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by Ning Yang, Ph.D., Shiri Wallach, Ph.D.

AcelRx Pharmaceuticals, Inc. (NASDAQ:ACRX) is a specialty pharmaceutical company focused on the development of four novel therapies for the treatment of acute and breakthrough pain. The company's lead product candidate, the Sufentanil NanoTab PCA system or ARX-01 for short, is designed to solve the challenges associated with post-operative intravenous patient-controlled analgesia (IV PCA).

ARX-01 is currently in 3 Phase III trials and AcelRx is expected to report top-line data in 2H 2012 or early 2013. The company has also completed Phase II clinical trials for two additional product candidates, ARX-02 and ARX-03. ARX-02 is short for the Sufentanil NanoTab Breakthrough Pain Management System for the treatment of cancer breakthrough pain while ARX-03 also known as Sufentanil/Triazolam NanoTab is designed to provide mild sedation, anxiety reduction and pain relief for patients undergoing painful procedures in a physician's office. The fourth drug candidate, ARX-04, a non-invasive, fast-onset sublingual product for the treatment of moderate-to-severe pain, is about to enter a Phase II trial under a grant funded by the Department of Defense.

In the United States, AcelRx is planning to develop and commercialize these product candidates through its own efforts or in conjunction with partners. Outside of the United States, AcelRx anticipates commercializing these products on a worldwide basis through select regional partnerships. With a stock price of $3.25 per share and fully diluted shares of 29.2 MM, AcelRx has a market cap of $73.53 MM and an enterprise value (EV) of $85.1 MM. With approximately $29 MM cash in hand, the company has enough cash resource to fund operations through early 2013, ensuring delivery of all clinical data for ARX-01 and enabling new drug application (NDA) preparation. Overall, we view that the stock is undervalued and should move significantly higher upon positive results from the ARX-01 Phase III trial data.

Clinical Trials

Figure 1 summarizes development status of AcelRx's existing product candidates. ARX-01 is the most advanced in clinical trials, with two Phase III trials initiated in 1H2012 and the third one expected to start in 3Q2012. Both ARX-02 and ARX-03 completed their Phase II trials, and future developments are contingent upon additional funding or corporate partnership resources. ARX-04's Phase II trial is currently pending on approval of the proposed clinical protocol for the study from the United States Army Medical Research and Material Command (USAMRMC).

Figure 1: Development status of AcelRx's existing product candidates.

Product Candidate

Description

Target Indication

Development Status

ARX-01

Sufentanil NanoTab PCA System

Acute post-operative pain

Three Phase III clinical trials are planned in 2012 as follows:

· A double-blind, placebo-controlled, efficacy and safety trial in 150 patients following abdominal surgery was initiated in March 2012 and top-line data is expected in 2H2012.

· An open-label active-comparator trial was initiated in April 2012 in 400 patients who undergo abdominal or orthopedic surgeries. Top-line data is expected in 2H2012.

· A second double-blind, placebo-controlled, efficacy and safety trial in 400 patients following orthopedic surgery is anticipated to begin by 3Q2012. Top-line data is expected in late 2012 or early 2013.

ARX-02

Sufentanil NanoTab BTP Management System

Cancer breakthrough pain

· Phase II trial and End of Phase II meeting successfully completed

· Future development contingent upon additional funding or corporate partnership resources

ARX-03

Sufentanil/Triazolam NanoTab

Mild sedation, anxiety reduction and pain control for painful procedures in a physician's office

· Phase II trial and End of Phase II meeting successfully completed

· Future development contingent upon additional funding or corporate partnership resources

ARX-04

Sufentanil Single-Dose NanoTab

Moderate-to-severe acute pain

· Phase II trial expected to start in 2H2012

Source: The company 10-K report for FY2011.

