso development program and will work closely with the FDA to address the Agency's concerns as outlined in the CRL to ensure that healthcare professionals and patient communities will have access to Zalviso."

The CR11 contains requests for additional information on the Zalviso System to ensure proper use of the device The requests include submission of data demonstrating a reduction in the incidence of optical system errors, changes to the Instructions for Use for the device to address inadvertent dosing, among other items, and submission of additional data to support the shelf life of the product. We believe certain of these requests have been addressed in amendments to the NDA that were submitted prior to the receipt of the CRL but, as acknowledged by the FDA, have not yet been reviewed by the Agency. While we anticipate that additional bench testing and human factors testing may be required to address certain items in the CRL, there were no requests to conduct additional human clinical studies. However, there is no guarantee that the information previously provided or to be provided to the FDA will be adequate to address the issues raised in the CRL.

119. On September 26, 2014, AcelRx filed a Form 8-K, signed by defendant

which attached a press release entitled, "AcelRx Pharmaceuticals Provides Regulatory Update

Zalviso." In the press release, the Company, in relevant part, stated:

AcelRx Pharmaceuticals, Inc. (Nasdaq: ACRX), a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acute and breakthrough pain, today provided an update on the plans for the resubmission of the Company's New Drug Application (NDA) for ZalvisoTM (sufentanil sublingual tablet system). The Company recently held a teleconference with representatives from the Food and Drug Administration (FDA) to review the Company's proposed response to the Zalviso Complete Response Letter (CRL) received on July 25, 2014. The Company had submitted a Briefing Document to the FDA ahead of the teleconference and received preliminary comments from the FDA on the Briefing Document Based on the communications with the FDA, subject to the timing of the FDA review and comment on protocols to be submitted for the bench testing and Human Factors Study, the Company is targeting resubmission of the Zalviso NDA in the first quarter of 2015. However, depending on feedback from the FDA, the timing of the filing of the NDA could


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be later than the first quarter of 2015. The FDA also communicated that the planned resubmission will qualify as a Class 2 resubmission with a review period of six months.

During the teleconference with the FDA, the Company discussed the items included in the CRL, specifically: testing of the proposed mitigations to reduce the incidence of optical system errors, changes to the Instructions for Use (IFU) for the Zalviso System to address risk of inadvertent misplacement of tablets, and submission of additional data to support the shelf life of the product.

As a result of the communications, the Company confirmed that bench testing would be an acceptable approach to evaluate the reduction in optical system errors. The protocol for the bench testing will be submitted to the FDA for review and comment.

To address the risk of inadvertent misplacement of tablets, the Company proposed mitigations through the Zalviso System and IFU and to test these mitigations by way of a Human Factors Study. The protocol for the Human Factors Study will be submitted to the FDA for review and comment. The FDA stated that the adequacy of the Human Factors Study and the results of the study will be subject to final review and approval by the FDA.

Lastly, the Company proposed including additional stability data in the resubmission to support the proposed 24 month shelf life of the Zalviso System. The FDA has agreed with this approach subject to review of the data previously submitted and to be submitted.

"The discussion with the FDA was productive," said Richard King, president and CEO of AcelRx. "Over the coming months we will prepare, submit and finalize with the FDA the protocols required to complete this work. Assuming timely review by the FDA on the protocols, we anticipate being able to complete the work with a target to refile the Zalviso NDA in the first quarter of 2015. However, depending on feedback from the FDA, the timing of the filing of the NDA could be later than the first quarter of 2015."

120. Further, the Company summarized the developments with Zalviso following

CRL in its 2014 Form 10-K:

In the third quarter of 2014, we held a Type A meeting with the FDA to discuss the Zalviso CRL received in July. During the meeting we discussed the resubmission of the Zalviso NDA and the steps necessary for the resubmission. In advance of resubmitting our Zalviso NDA, we agreed with the FDA to submit protocols for the bench testing and Human Factors, or HE, studies for their review and comment. In addition, the FDA requested in the minutes of the meeting that we provide a risk assessment that analyzes the risks associated with inadvertent dosing and the rationale that bench testing and HE studies are sufficient to address the specific items included in the CRL. We submitted the protocols and this rationale in the fourth quarter of 2014. In January 2015, we received feedback


