AcelRx Pharma: Pain Drug Developer With 2H12 Phase 3 Catalysts

| About: AcelRx Pharmaceuticals, (ACRX)

AcelRx Pharmaceuticals (ACRX) is a pain drug developer with lead product candidate Sufentanil NanoTab PCA System (ARX-01) (sublingual patient-controlled pain relief in a hospital setting) being evaluated in a pair of ongoing pivotal Phase 3 clinical trials. In March, ACRX began the first of three planned pivotal Phase 3 clinical trials vs. placebo after abdominal surgery ( ID NCT01539642 with results expected during 2H12).

In April, the Company began a second pivotal Phase 3 trial ( ID NCT01539538 with results expected during 2H12) for post-operative pain control vs. IV (intravenous) morphine PCA (patient-controlled analgesia). The Company plans to begin the third and final planned pivotal Phase 3 trial during 3Q12 vs. placebo after major joint replacement surgery with results expected late 2012-early 2013 to support a planned NDA filing mid-2013.

The Company also expects to begin Phase 2 clinical development for ARX-04 during the current quarter as a sufentanil-based product for the treatment of moderate to severe pain under a US Department of Defense grant with the goal of selecting a dose to further evaluate in Phase 3 clinical trials. In addition, ACRX has two product candidates that have completed Phase 2 clinical development, including ARX-02 (Sufentanil NanoTab BTP Management System) for the treatment of breakthrough cancer pain and ARX-03 (Sufentanil and Triazolam NanoTab combination) for providing both mild sedation and pain relief for doctor's office related procedures.

On June 1, ACRX closed a $10 million (NYSE:M) private placement that included some of the Company's Board members for the sale of units priced @$3.40 that resulted in the issuance of 2.9M shares of common stock and five-year warrants for the potential purchase of 2.6M additional shares of common stock @$3.40 (the 5.5M shares of common stock were recently registered with the SEC in a filing effective as of July 2). The Company reported a 1Q12 net loss of ($7.1M) and reported 19.6M shares of common stock outstanding at the end of 1Q12 (now about 22.5M shares of common stock outstanding after the private placement) along with approximately $19M in total debt.

Prior to the private placement, ACRX ended 1Q12 with $27.6M in cash and equivalents as compared to $35.8M at year-end 2011 and guided for sufficient liquidity at the time to fund operations into 1Q13 so the $10M private placement should extend the Company's liquidity thru the time of the planned NDA filing in mid-2013. In February 2011, ACRX completed its initial public offering (NYSEARCA:IPO) for the sale of 8M shares of common stock @$5, receiving net proceeds of $35.6M and in June 2011 completed a $20M secured loan agreement with Hercules Technology Growth Capital.

In April, ACRX announced that the US Patent and Trademark Office (USPTO) issued two notices of allowance for patents related to the Company's sufentanil-based NanoTab product candidates through at least 2029, which adds to a related European patent issued in June 2010.

Given the low float and market value (under $100M) for a Company with a late-stage Phase 3 asset that has the potential to improve the treatment of pain in a hospital setting; I believe shares of ACRX are poised to make a run back toward the IPO price of $5/share going into Phase 3 results-moving back toward or even through new 52-week highs, which has been common recently for many small biotech stocks with late-stage clinical or FDA catalysts. The less invasive and less complex route of sublingual pain drug delivery in the hospital setting would be a major improvement over the current use of intravenous (IV) based pain pumps that must be programmed and are more invasive to the patient as an IV line must be kept open and free of infection.

The low float, average trading volume and high share price volatility make shares of ACRX tough to trade actively; although I expect the average daily trading volumes to increase as the timeline for Phase 3 results nears and the Company provides more clarity as to the exact timing. With adequate liquidity through the planned NDA filing mid-2013 for ARX-01; I would not expect ACRX to raise additional capital ahead of the Phase 3 results later this year. In addition, ACRX would receive nearly $9M in additional cash proceeds if the 2.6M warrants @$3.40 are exercised any time within five years from December 1, which is the start date for potential exercise of the warrants and will likely occur after at least two Phase 3 results are reported.

Disclosure: I am long ACRX.