ARX-01 Phase II Clinical Trials Provided Promising Results. ACRX conducted three successful Phase II studies for ARX-01 (see Figure 2). Two of the studies were multicenter, randomized, double-blind, placebo-controlled Phase II trials. These trials include 101 patients randomized to one in four arms (placebo, 5 mcg, 10 mcg and 15 mcg) in patients undergoing a knee replacement surgery and 92 patients randomized to one in three arms (placebo, 10 mcg and 15 mcg) in patients undergoing major abdominal surgery. The primary endpoint was a 12-hour sum of pain intensity difference (SPID-12). Both trial data indicated that 15 mcg dose regimen achieved statistically significant separation in SPID-12 from placebo (P<0.05).

A third Phase II trial involving 30 patients in a multicenter, open-label device functionality study was performed in patients undergoing knee replacement. The trial results demonstrated no system or dosing errors with a low drop-out rate of 6.7% due to inadequate analgesia and 100% of the patients were found to be capable of using the system sufficiently.

Figure 3 compares the safety data of the three sufentanil dose regimens of all three Phase II trials with published IV PCA safety data (a meta analysis of published IV PCA adverse events, published by Cashman and Dolin in 2004 and 2005). [Sources: Cashman, J.N. and Dolin, S.J. Br. J. Anaesth. 2004; 93(2):212-223 and Dolin S.J., Cashman, J.N. Br. J. Anaesth. 2005; 95(5):584:591.] Overall ARX-01 is well tolerated for all the three dose regimens (5 mcg, 10 mcg, and 15 mcg) with a lower rate of nausea, vomiting, itching, somnolence and oxygen desaturation when compared to IV PCA.

Figure 2: Completed 3 Phase II trials for ARX-01.

Trial

# Subjects

Design Control

Drug Dose and Regimen

Primary End-point

Efficacy/Safety

1

101 patients undergoing knee replacement surgery

Multi-center, randomized, double-blind, placebo-controlled, four-arm

Study staff administered:

Oral Sufentanil:

5 mcg/dose, >= 20 mins between doses

Oral Sufentanil:

10 mcg/dose, >= 20 mins between doses

Oral Sufentanil:

15 mcg/dose, >= 20 mins between doses

Oral Placebo, >= 20 mins between doses

12-h Sum of the Pain Intensity Difference (SPID-12)

· 5 mcg dose did not achieve statistically significant separation from placebo overall.

· 10 mcg dose was significant as compared with placebo for the subgroup of women in the orthopedic surgery (P<0.05).

· 15 mcg dose was significant even at the earliest time point of 15 mins (P = 0.038) as compared to placebo, and also for the primary endpoint SPID-12 (P=0.018).

2

92 patients undergoing major abdominal surgery

Multi-center, randomized, double-blind, placebo-controlled, three-arm

Study staff administered:

Oral Sufentanil:

10 mcg/dose, >= 20 mins between doses

Oral Sufentanil:

15 mcg/dose, >= 20 mins between doses

Oral Placebo, >= 20 mins between doses

12-h Sum of the Pain Intensity Difference (SPID-12)

· Both 10mcg and 15mcg doses were significantly more effective than placebo for SPID-12 (p<0.001). Significant differences were observed within 2 hs after the first dose between sufentanil and placebo and continued until the end of 12-h period.

3

30 patients undergoing knee replacement surgery

Multi-center, open-label, device functionality study, single-arm

Patient self-administered:

Oral Sufentanil:

15 mcg/dose, >= 20 mins between doses

% patients without device failure in 12h

· No system failure or dosing errors for all 30 patients.

· Mean pain intensity scores decreased from 5.5 at baseline to 3.0 at 2hs.

· Dropout due to inadequate analgesia was 6.7%.

· 100% of patients could handle the system easily and liked other key characteristics.

Source: LifeSci Advisors.

Figure 3: Summary of Phase II adverse events for ARX-01.