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from the FDA on the protocol and the planned analysis of the results of the bench test. No modifications to the conduct of the bench test were necessary; however, in response to the FDA's request, we refined the planned analysis of the bench test results. In February 2015, we received feedback from the FDA on the HE protocols. In this feedback, the FDA confirmed that the HE studies as proposed were acceptable to evaluate the design changes related to inadvertent dispensing of tablets. In March 2015, we received additional correspondence from the FDA stating that in addition to the bench testing and two Human Factors studies we have performed in response to the issues identified in the CRL, an additional clinical study is needed to assess the risk of inadvertent dispensing and overall risk of dispensing failures. We plan to meet with the FDA to discuss and clarify the needfor an additional clinical study, and the potential design and objectives of such a study. As a result of this most recent FDA communication and the need for clarity with the FDA, the Zalviso NDA resubmission is on hold We will provide an update on the timing of the resubmission of the Zalviso NDA after we obtain more information from the FDA. The FDA has precleared certain aspects of our proposed Risk Evaluation and Mitigation Strategy, or REMS, and indicated that they will continue discussion of our proposed REMS after the Zalviso NDA has been resubmitted.

121. On March 19, 2015, the Company committed a cost reduction program

the workforce by 19 employees, approximately 36% of total headcount, in the first quarter

2015.

ADDITIONAL SCIENTER ALLEGATIONS

122. As alleged herein, Defendants acted with scienter in that Defendants knew

the public documents and statements issued or disseminated in the name of the Company w 18

materially false and misleading; knew that such statements or documents would be issued 19

disseminated to the investing public; and knowingly and substantially participated or acquies 20

in the issuance or dissemination of such statements or documents. As set forth herein in det 21

Defendants, by virtue of their receipt of information reflecting the true facts regarding Zalvi 22

their control over, and/or receipt and/or modification of AcelRx's allegedly materi 23

misleading misstatements and/or their positions of control within the Company, which m 24

them privy to confidential, proprietary information concerning AcelRx, participated in 25

fraudulent scheme alleged herein. 26

27

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1 The Individual Defendants, By Reason of Their Roles at the Small Company and Professional Backgrounds, Were Aware of the Truth About Zalviso

2 DuHn2 the Class Period

3

123. AcelRx is a small company, which, as of December 31, 2013, had only 27

4 time employees, all of whom were located at the headquarters in Redwood City, California. A

5 of December 31, 2014, after the Class Period, it only had 50 full-time employees. In a smal

6 company where no commercial product revenue has been generated and no revenue is expectec

7 until (and if) regulatory approval is obtained for one of its products and the Company is able t

8 commercialize one of its products, facts critical to the company's core operations or con

9 products are known to a company's key officers, particularly when the officers are hands-on am

10 intimately involved in the development and discussion of the product with the market. Durin

11 the Class Period, the Company stated that Zalviso was "its lead product candidate." Moreover

12 according to the 2014 Form 10-K, the Company stated that "[flhe success of our busines

13 depends primarily upon our ability to develop, receive regulatory approval for am

14 commercialize Zalviso for the management of moderate-to-severe acute pain in adult patients ii

15 the hospital setting. We have not marketed, distributed or sold any products to date." Further

16 the Company made clear, and Defendants were therefore obviously aware, that any delay it

17 approval for Zalviso may negatively impact its stock price, harm its business operations, an(

18 prevent it from commercializing Zalviso, generating revenues and achieving profitability

19 Additionally, the Company stated that since its inception in 2005, it has focused "primarily or

20 development of [its] lead product candidate, Zalviso." Indeed, the Company only has three othei

21 product candidates in development.

22

124. Thus, the only plausible inference both from the size and make-up of

23 Company is that Defendants knew every aspect of the chain of events in the development

24 Zalviso considering that it was pivotal to the Company's future financial success, especia

25 because the Company itself stated that it is "highly dependent on principal members of

26 executive team" in its SEC filings. If Defendants did not inform themselves of every aspect

27 the chain of events during the Class Period, then their Class Period statements regarding Zalvi:

28 and the Company's business, operations and prospects were made without a reasonable has



1 Nevertheless, Defendants failed to disclose and misrepresented the truth regarding Zalviso,

2 alleged herein.

3

125. Defendant King was, at all relevant times, the Company's CEO, and director

4 According to the Company's SEC filings, defendant King's "extensive experience as a

5 executive officer of public pharmaceutical companies and his knowledge of the day-to-da

6 operations of AcelRx provide him with the qualifications and skills to serve as a director.

