AcelRx Provides Encouraging Q2 Update

Summary

• ACRX reported Q2 financial results yesterday after hours.
• AdCom meeting date to be finalized and announced shortly; PDUFA date is Nov. 3.
• Current IV opioid shortage provides a window of opportunity for Dsuvia's potential entrance into the market.
• Cash and short-term investments totaled $50.1 million (not including the $20 million raised from the July equity offering); quarterly burn rate remains around $10 million.

Yesterday, August 2, AcelRx Pharmaceuticals (NASDAQ:ACRX) presented its second quarter update. On the whole, the update was quite positive - the company is clearly expecting approval of Dsuvia in November and has already hired sales representatives and developed a strategic, well-researched marketing plan. Additionally, ACRX provided some positive clarification on the reasoning behind its recent equity dilution.

Clinical Progress

CEO Vince Angotti began the call with an update on the company's significant clinical progress in Q2 and the outlook going forward. First, in mid-April, the company completed the human factors study required by Dsuvia's October 2017 CRL. Later in April, Dsuvia received a positive opinion from the CHMP in Europe (which was followed by a European Commission approval for Dsuvia in late June). Finally, and most importantly, in May, ACRX announced that the FDA had accepted ACRX's NDA resubmission for Dsuvia and set a PDUFA date of November 3.

Management are quite bullish on Dsuvia's chances of approval, as they believe that the company has fully addressed the points of concern outlined by the FDA in Dsuvia's CRL. Now, the company has begun looking forward. An advisory committee meeting for Dsuvia has been tentatively scheduled, and ACRX will announce the meeting's date once it is officially finalized. If approved, ACRX is planning a commercial launch in Q1 2019, and has already hired sales reps and developed a commercialization plan for North America.

Importantly, CEO Vince Angotti noted that the company had originally intended to wait until after approval of Dsuvia to begin building out a sales team. However, due to the current opioid shortage, "an increasing number of potential customers have expressed interest in Dsuvia," according to Angotti; as such, the company has started hiring a sales force so as to be better positioned for commercialization and distribution immediately post-approval. This move speaks to the confidence of ACRX's management in Dsuvia's approval in November - given the previous individual successes of the ACRX management team members, I believe that this should lend investors a certain confidence as well.

While Dsuvia is certainly ACRX's main clinical asset, Vince Angotti also reminded investors that the company is ready to resubmit Zalviso's NDA if Dsuvia is approved in November. Though the NDA has been ready for resubmission for quite some time, the company has made a strategic decision to focus on approval/commercialization of Dsuvia before devoting significant resources to Zalviso.

Commercialization Plan

According to Angotti, ACRX has now honed in on a target market in the US: the 18 million patient visits made to the emergency room each year which are treated by IV pain medication. Given the less invasive nature of Dsuvia compared to IV pain medication, Angotti and ACRX believe that the company will be able to "potentially displace the IV for those 18 million emergency department visits that are receiving the IV just for pain." ACRX's management has identified 3,000 different hospitals nationwide as composing its target market, and has selected 1,200 hospitals for initial sales penetration.

Once again, assuming approval in November, the company has planned a commercial launch in Q1 2019. During the call, Angotti mentioned that potential customers have "proactively" mentioned issues caused by the current opioid shortage, indicating that demand for ACRX, if approved, would likely be relatively high. As such, Angotti noted that the company is trying to "have [Dsuvia] shipments ready" as early as possible in that quarter - the exact timing "will be dependent on the FDA's feedback regarding that label and packaging."

Financial Update

As of the end of Q2 2018, ACRX held a total of $50.1 million in cash and short-term investments. Notably, this total does not include the $20 million in cash (less fees) raised by July's equity offering. Given that ACRX expects to maintain the current quarterly burn rate of $10-11 million for the time being, ending cash balance at the end of Q3 will likely be around $55-58 million. Thus, if Dsuvia is approved in Q4, the company will have a strong cash position from which to begin commercialization or negotiation of a potential buyout.

ACRX's CFO Raffi Asadorian also explained the rationale behind the equity offering recently initiated in July. Previously, some investors had speculated that ACRX might try to secure a European partnership with an upfront cash payment for Dsuvia commercialization rights in lieu of going through an equity dilution. However, Asadorian clarifies that ACRX used the share offering to not only increase its cash balance, but also to "reestablish [ACRX's] institutional shareholder base" - 80% of the offered shares were purchased by five institutions.