Adverse Events

Placebo (N=54)

Sufentanil

5 mcg

(N=24)

Sufentanil

10 mcg

(N=24)

Sufentanil

15 mcg

(N=79)

IV PCA

(Cashman & Dolin)

Nausea

17 (31%)

7(29%)

22(40%)

23(29%)

32%

Vomiting

3(6%)

2(8%)

6(11%)

9(11%)

21%

Itching

0(0%)

1(4%)

4(8%)

6(8%)

14%

Somnolence

1(2%)

1(4%)

0(0%)

2(3%)

56%

Oxygen Desaturation

0(0%)

0(0%)

1(2%)

1(1%)

11.5%

Respiratory Depression

1(2%)

0(0%)

2(4%)

0(0%)

1.2%-1.9%

Source: The company 10-K report for FY2011 and Corp. Deck 06-2012.

ARX-01 Phase III Efficacy Clinical Trials - Two out of the Three Trials are Underway. The Phase III clinical program is comprised of 3 trials (2 double-blind, 1 open-label) to treat post-operative pain in abdominal and orthopedic surgeries. The FDA requires studies in both of these populations to enable a broad post-operative pain indication.

The first double-blind trial is designed to include 150 patients following abdominal surgery, randomized in a 2:1 active to placebo ratio, and was initiated in March 2012. The second double-blind trial is designed to include 400 patients following orthopedic surgery in a randomized 3:1 active to placebo ratio and is expected to initiate in 2H2012. The primary endpoint measure for these double-blind trials is the Sum of the Pain Intensity Difference to baseline measured over 48 hours after initiation of treatment (SPID-48). This is the expected FDA measure for efficacy of treatments for acute pain treatments.

The company announced on April 12, 2012 the initiation of an additional study, a 400-patient, open-label, active comparator study in 400 patients, randomized 1:1 to receive ARX-01 or IV PCA morphine. This study and its complete data will assist in the commercialization of ARX-01 by providing data that demonstrates, in addition to being non-invasive and non-programmable, ARX-01 is just as effective as the current standard of care. The primary endpoint is the percent of patients rating the method of pain control as "good" or "excellent". Secondary endpoints include inter-dosing interval, sedation scores, ease of care, system related events and questionnaires for both nurse and patients. The completion of Phase III clinical trials with top-line data are expected in late 2012/early 2013 with a clear path for NDA filing in 2013.

Comparative Landscape for ARX-01 - We Believe ARX-01 Has an Edge

The post-operative pain market is large and highly competitive. Many companies either have commercialized products or are currently developing new therapeutics in post-operative pain, as summarized in Figure 4. The standard of care for post-operative pain is the IV PCA pump delivering intravenous morphine in response to patient demand, which is widely used in the post-operative setting.

Leading manufacturers of IV PCA pumps are Hospira Inc. (NYSE: HSP), CareFusion Corporation (NYSE: CFN), Baxter International Inc. (NYSE: BAX), Curlin Medical, Inc. and Smith Medical. Newer PCA modes such as transdermal and sublingual represent an interesting avenue of development. In addition, non-patient-controlled (non-PCA) delivery of pain medications has also been developed. In the non-PCA group, development products include Rylomine intranasal morphine system by Javelin Pharmaceuticals, AERx Inhalation Pain Management System by Aradigm (NASDAQ:ARDM), and AeroLEF™ inhalation system developed by YM BioScience Inc. (NYSE: YMI).

In the PCA group, IONSYS™ by Incline Therapeutics is in development. Rylomine™ is currently in Phase III trial in the U.S. and in Phase II trial in the EU. AERx and AeroLEF™ both completed Phase II trials, while IONSYS™ although approved by the FDA, was withdrawn by the manufacturer due to its technical problems. Morphine, hydromorphine, and fentanyl are among the most commonly used opioids in all these systems (both on the market and in development), all of which are available as generics.

We believe that ARX-01 clearly has an edge over all these systems for the following reasons. Firstly, ARX-01 uses sufentanil which has a much higher therapeutic index (26,716) than other opioids (meperidine = 5; methadone = 12; morphine = 71; hydromrophone = 232; fentanyl = 277). Hence ARX-01 has the potential to improve on current opioid safety while being a highly effective opioid. This is supported by ARX-01 Phase II trial safety data, as shown in Figure 3. Secondly, sufentanil does not produce active metabolites that can accumulate for other opioids such as morphine, potentially causing serious adverse events. Thirdly, ARX-01 is non-invasive, and unlike the standard IV PCA, patient mobility is not restricted. Lastly, ARX-01 is easy to set-up by nurses, since the ARX-01 device is not subject to programming, and is easy for patients to use, as suggested in its third Phase II trial (see Figure 2).