7 During the Class Period, defendant King signed materially false and/or misleading SEC filing

8 and was quoted in materially false and/or misleading press releases.

9

126. Defendant Morris was, at all relevant times, the Company's CFO, starting

10 March 25, 2014. According to a March 25, 2014 press release, defendant Morris is resp

11 for managing the Company's finance operations, its information systems and human r

12 and investor relations functions. During the Class Period, he signed materially false

13 misleading SEC filings.

14

127. Defendant Welch was, at all relevant times, the Company's CFO, starting

15 October 1, 2010. During the Class Period, defendant Welch signed materially false

16 misleading SEC filings.

17

128. Defendant Palmer was at all relevant times, a director, Chief Medical Officer

18 co-founder, since July 2005. Defendant Palmer signed the patent application in August 2013

19 one of the inventors. During the Class Period, defendant Palmer signed a materially false

20 misleading SEC filing.

21

129. Thus, there is no doubt that the Individual Defendants each knew every

22 about Zalviso, especially given that Defendants admitted that they have been in talks with

23 FDA during conference calls. During a December 16, 2013 conference call, in which defend

24 Welch and King participated, defendant King stated: "We have begun dialog with the age

25 regarding review of ZALVISO, and we'll be working diligently with the agency in the con

26 months to address questions they may have on the product, its clinical profile and its prepara

27 for commercial sale." Additionally, during the March 3, 2014 conference call to discuss

28 fourth quarter 2013 results, in which defendants Welch and King participated, defendant Kir



stated: "since the submission of the NDA in September, we have been in dialogue with the Fl

and it appears [that] the agency[] [is] actively reviewing the applications" and that "[d]ialo

with the agency is active and ongoing." Further, during the May 8, 2014 conference call

discuss first quarter 2014 results in which defendants King and Morris participated, defend

King made the following statements:

Since that time, we have been in active dialog with the agency. It appears the FDA is fully engaged in the review process and their questions have been inline with our expectations. We continue to anticipate a decision in regard to approvability of the NDA by the PDUFA date.

* * *

Well, I will say, we have a very - it's a dynamic discussion, its not quite daily but certainly it's a weekly interaction, it has been there since really the receipt of our day 74 letter. It's effective. It's focused on understanding the base set, more looking of it in different ways looking at both from a drug development device and point we are seeing kind of equal focus on each of those two areas. So I'm not seeing one group lag behind the other group in terms of that interface and interaction. And it continues to be dynamic. I think that's for me and for my pictures are very encouraging and encouraging sign of that continued work at the FDA to move towards the PDUFA date.

130. Additionally, due to their professional backgrounds, experience, and

knowledge of the FDA approval process, the Individual Defendants knew or reckl

disregarded the fact that the statements issued by them during the Class Period regai

Zalviso, detailed above, were materially false and/or misleading. It is not plausible

Defendants, who were senior management and involved in authorizing or making p

statements about the Company's key product that was vital to the Company's future fina

success, did not know that their Class Period statements were materially false and/or misle

and/or lacked any reasonable basis when made.

The Company Had Substantial Motivation to Make False and/or Misleadiiw Statements

131. AcelRx was in a race to get Zalviso approved. Emerging alongside

Company's Zalviso product was The Medicines Company's similarly non-invasive pain

device, IONSYS. IONSYS was originally developed by ALZA Corporation and Ortho-McN


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1 Pharmaceutical, Inc., both Johnson & Johnson subsidiaries, and most currently ui

2 development by The Medicines Company. IONSYS is a needle-free, patient-activ

3 iontophoretic transdermal analgesic system which uses a weak electric current to rapidly del

4 fentanyl across the skin and into the bloodstream. Like Zalviso, IONSYS is indicated for

5 short-term management of acute post-operative pain in adult patients requiring opioid analg

6 during hospitalization.

7

132. Since Zalviso and IONSYS occupy the same pain management space, only

8 can achieve a "first mover advantage." A "first mover advantage" is the competitive adval

9 gained by the initial significant product to enter a market segment. Often, the "first-mc

10 gains a competitive advantage with a new type of drug because physicians will prescribe the

11 product to market to treat their patients. Therefore, the first to garner FDA approval would

12 significant advantage.

