After Years Of Development, AcelRx's Dsuvia Has Finally Generated Revenue

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About: AcelRx Pharmaceuticals, Inc. (ACRX)
by: Douglas Johnson
Summary

On Wednesday, May 8, AcelRx reported its financial results for Q1 2019 and gave updates on the Dsuvia commercialization process.

AcelRx recorded approximately $50K in revenue related to Dsuvia, and ended the quarter with around $90.2M in cash and short-term investments.

Dsuvia's revenue figures represent sales from just 5 weeks of availability to wholesalers - as formulary approvals continue to roll in, revenue will likely increase significantly.

All in all, AcelRx appears to be continuing smoothly along the planned commercialization track it has outlined in previous business updates, earnings calls, and press releases.

Last week, on Wednesday, May 8, AcelRx (NASDAQ: ACRX) reported its financial results from the first quarter of 2019. Though there has not been a huge amount of news to report since the company's last business update in March, it nevertheless appears that AcelRx is moving steadily along with its planned approach to commercialization of Dsuvia.

AcelRx Stock Price (05/07-05/14)

Although AcelRx's stock price dropped over 10% (circled above in blue) after the company's earnings announcement, likely due to Dsuvia's small revenue figure, this initial reaction seems overstated to me. At this point, I think it is fruitless to try and draw much in the way of meaningful insight from Dsuvia's initial revenue figures. For the moment, investors in AcelRx still have little to do but watch and wait to see how Dsuvia performs sales-wise over the next several quarters.

Progress On Dsuvia's Commercial Launch

Hiring & Personnel

AcelRx has been very clear with its investors that it intends to take a resource-conservative and gradual approach to commercialization of Dsuvia. The company has outlined a three-stage plan for commercialization, staggering its hiring as it expands Dsuvia's launch to target an increasing number of geographic regions.

Source: AcelRx March 2019 Investor Presentation

In Q1, AcelRx completed its first stage of hiring, and currently has 15 hospital account managers out in the field. Initially, AcelRx planned to kick off Stage 2 of commercialization (and the additional hiring this step entailed) in Q4 2019. However, as the company announced in the Q4 2018 earnings call in March, AcelRx will accelerate its hiring and training of 25 additional account managers and 3 additional medical science liaisons to Q3 2019. This change in commercialization plan is designed to take advantage of what CEO Vince Angotti described in the Q1 earnings call as a "greater than expected level of engagement seen to date with hospitals." Overall, there is little to report on the hiring and personnel front for the moment; however, the fact that hospital engagement is above expectations hopefully portends a bright future for Dsuvia.

Progress In Reaching Target Market

As the graphic below shows, AcelRx has identified its initial target market as the population of approximately 18 million patients annually who visit the ER and receive an IV exclusively for pain treatment.

Source: AcelRx March 2019 Investor Presentation

AcelRx's first step in reaching its target market is through winning formulary approvals, and the company projects that it will receive around 125 formulary approvals in 2019 (up from an initial projection of 100). Thus far, AcelRx representatives have engaged with 400 hospitals (about 1/3 of the company's initial hospital launch targets). In addition, Dsuvia has received 5 approvals to date (all received in April), and has another 41 formulary reviews scheduled for before mid-year. Outside of hospitals, the company has gained access to sell Dsuvia in more than 300 ambulatory surgical centers.

Now that AcelRx has progressed into its initial launch of Dsuvia, the company has also begun to identify a target market in the outpatient surgery segment.

Source: AcelRx March 2019 Investor Presentation

As the graphic above shows, AcelRx has identified a population of 11 million outpatient surgery patients annually who receive pain medication for moderate-to-severe acute pain. Though there has not been much in the way of guidance from management as to how and when the company expects to start actively targeting outpatient facilities, I'd imagine that AcelRx intends to focus primarily on targeting hospitals for the foreseeable future - the company may direct its attention more towards outpatient sales as it progresses further into its staged launch.

Proposed Clinical Benefit And Physician Feedback

As I have discussed at length in prior articles, AcelRx sees Dsuvia as superior to IV morphine, the current standard-of-care for acute pain, from both a clinical benefit and a cost standpoint. Not only does the drug have a superior pharmacokinetic profile, its noninvasive method of administration reduces the time that acute pain patients spend in the emergency room - and therefore the associated cost of treatment.

