AcelRx's DSUVIA Was Just Approved And The Stock Is Primed For A Sharp Upward Move

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About: AcelRx Pharmaceuticals, Inc. (ACRX)
by: Trevor Springman

Summary

Last Friday, November 2, 2018, AcelRx Pharmaceuticals announced the FDA’s approval of its lead drug, DSUVIA, for use in the United States.

This recent regulatory approval has eliminated nearly all near-term investment risk in the company and the stock could be set for sharp moves upward.

A Licensing Agreement with a European partner to commercialize the product in the EU would provide the capital necessary to exploit the massive U.S. market opportunity for DSUVIA.

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Editor's note: Seeking Alpha is proud to welcome Trevor Springman as a new contributor. It's easy to become a Seeking Alpha contributor and earn money for your best investment ideas. Active contributors also get free access to the SA PRO archive. Click here to find out more »

On November 2, 2018, AcelRx Pharmaceuticals (NASDAQ: ACRX) announced that the company’s lead drug candidate, DSUVIA, received FDA approval for use in medically supervised settings in the United States. The drug, marketed as DZUVEO in the European Union, also received approval by the European Commission in June of this year.

The controversy over whether this drug, a sublingually-administered opioid, would be accepted by regulators was widely viewed as the single largest risk to the company’s future viability as a commercial drug company. With this major hurdle behind them, ACRX has mitigated virtually all near-term risk associated with obtaining regulatory approval for its lead product candidates.

The company followed the announcement of DSUVIA’s approval with their Third Quarter 2018 Earnings Call three days later on Monday, November 5th. Investors were hopeful that the company would shed some light on the path forward for commercialization of its newly approved products. The executive team’s guidance on prospects for the future was promising but somewhat lacking in detail. After trading as high as $4.86 in premarket hours on Monday, the stock has since responded by sliding as much as 25% to $3.55 during Wednesday’s trading hours.

There were important clues to the company’s strategy revealed during the call which I’ll analyze here. The big unanswered question is exactly what near-term steps ACRX plans to take to bring these newly approved products to market and capitalize on the projected peak annual sales of $1.1B in the U.S. and $800M in the EU. I’ve provided an overview of what appears to be the company’s strategy in the near term and how I see it playing out.

Commercializing DSUVIA/DZUVEO

The obvious challenge in front of ACRX is commercializing both of its newly approved products in the U.S. and EU. The company is sitting on $63.6M in cash as of September 30, 2018. While an exact estimate to produce, market, and sell these products in both the European Union and the United States could vary depending on many factors, the current cash reserve is likely insufficient to complete the task. More cash is needed and that has investors worried about a stock offering in the near term. However, ACRX looks to be working to avoid this via a commercialization partnership to market DZUVEO in Europe with another company.

Vincent Angotti, AcelRx CEO, has stated that the company does not intend to commercialize DZUVEO on their own. In August, during ACRX’s Second Quarter 2018 Earnings Call, and after it had been announced that DZUVEO was approved for use in the EU, Angotti offered the following remark:

As we have previously stated, we do not intend to commercialize DSUVIA in Europe on our own and expect that this will be done with a partner. Our timing of concluding any deal with the partner will be after we receive U.S. approval for DSUVIA as we believe more value is created for DZUVEO upon U.S. approval.

Angotti reaffirmed during the Third Quarter call on Monday that discussions with European partners to commercialize DZUVEO are continuing with DSUVIA now approved in the U.S. Reaching such a deal with a European partner has the potential to provide the needed infusion of cash ACRX needs in the near term to avoid a large share offering and achieve commercialization of DSUVIA in the U.S. Investors could receive details on the specifics of a potential agreement any time including at ACRX’s planned analyst and investor day on December 11th.

What A DZUVEO Commercial Partnership Could Look Like

We can take a look at ACRX’s current License Agreement with Grünenthal for their other product, Zalviso, to see how such a deal will likely be structured. ACRX first reached agreement on terms for a Zalviso licensing agreement with Grünenthal in December 2013. As part of the agreement, ACRX received a $30M upfront payment as well as $220M in future milestone payments contingent on achieving product development milestones and net sales targets.