13

133. IONSYS was originally developed and evaluated in an extensive

14 program, including seven Phase 3 clinical trials, which formed the basis of FDA and Europ

15 Medicines Agency ("EMA") marketing clearances in 2006 for the short-term management

16 acute post-operative pain in the hospital setting. In 2008, IONSYS was launched in Euro

17 achieving strong hospital formulary acceptance, but later was voluntarily recalled due to dcv

18

stability issues.

19

134. Although IONSYS has changed hands in a series of pharmaceutical

20 transactions before landing into The Medicines Company drug portfolio, it has been the sub

21 of an approval re-launch campaign in both the EU and US since 2010. In September 2014,

22 FDA accepted for filing the NDA that was submitted for IONSYS in the United States.

23 Medicines Company reported that IONSYS has a PDUFA date of April 30, 2015. If apprc

24 on this date, IONSYS may be marketed prior to the potential approval of Zalviso, which i

25 provide a first-to-market advantage for IONSYS. Alongside the U.S. approval, the E

26 accepted for review the MAA for IONSYS that was submitted in the EU, and the EU is expe

27 to weigh in on a potential European re-launch of IONSYS later this year.

28

135. Thus, percolating in the background of the Company's planned NDA


54


for Zalviso was the imminent possibility that The Medicines Company's NDA for

would attain a first-pass approval, and thereby reduce the competitive lead that Zalviso

likely have over JONSYS in entering the market in the United States and in Europe.

136. Further, according to the Company's 2014 Form 10-K, the Company had i

net losses in each year since inception. As of December 31, 2014, it had an accumulated

of approximately $178.8 million. As of December 31, 2013, it had accumulated deficit of $145.:

million:

We have devoted most of our financial resources to research and development, including our non-clinical development activities and clinical trials. To date, we have financed our operations primarily through the sale of equity securities and debt. The size of our future net losses will depend, in part, on the rate of future expenditures and our ability to generate revenues. We expect to continue to incur substantial expenses as we prepare for the potential commercialization of Zalviso and continue our research and development activities for our product candidates. To date, none of our product candidates have been commercialized, and if our product candidates are not successfully developed or commercialized, or if revenues are insufficient following marketing approval, we will not achieve profitability and our business may fail. Our success is also dependent on obtaining regulatory approval to market our product candidates outside of the United States through current and future collaborations which may not materialize or prove to be successful.

137. Thus, during the Class Period, Defendants were motivated to make

false and/or misleading statements in order to be able to enter into a new amended and res

credit facility with Hercules Technology Growth Capital, Inc. on December 16, 2013

extends its relationship with Hercules and allows for up to $40 million of new loans to pr(

AcelRx "with additional operating capital and contingency funding for fl commercializ

activities as [it] continues to prepare for the launch, if approved, of Z alvisoTM."

138. Moreover, during the Class Period, Defendants were further motivated to

materially false and/or misleading statements about Zalviso because they were looking

potential companies to partner with in the United States. As stated in the Company's Form 1

for the period ending December 31, 2013, which was filed on March 17, 2014 ("2013 Form

K"),"[w]e continue to seek partnerships to market Zalviso in markets outside of the GrUnen

territory and the United States." Further, on December 16, 2013, AcelRx announced that it


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I entered into a commercial collaboration for Zalviso with GrUnenthal GmbH covering

territory of the European Union, certain other European countries and Australia.

The Individual Defendants Had Substantial Motivation to Make the False and/or Misleading Statements

139. The Individual Defendants were also motivated by various financial

benefitting them personally to make the materially false and/or misleading statements

Zalviso.

140. The Company's June 20, 2014 DEF 14A stated, in relevant part, the following:

Executive Summary and 2013 Highlights

For 2013, we achieved several of our corporate performance objectives and key milestones, including:

[T]n December, we announced a commercial collaboration with GrUnenthal GmbH, covering the territory of the European Union, certain other European countries and Australia for Zalviso for potential use in the management of moderate-to-severe acute pain within a hospital, hospice, nursing home or other medically supervised setting

In December, we entered into an amended loan and security with Hercules, which expanded the loan facility to $40 million, $15 million of which we drew down in December. These financing events have allowed us to continue commercial preparation activities for Zalviso and to allow for the continued advancement of our ARX-04 clinical development program.