With regards to the company's plans in Europe, Angotti clarified that ACRX intends to seek a partner for European commercialization, but is waiting for FDA approval of Dsuvia so as to not only take advantage of the lower unit costs associated with higher US production volumes. Although the company has not indicated publicly that it is seeking a buyout or American partnership, I would also speculate that it is possible ACRX may have held off on seeking a European partnership for Dsuvia so as to make itself more attractive as a buyout target for a big pharma company with a strong global presence.

Value Opportunity - Has Bottom Been Reached?

As of Friday, August 3, ACRX is trading at $2.80 - just 5 cents above the recent equity offering price of $2.75. This fact itself implies that ACRX may be near a bottom in its chart, given that institutional support will likely keep share price from dropping too far below $2.75/share.

In a previous article, I outlined a speculative combination shares-options strategy which used a model which argued that ACRX would rise to $8 if approved, and would drop to $1 if it received a CRL; given that ACRX's clinical outlook has not materially changed since I wrote that article, I believe that model is still valid. Since that time, the price of both ACRX shares and Dec. 21 $5 call options has also declined (to $2.80 and $0.40, respectively). If you believe, like I do, that ACRX has hit bottom and must therefore trend upwards in advance of AdCom (once announced), my previous article's strategy provides an opportunity to take advantage of an outsized risk-reward scenario.

In my previous article, I used a hypothetical cash outlay of $1,600 to purchase ACRX shares - the price, at that point in time, of 500 shares. Using my shares-options strategy, if we use the same hypothetical outlay of $1,600 to purchase shares, we would be able to purchase 571 shares (rounded) at the current price of $2.80. If we assume a shares-only strategy through AdCom, the expected loss in case of CRL is [571 x ($2.80 - $1.00)] = $1,027.80. Per my strategy, cash outlay for options equals the expected loss in case of CRL. Currently, the ask price for Dec. 21 $5 ACRX call options is $0.40/share, or $40/contract - enough for 25 contracts (rounded). Using my strategy, an investor should purchase 571 shares and 25 Dec. 21 call options: a total cash outlay of $2,698.80. For the purpose of simplifying calculations, let's use $2,700 for our total cash outlay number.

In my model, I argue that the chances of Dsuvia's approval are, quite conservatively, 45%; additionally, pricing in the event of approval would be $8/share, while price in the event of a CRL would be $1/share. I'd like to revise my opinion on the potential run-up price in anticipation of AdCom; given recent price action, I would estimate for the purposes of the model that ACRX will trade at either $3.50 (60% chance) or $2.50 (40% chance) before AdCom. Share price is August 3rd's closing price of $2.80; option price is August 3rd's closing ask price of $0.40/share or $40/contract. Probabilities and expected gains/losses for the possible scenarios per the model are as follows:

• ACRX trades at $3.50 upon sale of shares, then receives approval: 27%
  • Expected gain: {[(3.50-2.80) x 571] + [(8.00-5.40) x 25 x 100]} x .27 = $1,863
• ACRX trades at $2.50 upon sale of shares, then receives approval: 18%
  • Expected gain: {[(2.50-2.80) x 571] + [(8.00-5.40) x 25 x 100]} x .18 = $1,139
• ACRX trades at $3.50 upon sale of shares, then receives CRL: 33%
  • Expected loss: {[(3.50-2.80) x 571] + [0.40 x 25 x 100]} x .33 = -$198
• ACRX trades at $2.50 upon sale of shares, then receives CRL: 22%
  • Expected loss: {[(2.50-2.80) x 571] + [0.40 x 25 x 100]} x .22 = -$258

Total expected gain on the initial cash outlay of approximately $2,700 would be $2,546 - an expected return of 94%. In my previous article introducing the option strategy used above, I forecasted an expected return of 75%. The assumptions in this scenario are 17% less bullish - but the price has dropped to such a point that despite this, the trade still has a high expected return. Obviously, this strategy is highly speculative, but I believe it offers an opportunity to take advantage of ACRX's high upside and relatively low downside and score significant gains. Once the final date for Dsuvia's AdCom meeting is announced, I would expect that the stock may run up into the catalyst. Until then, the low prices of both shares and options represent a window of buying opportunity for those willing to tolerate a certain amount of risk into the upcoming approval event.

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Analyst’s Disclosure: I am/we are long ACRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.