- ACRX's Zalviso drug seem to have sound science and fundamentals going into PDUFA.
- Selling puts or put spreads in the run-up to PDUFA is a low risk way to profit from this event.
- The same option strategy going into PDUFA is also another possible strategy.
ACRX company overview:
AcelRx (NASDAQ:ACRX) has Zalviso coming up for PDUFA approval by July 27th. From ACRX's latest 8-Q filing: "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." ACRX is also the owner of a record of over 20 issued patents worldwide. These issued patents cover the sufentanil tablet, medication delivery devices and platform technology. These issued patents are expected to provide coverage through 2027-2031, which provide some reassurance to the long-term prospects of ACRX.
The goal date for the launch of Zalviso (if approved) for sale in the United States falls in the first quarter of 2015. ACRX has a market cap of close to $500M with about $100M in cash and ~$35M debt/liabilities as of Q1 2014. The annual cash burn rate is close to $40M, therefore the company can last another 2 years without revenue, increasing the urgency to obtain revenue from Zalviso by mid 2015. However, the current scenario suits the company's strategic timeline well.
ACRX recently established a partnership with Grünenthal, covering the territory of the European Union, certain other European countries and Australia for Zalviso for potential use in pain treatment. Grünenthal will also make tiered royalty, supply and trademark fee payments between 15-25%, on net sales of Zalviso in the Grünenthal territory. This shows that ACRX has the ambition to expand their product out of the USA to increase potential revenue as a long-term strategic goal. The management of ACRX has been covered in a previous SA article. The article mentioned the track records of the management team, which is in line with the sound fundamentals of the company thus far.
In Zalviso's Phase 3 active comparator clinical trial (IAP 309), 7.9% of Zalviso treated patients dropped out of the trial prematurely due to an AE. The Phase 3 topline results are promising. Zalviso met its primary endpoint of non-inferiority in a Phase 3 open-label active comparator trial designed to compare the efficacy and safety of Zalviso to IV PCA with morphine, which is the current standard of care for the treatment of moderate-to-severe acute post-operative pain immediately following
major abdominal or orthopedic surgery. More details of the solid results for Zalviso can be seen in the link given above.
According to the filing for the Phase 3, double-blind, placebo-controlled, abdominal surgery trial (IAP 310, n=178 at 13 US sites), adverse events reported in the trial were generally mild or moderate in nature and similar in both placebo and treatment groups. In the Phase 3, double-blind, placebo-controlled, orthopedic surgery trial (IAP 311, n=426 at 34 US sites), treatment-emergent adverse events were generally mild-to-moderate in nature and similar for the majority of adverse events between sufentanil and placebo treated patients. Therefore, the safety profile of Zalviso appears to be sound and will help its case for PDUFA approval. Moreover, the advantage in efficacy shown against IV PCA as mentioned above adds to the approval odds. In the case of approval, I will further analyze the market and revenue potential of Zalviso.
IV-PCA costs $200-240 for 2 days of post-surgical pain management, which forms a guide for the possible cost of Zalviso. Considering the annual cash burn rate of $40M, to break even, ACRX needs to sell at least 200,000 Zalviso prescriptions. To reach P/S (based on current market cap) of about 3 (Close to median of all biopharmaceutical companies), about 600,000 prescriptions are required a year. A quick search in CDC reveals ~3 million abdominal area surgeries performed in the US annually and an additional ~2 million orthopaedic surgeries. I have used only these two categories as most of the Phase 3 trials for Zalviso have investigated patients involved in these two types of surgeries. In the projection below, I have assumed that the cash burn increases by approximately 20% each year due to increase R&D efforts and sales/marketing costs. I have also projected market share of the abdominal and orthopaedic surgeries on the same graph. With the market share, comes the projected revenue assuming $240 for 2 days of post-surgical pain treatment. Looking at the 2015 projections, it appears that the P/E with the current market cap at ~$500M is about 25, which is reasonable for a biopharmaceutical that is just starting to market its first indication. The current market cap appears to value ACRX fairly in terms of 2015 revenue and profit. However, projecting into 2016 with a slightly lower P/E of 15 (conservative projection) puts the 2016 value of the stock at ~$24. This price target in 2016 assumes that the current cash burn rate is maintained or slightly higher and that 10% of the key surgery markets are captured by Zalviso. If the drug is approved, I foresee that the market will value the company between $12 and $20.
A put spread (below at 07/02/2014 close) at Aug 16th expiration by selling the $10 put and buying the $7.5 put will net $80 per contract if the stock price of ACRX stays above $10 by expiration. The maximum loss is $160 per contract. This represents about an 8% return on capital over the next few weeks. A riskier bet to net more premium can be done by selling the $12.5 strike put and buying the $10 strike put.
As you can see from the P&L graph above, the downside is capped at about 12-16% of the stock price. If you had purchased the stock at $11-12 during the first 2 weeks of July, in the case of a delay or even a minor CRL, you run the risk of losing even more than 16%. Since ACRX is going for its first approval as a company, there is no projected revenue if this drug does not get approved and the market will likely price the stock at about $5 (before the Phase 3 results were released). This would create a 50% loss if you were to carry out a simple long/bullish play. However, a put spread also limits your profit to about 10% of the capital instead of perhaps more than 25% gain if you were to go long simply. This put spread strategy simply limits the risk resulting from unforeseen circumstances in the PDUFA approval process.
If you are more bullish on the prospects of PDUFA approval, selling the $10 put with August 16th expiration will net you about 12% return of capital if the stock stays above $10 by expiration. As the stock is sitting a few percent above $11 now, the probability of profit (POP) seems to be about 70% based on the free probability calculator. A more gutsy bet would be to sell the $12.5 put but that would also ensure large losses in case the PDUFA is not positive.
I have given a few possible strategies to profit from the PDUFA binary event. A less risky proposition would be to open any of the above positions and earn from the decay of premium and close the positions for a nice profit before the PDUFA date in case of any mishaps. (This is a likely scenario as the typical 'bio runup' would be occurring in the next 2 weeks of July) All in all, the prospects for ACRX's Zalviso PDUFA seem sound and the put spreads and sold puts are a lower risk way to profit from this binary event.
Additional disclosure: Open sold put and put spread option positions in ACRX.