141. The DEF 14A also stated the following regarding incentive bonuses:

Since our Chief Executive Officer is responsible for the overall performance of the Company, his 2013 annual bonus was based solely on the Company's overall performance in achieving corporate goals. For our other named executive officers, the cash bonus was weighted 60% on achievement of the Company's 2013 corporate objectives and 40% on achieving his or her individual performance goals, as determined by the Chief Executive Officer and recommended by the Compensation Committee and approved by the Board of Directors.

* * *

For 2013, our corporate performance objectives, as recommended by our Compensation Committee and approved by our Board of Directors, were as follows:

timely submission of the New Drug Application, or NDA, for Zalviso, to the U.S. Food and Drug Administration, or FDA;


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• obtaining positive top-line data results for orthopedic data in the IAP-301 study for Zalviso;

• obtaining positive top-line data results in the Phase 2 clinical trial of ARX-04;

• completion of a partnership deal for Zalviso; and • obtain funding sufficient to prepare ARX-04 for Phase 3 initiation

in 2014.

In February 2014, the Compensation Committee reviewed the performance of the company against its 2013 goals and determined that the Company had achieved all of its 2013 corporate objectives. The Board of Directors then confirmed this determination.

In addition to achieving these pre-established goals, the Board found that the Company also achieved certain other key milestones related to positive clinical data for Zalviso and ARX-04, including preparation of commercial development plans for Zalviso, equity financing and the collaboration agreement with GrUnenthal. Based on these results, the Board of Directors determined that the level of achievement on the Company's corporate goals was 130% of target.

At this same meeting, the Board of Directors also confirmed the performance level achieved by each of the named executive officers against their individual performance goals for 2013. As noted above, since our Chief Executive Officer is responsible for the overall performance of the Company, his 2013 annual bonus was based solely on the Company's overall performance in achieving corporate goals.

In evaluating Mr. Welch's performance, the Compensation Committee considered his attainment of certain defined individual objectives. In particular, in 2013 Mr. Welch completed certain pre-defined financing initiatives on behalf of the Company, supported the Company's investor strategy and completed certain organizational infrastructure initiatives.

142. Thus, Defendants' misrepresentations and omissions to the market about

also made it possible for them to meet certain corporate objectives, as well as certain individu

objectives, in order to increase their compensation. According to the DEF 14A, "The 201

corporate objectives are similar to those set for 2013 and relate primarily to prodw

development, including regulatory approval of Zalviso and related commercial preparation an

financial objectives."

143. In 2013, defendant King was paid $2,631,565 in compensation (consisting

$475,000 in salary, $1,871,040 in option awards, $277,875 in non-equity incentive

compensation, and $7,650 in all other compensation). According to the Form 8-K filed


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1 13, 2015, defendant King was paid $91,875 in bonus payments for his 2014 performance,

2 accordance with the Company's 2014 Cash Bonus Plan.

3

144. In 2013, defendant Welch was paid $963,145 in compensation (consisting

4 $307,500 in salary, $523,150 in option awards, $124,845 in non-equity incentive ph

5 compensation, and $7,650 in all other compensation). In March 2014, the Company entered in

6 a separation and consulting agreement with defendant Welch, which provided for a lump su:

7 cash payment equal to three months of his then current base salary ($375,000) and heal

8 benefits continuation for a period of three months. In addition, defendant Welch would remain

9 consultant through a transition period beginning March 24, 2014, the employment terminatk

10 date, and ending three months thereafter, the consulting period.

11

145. In March 2014, the Company entered in an offer letter agreement with

12 Morris, which provided for his initial annual base salary of $375,000, eligibility for an annu

13 target bonus of up to 37.5% of his annual base salary, based upon achievement of a series

14 personal and company objectives. The offer letter also provided for an initial stock option gra

15 of 200,000 shares of our common stock. According to the Form 8-K filed February 13, 201

16 defendant Morris was paid $70,137 in bonus payments for his 2014 performance, in accordan

17 with the Company's 2014 Cash Bonus Plan.

18

146. In 2013, defendant Palmer was paid $2,023,519 in compensation (consisting

19 $409,000 in salary, $1,432,226 in option awards, $174,643 in non-equity incentive p1

20 compensation, and $7,650 in all other compensation). According to the Form 8-K filed Febrw

21 13, 2015, defendant Palmer was paid $104,987 in bonus payments for her 2014 performance,

22 accordance with the Company's 2014 Cash Bonus Plan.