Other pain management therapeutics on the market, often used as adjuncts to core opioid therapy, although not patient controlled, include DepoDur®, Exparel® and Nucynta®. DepoDur and Exparel are both marketed by Pacira Pharmaceuticals (NASDAQ:PCRX), whereas Nucynta is marketed by Johnson & Johnson (NYSE: JNJ). While DepoDur® is a morphine sulfate extended-release liposome injection, Exparel® is a local liposome injection of bupivacaine, a local anesthetic, which was approved for marketing in October 2011. Both drugs require needle-based injection, and can cause adverse drug reactions if administered incorrectly. DepoDur can cause respiratory depression, especially in elderly and debilitated patients and in those with compromised respiratory function. Other side effects include oxygen saturation, hypotension, urinary retention, vomiting, constipation, nausea, pruritus, pyrexia, anemia, headache, and dizziness (incidence > 10%). Exparel, like all other bupivacaine drugs, is markedly cardiotoxic. In addition, it has to be used cautiously in patients with hepatic disease. Like sufentanil, Nucynta is a Schedule II controlled substance. The drug has a high incidence rate (>10%) of nausea, constipation, headache, dizziness, and somnolence, and is contraindicated in patients with severe bronchial asthma, paralytic ileus, and in patients taking monoamine oxidase inhibitors (MAOI). Moreover, serotonin syndrome can develop with the use of Nucynta.

Other new adjunct drug products in development, although again, not patient controlled, consist of POSIDUR™ developed by Durect (NASDAQ:DRRX), CR845 by Cara Therapeutics, XaraColl by Innocoll, and MoxDuo® by QRxPharma (OTCQX: QRXPY.PK). Like Exparel, POSIDUR is bupivacaine-based, and thus can cause similar side effects encountered in Exparel. Durect completed an international, multi-center, randomized, double-blind, controlled, Phase III trial of POSIDUR in January 2012. Three hundred and five patients undergoing general abdominal surgical procedures were enrolled. No statistically significant results were achieved in the trial.

Cara Therapeutics successfully completed a Phase II trial in June 2012 for its drug candidate, CR834, a peptide-based, peripherally-acting kappa opioid agonist. The study was a randomized, double-blind, placebo-controlled study of intravenous CR845 (0.04 mg/kg/dose) in women undergoing a laparoscopic hysterectomy. Patients who received both a pre- and post-operative dose of CR845 achieved statistically meaningful reduction of morphine use when compared to placebo cohort. XaraColl is a collagen/bupivacaine sponge which is implanted during surgery for the sustained delivery of bupivacaine hydrochloride.

Innocoll completed two Phase II trials of XaraColl in September 2011, and the patients receiving Xaracoll demonstrated a statistically significant reduction in the total use of opioid medication through 24 and 48 hours post-surgery and a statistically significant increase of the time before rescue opioid medication. MoxDuo (morphine and oxycodone) is developed by QRxPharma, an Autralian pharmaceutical company. The company filed an NDA to the FDA for MoxDuo in August 2011 and received a complete response letter from FDA in June 2012, requesting additional information on efficacy and safety of MoxDuo. Overall, we do not believe that any of these drugs (in development or on the market) pose a threat to ARX-01 because they all act as an analgesic adjuvant to morphine or other opioids, whereas ARX-01 represent a new mono-therapy and has a potential to replace the current standard of care, IV PCA.

Figure 4: Competitive Landscape for Post-operative Pain Management.