ACRX also receives royalty payments on net sales of Zalviso. A similar deal is likely going to be reached for the European rights to DZUVEO that would generate the near-term capital needed to rapidly expand ACRX’s U.S.-based operations with DSUVIA.

However, it’s important to note a major difference between ACRX’s 2013 license agreement with Grünenthal and the one that is likely currently being negotiated. When ACRX entered the 2013 agreement, Zalviso was not approved in the EU or the U.S. Thus, a major risk that Grünenthal accepted at the time was that Zalviso would not achieve regulatory approval. That fact was likely factored into the amount of the cash payment and milestone structure that ACRX received in the deal, dragging it lower. Thus, I think ACRX is in a strong position to get well more than they did in the Grünenthal deal and here’s why:

  • DSUVIA and DZUVEO are already approved in the U.S. and EU, respectively, and are ready to enter production; the potential partner will have an assured and almost immediate return on their investment
  • With the product approved in both the U.S. and the EU markets, production numbers will be far higher than if DZUVEO were produced for the EU alone. Leveraging economies of scale will allow ACRX to lower its unit cost for DSUVIA and DZUVEO, resulting in more flexible pricing and larger profit margins in both markets
  • ACRX has the cash reserves needed for the next few quarters of operations, even without additional revenue, providing time for a favorable negotiation to take place

Plans For The U.S. Market

While the details of a European commercialization are being ironed out, ACRX has already proactively taken steps to begin commercialization of DSUVIA in the U.S. The company has already hired 9 sales representatives with plans to hire 6 more this year and another 45 by the first half of 2020. The product launch is planned for the First Quarter of 2019 and this will allow the company to begin generating revenues that will offset some ongoing operations cost in the near term.

The finalization of the European deal for DZUVEO will simply supply a major cash infusion that will enable the rapid expansion that the company is planning.

Also, I’d be remiss not to mention the potential near-term revenues that ACRX stands to capitalize on from the Department of Defense. Pursuant to the terms of their original contract, awarded in May 2015 to help fund ACRX’s R&D costs for DSUVIA, the Department of Defense has triggered an option to purchase 112,000 units of commercial DSUVIA product.

If exercised, it would be at a unit price of $38-$45 per unit (based on Angotti’s statements during the Q3 Earnings Call, the DoD would receive a 24% price discount off the commercial Wholesale Acquisition Cost of $50-$60 per unit), ACRX could receive an order valued as high as $5,000,000 in the very near future. This would likely just be the beginning for DoD sales as the military will likely use the initial lot for testing and limited trials before issuing a series of much larger orders down the line.

The Upshot For Investors

All of this points to long-term sustainable growth for ACRX. The company seems to be making all the right tactical and strategic moves in looking for a European partner for DZUVEO while taking steps to build a self-sustaining U.S. business for DSUVIA. Longer term, Angotti indicated the company is open to mergers with other drug companies which he outlined during the Q3 Earnings Call on Monday:

“When we look at the hospital space, there appear to be a number of single product hospital companies out there, whether they are anti-infectives or the therapeutic disease areas that we think are crying for consolidation in the industry over the next two to three years. We think that’s something we can take part in over those next two to three years.”

Regardless of when this might occur, ACRX is doing the right thing by continuously driving value into their business by building a long-term sustainable enterprise with DSUVIA/DZUVEO and Zalviso.

The stock, trading well below $4.00 as of Wednesday, is grossly undervalued at current prices. With nearly all near-term downside risk eliminated by the FDA’s approval of DSUVIA, $6.00-$7.00 is certainly achievable by early 2019. Investors should be on the lookout for the following near-term catalysts to spark a sharp upward move:

  • On December 11, 2018, ACRX will hold an investors and analysts conference where they plan to provide a corporate update potentially including updated guidance for U.S. sales and metrics projections.
  • Zalviso NDA Resubmission for FDA approval in the United States.
  • Announcement of the terms of a European partnership for commercialization of DZUVEO in the European Union.

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.

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