23

LOSS CAUSATION

24

147. The market for AcelRx securities was open, well-developed and efficient at

25 I relevant times. As a result of Defendants' materially false and misleading statements

26 failures to disclose alleged herein, AcelRx securities traded at artificially inflated prices

27 the Class Period. Plaintiffs and the Class purchased or otherwise acquired AcelRx

28 relying upon market information relating to AcelRx and the integrity of the market price



1 AcelRx securities, thus causing economic loss and the damages complained of herein when

2 I truth and/or the effects thereof were revealed and the artificial inflation was removed from

3 price of AcelRx securities.

4

148. Defendants' wrongful conduct, as alleged herein, directly and proximately

5 the economic loss suffered by Plaintiffs and the Class.

6

149. But for Defendants' misrepresentation and omissions, Plaintiffs and the

7 members of the Class would not have purchased AcelRx securities at the artificially

8 prices at which they were purchased.

9

150. AcelRx investors were not aware of the truth regarding the Phase 3 Device

10 the incidence of the optical system errors, as detailed herein, prior to July 25, 2014 (after th

11 market closed). Because of the revelations on July 25, 2014, the Company's securiti

12 plummeted from a closing price of $10.83 per share on July 25, 2014, to a closing price of $6.3

13 per share on July 28, 2014, a decline of nearly 41% on unusually heavy trading volume of ov

14 15 million shares.

15

151. Thus, the damage suffered by Plaintiffs and other members of the Class was

16 direct result of Defendants' fraudulent scheme to artificially inflate the price of AcelRx

17 and the subsequent significant decline in the value of AcelRx securities when the truth

18 Zalviso was revealed.

19

152. The foregoing allegations describe Plaintiffs' general theory of

20 demonstrate that Plaintiffs' damages were caused by the scheme to defraud as alleged

21 and negate any inference that Plaintiffs' losses were the result of general market conditions

22 other factors wholly unrelated to Defendants' omissions alleged herein.

23

NO SAFE HARBOR

24

153. The statutory safe harbor provided for forward-looking statements under

25 circumstances does not apply to any of the allegedly false statements pleaded in this

26 Many of the specific statements pleaded herein were not identified as "forward-

27 statements" when made. To the extent there were any forward-looking statements, there were

28 meaningful cautionary statements identifying important factors that could cause actual results -



1 differ materially from those in the purportedly forward-looking statements. Alternatively, to

2 extent that the statutory safe harbor does apply to any forward-looking statements plea

3 herein, Defendants are liable for those false forward-looking statements because at the time

4 of those forward-looking statements was made, the particular speaker knew that the partic

5 forward-looking statement was false, and/or the forward-looking statement was authori

6 and/or approved by an executive officer of AcelRx who knew that those statements were I

7 when made.

8

COUNT I Violation of Section 10(b) of

9 The Exchange Act and Rule lOb-S

10 Promulgated Thereunder Against All Defendants

11

154. Plaintiffs repeat and reallege each and every allegation contained above as if

12 set forth herein.

13

155. During the Class Period, AcelRx and the Individual Defendants, and each

14 them, carried out a plan, scheme and course of conduct which was intended to and, throi

15 the Class Period, did: (a) deceive the investing public, including Plaintiffs and other

16 members, as alleged herein; (b) artificially inflate and maintain the market price of I

17 securities; and (c) cause Plaintiffs and other members of the Class to purchase AcelRx sec

18 at artificially inflated prices. In furtherance of this unlawful scheme, plan and course of cc

19 Defendants, and each of them, took the actions set forth herein.

20

156. Defendants (i) employed devices, schemes, and artifices to defraud; (ii)

21 untrue statements of material fact and/or omitted to state material facts necessary to make I

22 statements not misleading; and (iii) engaged in acts, practices, and a course of business whi

23 operated as a fraud and deceit upon the purchasers of the Company's securities in an effort

24 maintain artificially high market prices for AcelRx securities in violation of Section 10(b) of 1

25 Exchange Act and Rule lob-S. All Defendants are sued either as primary participants in I

26 wrongful and illegal conduct charged herein or as controlling persons as alleged below.