Source: AcelRx March 2019 Investor Presentation

The slide above, which was presented at AcelRx's investor presentation in March, demonstrates the significant costs associated with delays in the emergency department - research shows that each hour of delay in the emergency department saddles hospitals with an estimated cost of between $82-200 per patient. Given that patient flow appears to be by far the most pressing issue in emergency department administration, it is clear that hospitals are losing out on potential millions of dollars due to what are essentially various inefficiencies in treatment. Dsuvia is designed specifically to help address the inefficiencies involved in treating acute pain patients - it is quicker and easier to administer than IV morphine, and provides analgesia in a shorter period of time.

Source: AcelRx March 2019 Investor Presentation

As the graphic above demonstrates, IV access on average takes just over an hour from triage, and can take over three hours for patients requiring advanced IV techniques. This means that even after being assessed by a healthcare provider, patients on average need to wait an additional hour to receive IV access... and then patients must also wait for the morphine provided by the IV to provide the analgesia they require. Thus far, AcelRx has not provided data on the average time from triage to administration for Dsuvia.

However, given the single-use applicator's ease of administration, I can only imagine that Dsuvia saves a significant amount of time in comparison to IV morphine, thus increasing patient flow/throughput and saving hospitals time and money. In addition to providing hospitals with time savings, Dsuvia is also cheaper than IV morphine - the list price of one dose of Dsuvia is just over $58, while the company estimates that the average total cost of administering one dose of morphine is around $145. Granted, the $58.31 list price for Dsuvia does not include the cost for nurses' time; however, it is nevertheless clear that if that estimate of $145 is anywhere near accurate, Dsuvia offers considerable cost savings over IV morphine.

After five weeks of sales, AcelRx has received some positive initial feedback regarding Dsuvia. In the Q1 earnings call, management noted that clinicians had generally indicated that Dsuvia's non-invasive method of administration was the drug's primary benefit. Unlike with IV morphine, administration of Dsuvia is simple and does not require a patient to occupy a valuable bed space - which improves patient wait times and ER throughput. Additionally, Dsuvia's pharmacokinetic profile has received accolades - it provides quicker and more stable analgesia than any other IV pain drug currently available. Though it is too early at this point to be certain as to whether or not the drug satisfies an unmet need, the response to Dsuvia among healthcare providers seems positive overall.

Zalviso - The Icing On The Cake

After finally launching Dsuvia, AcelRx has indicated that it plans to resubmit the Zalviso NDA before the end of 2019. However, before doing so, AcelRx wants to obtain two sets of supporting documentation that it wishes to submit to the FDA in support of Zalviso's NDA - the 12-month Dsuvia REMS report, and the data from a multinational prospective study on Zalviso use throughout Europe from the company's partner Grunenthal. The company expects to receive both sets of data sometime in Q4 2019.

Personally, I see Zalviso as little more than a potential bonus beyond Dsuvia. In both 2017 and 2018, the company announced plans to re-submit its Zalviso NDA before the end of the year; obviously, that never happened. Although I believe that the company might actually be able to resubmit the NDA this year or at least early in 2020 (given that Dsuvia has now been approved), I have my doubts as to whether or not the drug will ever be approved.

Although Zalviso offers potential improvements over current PCA systems, I think that the potential liability of patients using Zalviso without more constant supervision from a healthcare provider might not sit well with the FDA. Either way, however, I still see Dsuvia as by far the most important asset for AcelRx, and Zalviso merely as the icing on the cake - regulatory challenges aside, Zalviso simply does not have the blockbuster sales potential that Dsuvia does.

ACRX's Financial Health And Performance

Sales Performance

In Q1 2019, AcelRx recorded $0.3M in revenue, of which around $50K was related to Dsuvia; the remainder was Zalviso-related collaboration revenues received from Grunenthal. Q1 2019 is the first quarter in which AcelRx has generated sales revenue - since Dsuvia was launched in late February, the drug has only been available for five weeks. In addition, the company did not have access to sell Dsuvia to any customers besides wholesalers, since it did not receive formulary approvals or access to ambulatory surgical centers until the second quarter. Given these facts, I do not see the low sales figure for Q1 as cause for concern. Rather, since AcelRx estimates that it will take approximately 6 months on average to receive formulary approvals, it appears that the company will not start generating meaningful revenues until at least Q3 2018.