Therapies

Brand Name

Company

Ingredient and Delivery

Stage

Limitations

IV PCA

n.a.; Alarix®;

Baxter PCA; Curlin PCA;

CADD®

Hospira Inc.; CareFusion Corporation; Baxter International Inc.; Curlin Medical, Inc.; Smiths Medical

When programmed, able to deliver variety of opioids, typically morphine or hydromorphone

On Market

· Common side effect of morphine: nausea, vomiting, sedation, oxygen desaturation, and respiratory depression.

· The PCA system has the inherent potential for programming and delivery errors associated with complexity of infusion pumps.

· Invasive route of delivery is expensive, and induces high incidence of analgesic gaps, and significantly restricts patient mobility.

Intranasal Morphine System

Rylomine™

Javelin Pharmaceuticals

Intranasal administered morphine

Phase III in the US and Phase II in the EU

· Safety and efficacy concerns associated with morphine and with nasal delivery route

Fentanyl iontophoretic transdermal PCA system

IONSYS™

Incline Therapeutics

Patient-controlled iontophoretic transdermal system providing on-demand systemic delivery of fentanyl

FDA has approved product, but issues with stability of system, particularly electrode corrosion, caused removal from market.

· As with all transdermal systems, skin hypersensitivity, skin redness, and hyperpigmentation are common problems.

· Lack of programmability and a basal infusion rate that may be important in opioid-dependent and opioid-tolerant patients.

· Number and timing of attempts by the patient cannot be determined.

Patient-controlled transpulmonary analgesia

AeroLEF™

YM BioScience Inc.

Inhalation formulation of free and liposome-encapsulated fentanyl

Phase II completed

· Concerns with delivery route

AERx Pain Management System

n.a.

Aradigm

Morphine inhalation PCA

Phase II completed

· Concerns with deliverey route.

Medication on Demand

MOD®

Avancen

Dispensing device delivering oral hydromorphone, oxycodone, morphine, and acetaminophen for cancer pain

On the Market

· Mainly to treat cancer break-through pain.

Extended-release epidural morphine (EREM)

DepoDur®

Pacira Pharmaceuticals

Morphine sulfate extended-release liposome injection

On Market since 2004

· Needle-based.

· Respiratory depression, especially in elderly and debilitated patients, and in those with compromised respiratory function.

· Decreased oxygen saturation, hypotension, urinary retention, vomiting, constipation, nausea, pruritus, pyrexia, anemia, headache, and dizziness (incidence > 10%)

Bupivacain

EXPAREL®

Pacira Pharmaceuticals

Local liposome injection of bupivacaine

On Market since 2011

· Needle-based.

· Nausea, constipation, and vomiting (incidence < 10%)

· Not demonstrated to be more effective than short acting bupivicaine

Tapentadol

Nucynta®

Johnson & Johnson

Tapentadol is a mu-opioid agonist and a Schedule II controlled substance; oral doses of 50 mg, 75 mg, and 100 mg to be used every 4-6 hours

Approved by the FDA in 2008 and available for prescription on the US market since 2009

· Nausea, constipation, headache, dizziness, and somnolence (incidence > 10%)

· Contraindicated in patients with severe bronchial asthma, paralytic ileus, and in patients taking monoamine oxidase inhibitors (MAOI).

· Serotonin syndrome can develop with the use of tapentadol.

Bupivacaine

POSIDUR™

Durect

Long-acting local anesthetic; injected locally during surgery to the surgical site

Phase III completed

· Intramuscular injection and subject to incorrect administration

· No statistically significant data were achieved in the Phase III trial.

CR845

n.a.

Cara Therapeutics

Peptide-based, peripherally-acting kappa opioid agonist; IV administered

Phase II completed

· IV administration

Collagen/bupivacaine sponge implant

XaraColl

Innocoll

Surgical implant for the sustained delivery of bupivacaine hydrochloride

Phase II completed

· Trials only focused on patients undergoing herniorrhaphy and hysterectomy.

· Can reduce opioid rescue medication, but not eliminate it.

Morphine and Oxycodone

MoxDuo®

QRxPharma

Oral delivery of morphine and oxycodone

CRL received from FDA requiring more data on efficacy and safety of MoxDuo; plan to meet the FDA in August 2012.