27

157. In addition to the duties of full disclosure imposed on Defendants as a result

28 their making of affirmative statements and reports, or participation in the making of affirmatii



1 statements and reports to the investing public, Defendants had a duty to promptly dissemin

2 truthful information that would be material to investors in compliance with the integra

3 disclosure provisions of the SEC, including accurate and truthful information with respect to

4 Company's business, operations, products, and/or financial condition so that the market price

5 the Company's securities would be based on truthful, complete and accurate information.

6

158. AcelRx and the Individual Defendants, individually and in concert, directly

7 indirectly, by the use, means or instrumentalities of interstate commerce and/or of the

8 engaged and participated in a continuous course of conduct to conceal adverse ii

9 information about the business, operations, products, financial condition and/or future pr

10 of AcelRx as specified herein.

11

159. These Defendants employed devices, schemes and artifices to defraud, while

12 possession of material adverse non-public information and engaged in acts, practices, and

13 course of conduct as alleged herein in an effort to assure investors of AcelRx's value al

14 performance and continued substantial growth, which included the making of, or ti

15 participation in the making of, untrue statements of material facts and omitting to state materi

16 facts necessary in order to make the statements made about AcelRx and its business, produci

17 operations, products, financial condition and/or future prospects in the light of the circumstanc

18 under which they were made, not misleading, as set forth more particularly herein, and engag

19 in transactions, practices and a course of business which operated as a fraud and deceit upon t]

20 purchasers of AcelRx securities during the Class Period.

21

160. The Individual Defendants' primary liability, and controlling person liability

22 arises from the following facts: (a) the Individual Defendants were high-level executives and

23 directors at the Company during the Class Period; (b) the Individual Defendants were privy

24 and participated in the creation, development and reporting of the Company's internal budge

25 plans, projections and/or reports; and (c) the Individual Defendants were aware of I

26 Company's dissemination of information to the investing public which they knew or reckles:

27 disregarded was materially false and misleading.

28

161. Defendants had actual knowledge of the misrepresentations and omissions



1 material facts set forth herein, or acted with reckless disregard for the truth in that they failed

2 ascertain and to disclose such facts, even though such facts were available to them. Su

3 Defendants' material misrepresentations and/or omissions were done knowingly or reckles:

4 and for the purpose and effect of concealing AcelRx's operating condition and future busing

5 prospects from the investing public and supporting the artificially inflated price of its securiti

6 As demonstrated by Defendants' misstatements of the Company's business, operations, a

7 products throughout the Class Period, Defendants, if they did not have actual knowledge of I

8 misrepresentations and omissions alleged, were reckless in failing to obtain such knowledge

9 deliberately refraining from taking those steps necessary to discover whether those statemei

10 were false or misleading.

11

162. As a result of the dissemination of the materially false and misleading

12 and failure to disclose material facts, as set forth above, the market price of AcelRx securit

13 was artificially inflated during the Class Period. In ignorance of the fact that the market prices

14 AcelRx securities were artificially inflated, and relying directly or indirectly on the false a

15 misleading statements made by Defendants, or upon the integrity of the market in which I

16 securities trade, and/or on the absence of material adverse information that was known to

17 recklessly disregarded by Defendants but not disclosed in public statements by Defendai

18 during the Class Period, Plaintiffs and the other members of the Class acquired AcelRx securit

19 during the Class Period at artificially high prices and were damaged thereby.

20

163. At the time of said misrepresentations and omissions, Plaintiffs and

21 members of the Class were ignorant of their falsity, and believed them to be true. Had Plai

22 and the other members of the Class and the marketplace known of the true business, opera

23 financial condition and/or future prospects of AcelRx, which were not disclosed by Defen

24 Plaintiffs and other members of the Class would not have purchased or otherwise acquired

25 AcelRx securities, or, if they had acquired such securities during the Class Period, they

26 not have done so at the artificially inflated prices which they paid.

27

164. By virtue of the foregoing, Defendants have violated Section 10(b) of

28 Exchange Act, and Rule lob-S promulgated thereunder.


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1

165. As a direct and proximate result of Defendants' wrongful conduct, Plaintiffs

2 the other members of the Class suffered damages in connection with their respective

3 and sales of the Company's common stock during the Class Period.

4

COUNT II Violation of Section 20(a) of

5

The Exchaiwe Act Against the Individual Defendants

6 166. Plaintiffs repeat and reallege each and every allegation contained above as if fully

7 set forth herein.