Financial Health

As of the end of Q1 2019, AcelRx had $90.2M in cash and short-term investments on its balance sheet. During Q4 2018, the company used $15.5M in cash, of which $2.3M was related to debt service. AcelRx also reported $10.0M of long-term debt related to a loan maturing in March 2020. In addition to the $10.0M of long-term debt (which matures in March 2020) that the company carries on its balance sheet, the company also records on its balance sheet a $94.7M long-term liability related to its 2015 sale of future EU Zalviso royalties to PDL BioPharma (NASDAQ:PDLI).

Under the terms of the agreement, AcelRx received $65.0M in cash, while PDLI BioPharma received the rights to 80% of AcelRx's next four milestone payments from Grunenthal and 75% of all future Zalviso-related royalties (subject to a cap of $195.0M). AcelRx uses the following procedures to account for this liability:

In order to determine the amortization of the liability, we are required to estimate the total amount of future royalty and milestone payments to be received by PDL and payments we are required to make to PDL, up to a capped amount of $195.0 million, over the life of the arrangement. Consequently, we impute interest on the unamortized portion of the liability and record interest expense using an estimated interest rate for an arms-length debt transaction. Our estimate of the interest rate under the arrangement is based on the amount of royalty and milestone payments expected to be received by PDL over the life of the arrangement. Our estimate of this total interest expense resulted in an effective annual interest rate of approximately 14%.

Essentially, accounting standards require AcelRx to record a liability to account for potential future payments to PDL and record imputed interest on the balance of the liability as interest expense. Economically speaking, however, this imputed interest has little effect on the company - the interest expense is a non-cash charge, and does little besides distort AcelRx's net income downwards. Additionally, it seems highly unlikely that AcelRx's will ever actually be required to pay the total balance of the recorded liability to PDL - Zalviso royalties will probably continue to be relatively minimal, and I predict that AcelRx will be able to eventually write off the majority of that large liability.

Without an understanding of the accounting requirements affecting AcelRx's liability related to sale of future royalties, AcelRx's long-term debt situation appears much more dire than it actually is. In reality, AcelRx has little true long-term debt and is thus well-positioned to potentially take on debt in the future in order to avoid raising capital via an equity offering. With that said, however, future equity offerings are certainly not out of the question and may in fact even be probable - in a 14A statement AcelRx filed on May 14, the company announced that it plans to hold a vote to raise the number of authorized shares from 100,000,000 to 200,000,000, indicating that the company may have plans to issue further shares at some unspecified point in the future.

Going forward throughout the remainder of 2019, the company is committed to keeping quarterly cash burn between $13-16M. In addition, management indicated in the Q1 earnings call that AcelRx is working on refinancing its existing $10.0M of long-term debt in order to provide improved cash flow and reduce debt service.

Risks

After securing FDA approval for Dsuvia, regulatory risk for AcelRx has essentially been eliminated. Now, the remaining risk is in the execution - potential investors in the company should be well aware of the difficulties inherent in commercializing an entirely novel drug. Though the company seems to be off to a good start, investors should nevertheless be wary that there is still significant risk to an investment in AcelRx.

Overall Outlook

At this point, AcelRx has no huge catalysts on the horizon, and so there is little for investors to do besides wait and see how much revenue Dsuvia generates over the next few quarters (particularly Q3 and Q4 2019). On the whole, with a strong cash balance, a cohesive commercialization plan, experienced management, and what appears thus far to be a relatively interested market, AcelRx seems to be well positioned to bring Dsuvia to market.

At a share price of $3.15 and a market cap of $248.6M, AcelRx is trading well below previous highs, and actually took a hit after its earnings announcement; this ~10% drop offers a solid entry point for the stock, which could potentially reward investors willing to take the risk. As a long-time investor myself, I'm very much looking forward to seeing how Dsuvia performs this upcoming year, and I'm hoping that patience will pay off.

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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.