· Does not eliminate morphine

Source: LifeSci Advisors.

Intellectual Property

AcelRx is currently pursing 16 U.S. no-provisional patent applications, two pending international Patent Cooperation Treaty application and 52 foreign national patent applications covering various aspects of its product candidates. AcelRx was recently granted its first U.S. Patent, Number 8,202,535 entitled "Small-Volume Oral Transmucosal Dosage Forms." The patent describes a method of treating pain by administering a small-volume solid tablet containing sufentanil by adhering to the oral mucosa. This patent, directed to all of AcelRx's sufentanil containing development candidates, will expire in late 2030.

In addition, AcelRx holds a European Patent, EP2114383, granted on July 21, 2010 with an expiration date of December 28, 2027. The issued patent includes composition of matter claims directed to ARX-01, ARX-02, ARX-03, and ARX-04 NanoTab for oral transmucosal delivery of sufentanil, alone and in combination with key features of the ARX-01 PCA device, the ARX-02, ARX-03, and ARX-04 single dose applications (SDAs), and use of the claimed compositions in the treatment of pain. The patents filed so far covers the United States, Europe, Japan, China, India, Canada, and Korea. If issued, and if properly maintained and renewed, these patients will expire between 2027 and 2030. The company's future commercialization success will depend on whether all these pending patents will be issued.

Market Potential

The post-operative pain market in the U.S., EU, and Japan is growing steadily and is expected to reach $6.5 B by 2018. Despite its large market size, post-operative pain relief continues to be a challenge even with the current drugs and technologies, with 75% of patients still complaining about post-surgery pain. Post-operative pain restricts patient's recovery and may result in further medical complications such as deep vein thrombosis and lung collapse due to decrease mobility. There is a strong need and a growing market for a safer and more effective post-operative analgesia. We believe that AcelRx has a strong competitive advantage with the combination of sufentanil and non-invasive sublingual delivery system.

Milestones

ARX-01 Future Milestones:

  • Q3-4 FY2012 - early FY2013: Three Phase III trials results are expected. The strong Phase II results suggest a promising Phase III outcome.

  • FY2013: Post-Phase III NDA submission is targeted for mid-FY2013 followed by the commercialization of the ARX-01 product in the U.S., dependent on FDA approval, as well as other destinations, dependent on local regulatory approval.

  • FY2013-2014: Pre-launch phase in which the Phase IV clinical program for ARX-01 will be developed and will be part of the U.S. commercialization strategy.

  • FY2014-2015: ARX-01 product launch is expected with complete commercialization by FY2015 globally.

Stock Valuation

AcelRx completed an IPO in early 2011 and raised net proceeds of $35.6 MM, $29.4 MM short of its targeted $75MM. With a $10MM private placement on June 1, 2012 and quarterly cash burn rate of $8 MM, we estimate that AcelRx currently has approximately $29 MM in cash, cash equivalent, and short-term investment. With fully diluted share of 29.2 M and a stock price of 3.25 per share, AcelRx has a market cap of $73.53 MM and an EV of $85.1 MM.

The company had $19.2 million of debt on 3/31/2012, which was consistent with the end-FY2011 level. Debt was primarily comprised of a two-tranche $20.0 million secured, convertible term promissory note facility with Hercules. With current cash position, AcelRx will have enough cash to fund through early FY2013. The company will need more cash next year to fund through ARX-01 NDA submission and following commercialization by issuing more debt or more shares.

We assume that ARX-01 will be launched in the U.S. in FY2014, and will hit 10% (very conservative) U.S. market share in post-operative pain management by FY2018. This translates into revenue of $325MM (6.5B×10%×50%), assuming the U.S. market accounts for 50% of the global market in post-operative pain. With 30% discount rate and a multiple of 5 (very conservative), one can estimate that AcelRx currently has a firm value of $337MM and a stock price of approximately $11 per share, more than 3 times higher than its current level.

Source: AcelRx Pharmaceuticals: Next Generation Of Pain Management Technologies