8 167. The Individual Defendants acted as controlling persons of AcelRx within

9 meaning of Section 20(a) of the Exchange Act as alleged herein. By virtue of their high-le'

10 positions, and their ownership and contractual rights, participation in and/or awareness of I

11 Company's operations and/or intimate knowledge of the statements filed by the Company w

12 the SEC and disseminated to the investing public, the Individual Defendants had the power

13 influence and control and did influence and control, directly or indirectly, the decision-making

14 the Company, including the content and dissemination of the various statements which Plainti

15 contend are false and/or misleading. The Individual Defendants were provided with or h

16 unlimited access to copies of the Company's reports, press releases, public filings and oti

17 statements alleged by Plaintiffs to be misleading prior to and/or shortly after these statemei

18 were issued and had the ability to prevent the issuance of the statements or cause the statemei

19 to be corrected.

20 168. In particular, each of these Defendants had direct and supervisory involvement i

21 the day-to-day operations of the Company and, therefore, is presumed to have had the power

22 control or influence the particular transactions giving rise to the securities violations as

23 herein, and exercised the same.

24 169. As set forth above, AcelRx and the Individual Defendants each violated S

25 10(b) and Rule lob-S by their acts and/or omissions as alleged in this Complaint. By virtue

26 their positions as controlling persons, the Individual Defendants are liable pursuant to

27 20(a) of the Exchange Act. As a direct and proximate result of Defendants' wrongful

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1 Plaintiffs and other members of the Class suffered damages in connection with their purchases

2 I the Company's securities during the Class Period.

3

PRAYER FOR RELIEF

4

WHEREFORE, Plaintiffs pray for relief and judgment, as follows:

5

(a) determining that this action is a proper class action under Rule 23 of the

6 Rules of Civil Procedure, designating Plaintiffs as lead plaintiffs and certifying Plaintiffs as

7 representatives and Plaintiffs' counsel as lead counsel;

8

(b) awarding compensatory damages in favor of Plaintiffs and the other Cl

9 members against all Defendants, jointly and severally, for all damages sustained as a result

10 Defendants' wrongdoing, in an amount to be proven at trial, including interest thereon;

11

(e) awarding Plaintiffs and the Class their reasonable costs and expenses incurred i

12 this action, including counsel fees and expert fees; and

13

(d) such other and further relief as the Court may deem just and proper.

14

JURY TRIAL DEMANDED

15

Plaintiffs hereby demand a trial by jury.

16 IDATED: April 17, 2015 BRODSKY & SMITH, LLC

17

EVAN J. SMITH (SBN 2423 52)

18

19 EVAN J. SMITH

20 BRODSKY & SMITH, LLC

21

EVAN J. SMITH (242352) 9595 Wilshire Boulevard

22 Suite 900

Beverly Hills, CA 90212 23 Telephone: 310-300-8425

Fax: 310-247-0160

24 esmith(brodsky-smith.com

25 Counsel for Rick L. Colyer and

26 Liaison Counsel for the Class

27

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1 BROWER PIVEN A Professional Corporation

Charles J. Piven Yelena Trepetin 1925 Old Valley Road Stevenson, MD 21153 Telephone: (410) 332-0030 Facsimile: (410) 685-1300

Email: [email protected] Email: [email protected]

Counsel for Rick L. Colyer and Lead Counsel for the Class

GLANCY BINKOW & GOLDBERG LLP Lionel Z. Glancy Robert V. Prongay 1925 Century Park East, Suite 2100 Los Angeles, CA 90067 Telephone: (310) 201-9150 Facsimile: (310) 201-9160 Email: lglancyglancylaw.com rprongayglancylaw.com

Counsel for Harry Zwezfel

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1

CERTIFICATE OF SERVICE

2

I hereby certify that the Amended Class Action Complaint for Violations of the Federa

3 Securities Laws (with Exhibits A and B) was filed through the ECF system and will be sen

4 electronically to the registered participants as identified on the Notice of Electronic Filing (NEF)

5 and paper copies will be sent to those indicated as non-registered participants on April 17, 2015.

6

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/s/ EVA]V J. SMITH EVAN J. SMITH

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case 5:14-cv04416-lhk document 28 filed 04/17/15 page 1 of...

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