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An update with information from AcelRx's conference call is below.

AcelRx Pharmaceuticals (ACRX) - Get Free Report failed to secure FDA approval for its painkiller dispensing device Zalviso. AcelRx disclosed the FDA rejection late Friday. The company has scheduled a conference call with investors for this morning. 

Zalviso's rejection is a definite setback (I predicted approval) so expect AcelRx shares to fall significantly Monday from Friday's close of $10.83. In early Monday trading, the stock is down 27% to $7.90. An analyst at Canaccord Genuity downgraded AcelRx to hold and slashed his price target in half to $8 Monday morning. 

AcelRx's ability to recover and eventually win Zalviso approval depends on the company's ability to satisfy FDA's lingering concerns. Here's what the company has told us so far about the requirements contained in the agency's Complete Response Letter:

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 theFDA, 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.  

"Optical system errors" refers to a set-up feature of the Zalviso system which requires the nurse to dispense a placebo pill into her hand before the device is ready for the patient to use. When Zalviso is working correctly, an optical sensor in the device detects two holes in the placebo pill and signals to the nurse that the cartridge containing the painkilling tabs is full and has not been tampered with. If an error message pops up, the nurse loads a new cartridge into the machine and tries again.

The FDA is apparently worried about a high error rate involving the optical sensor in the device. AcelRx believes it has data in hand already demonstrating a lower error rate, but whether that's enough to assuage FDA remains to be seen. 

"Shelf life" refers to the stability of the painkilling sufentanil tabs in the Zalviso system. AcelRx submitted 18-month stability data as part of the FDA submission. The company later provided FDA with 24-month stability data but FDA did not get a chance to review. 

AcelRx believes it can gather all the requested information and re-submit Zalviso to the FDA before the end of the year. If that timeline sticks, the next approval decision will come in 2015. Resubmissions are accepted with either a two-month or six-month review period.

AcelRx finished the first quarter with $92 million in cash. Whether or not the company will need to raise additional money before a second Zalviso approval decision is question that should be addressed on this morning's conference call. 

Update following AcelRx's conference call:

AcelRx management said the rate of "optical errors" in Zalviso clinical trials was in the "single digits" but wouldn't specify further. To fix, the company is making changes to a dispensing rod in the Zalviso device. Bench testing will then be done to demonstrate (hopefully) a lower optical error rate. Re-engineering a medical device, even if it's only a minor change, can be tricky, which makes the optical error issue the biggest concern or worry facing AcelRx as it tries to get Zalviso approved for a second time. The company believes FDA will be satisfied with confirmatory bench testing of the optical error issue but won't know for sure until it sits down with regulators to clarify the agency's concerns in the Complete Response Letter. This uncertainty just heightens the risk. 

The cash issue: AcelRx is burning about $12 million per quarter, which gives the company two years of cash on hand. 

AcelRx shares are trading down 35% to $6.96, reflecting the uncertainty around the device fix for the optical error issue. 

Adam Feuerstein writes regularly for TheStreet. In keeping with company editorial policy, he doesn't own or short individual stocks, although he owns stock in TheStreet. He also doesn't invest in hedge funds or other private investment partnerships. Feuerstein appreciates your feedback;

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