ACELRX PHARMACEUTICALS INC ACRX
July 21, 2014 - 1:40pm EST by
compass868
2014 2015
Price: 10.04 EPS $1.21 $3.21
Shares Out. (in M): 44 P/E 7.6x 3.1x
Market Cap (in $M): 437 P/FCF 5.9x 2.5x
Net Debt (in $M): -78 EBIT 58 140
TEV ($): 358 TEV/EBIT 6.2x 2.6x

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  • Specialty Pharma
  • Pharmaceuticals
  • New Drug Application
  • FDA approval
  • Small Cap
 

Description

DESCRIPTION

AcelRx (the “Company” or “ACRX”) is a clinical stage specialty pharmaceutical company focused on the development and commercialization of drugs for the treatment of moderate-to-severe acute pain.   The Company’s first product up for approval is Zalviso (or ARX-01), a combination opioid drug and patient controlled analgesia medical device for the hospital and acute care setting.  The opioid is a reformulated version of the long standing generic, Sufentanil, allowing it to be taken sublingually (ie under the tongue).  ACRX’s New Drug Application (“ NDA”) currently has a PDUFA date (ie the FDA decision date) of July 27th after having gone through years of successful testing with minimal safety issues and significant efficacy. 

The current standard of care for patients with moderate-to-severe pain in the hospital (especially postoperative) is intravenous patient controlled analgesia pumps (“IV PCA”), which has been shown to cause harm (most opioids have significant side effects to older and sicker patients, ie the people who actually have most of the surgeries) and inconvenience to patients (they are tethered to the pump via the IV) and healthcare providers (many unintentional overdoses and constant nurse focus on the pump and the alarms – IV PCA pump alarms are what you will hear at all times of day and night in an ICU or recovery ward).

AcelRx also has a legitimate pipeline of additional pain treatment products.  The most significant product is ARX-04 which is a product for short term acute care pain that can be utilized outside the hospital setting.  ARX-04 was originally funded by the US Army in hopes of it becoming a replacement to morphine syringes.  ARX-04 also is a potential substitute for acute care pain treatment in the emergency room and for paramedics at emergency sites. 

Zalviso Product Description

Zalviso is a pre-programmed, handheld device that delivers a sublingual formulation of Sufentanil, a synthetic opioid analgesic.  The Zalvis New Drug Application (“NDA”) was accepted for filing by the FDA on November 26, 2013 with a PDUFA date of July 27, 2013, as a combination product led by the CDER arm of the FDA.  Like an asthma inhaler, the approval will be for the combination of drug and device, providing significant patent protection. 

Sufentanil is a rapid onset opioid which typically doesn’t get used as it peaks fast and is then metabolized by the liver very fast, making administering the drug very burdensome, even though it is highly efficacious and much safer than other opioids (multiple studies over time showing less oxygen desaturation, the most severe adverse event for opioids).  However, packaged in a patient controlled device that only allows one table every twenty minutes (so is non-programmable unlike IV PCA pumps) , Zalviso avoids the hassle of constant administration by nurses while allowing for very fast and significant pain relief.

Zalviso is fast to set up for nurses, requiring only a new mouthpiece (to be attached to the dispenser), a tether for the device to the bed that sets automatically with the device, and the cartridge of 40 nanotabs.  Then the patient, who wears a bandaid like identification strip on their thumb, just presses the botton with that thumb on the dispenser to release a nanotab under their tongue.  The device is pre-programmed to dispense a nanotab no more than every 20 minutes, ensuring no overdose is possible. 

Investment Thesis

AcelRx is an extremely attractive investment because it is mispriced due to a lack of understanding by many investors into the probability of its first product of being approved by the FDA and subsequently the fact that Zalviso is a vastly superior treatment for moderate-to-severe pain from a safety and efficacy standpoint to the current standard of care, such that it will have quick success in its commercial launch.  With such a small market cap, even relatively small penetration rates would lead to significant upside in ACRX, because the profitability of the product is so significant even at pricing of just $100/day (the low cost will also help drive fast and substantial penetration).  With several pharma and biotech companies looking to further leverage their existing hospital focused salesforces and the fact that AcelRx has a very attractive pipeline, it is highly likely ACRX gets taken over within the first two years of approval of Zalviso.  Importantly, AcelRx has more than enough cash on hand to be able to launch Zalviso and hit breakeven without needing to raise any more capital, something many small biotechs reaching their PDUFA are never able to claim.  Altogether, this results in a 3 year price target of $50, based on a 12x forward FCF multiple.

  • Binary Event In ACRX’s PDUFA Date Is Being Mis-Priced As A Coin Flip – First and foremost of why AcelRx is an attractive investment is that the stock is being priced as if there is an equal chance for Zalviso to be approved or unapproved come July 27th.  We think the odds of approval are greater than 90% and that there is less than a 5% chance of a Complete Response Letter from the FDA with no actions recommended for correction (an outright no, with little chance for approval in the future).  The reason investors think this is that they don’t understand the specifics of Zalviso and are using the long term average of FDA approval rates (approximately 50%) as a means of handicapping Zalviso’s approval.  So while the stock could go up 50-80% ($15.00-$18.00/share) on approval and down 50-80% ($2.00-$5.00/share) if not approved, with the stock trading recently between $9-$11/share would it would strongly suggest that investors see the same probability of Zalviso being approved as not approved.  We would agree that the situation is somewhat binary in nature (somewhat because there are several distinct and materially different shades of non-approval), but that does not mean the distribution of results is even close to being no
    • Approval Will Lead To At Least 50% Upside, Potentially 100% – On the upside following an approval, the company should be valued closer to its fair value on a DCF basis using conservative uptake rates, pricing and market share gains from IV PCA.  Our math suggests that using $200 for a 2 day scrip (with 1.5% annual price inflation) and reaching in year 3 of launch 5.6% market share (3.5% in ’17 in Europe) of addressable surgeries, generates $220 million of revenue.  Applying today’s 2016E Pacira revenue multiple of 6.7x (discounted 15% to 5.4x) to our forecasted ACRX revenue in 3 years and then discounting that EV back to today using a 12.5% discount rate results in an NPV price per share of $23.69 or 136% more than ACRX’s current price.  This conservative valuation backs up the view that the stock could trade substantially higher if Zalviso is approved, potentially up as much as 100% or to $20.00, as post approval, the right discount rate is somewhere between 8.5-10%.  At a 8.5% discount rate, today’s fair value jumps from $23.69 to $25.93, which is probably closer to fair value for ACRX once Zalviso is approved by the FDA.  

                     
                    AcelRx Pharmaceuticals
                         Comparable Company Future Valuation

PCRX 2016E Sales

 

 

 

$475.9

 

 

PCRX Enterprise Value

 

 

$3,037.5

 

 

PCRX Multiple

 

 

 

                                                      6.4

 

 

 

 

 

 

 

2017E

 

ACRX 2017E Sales - Conservative Case (4.5% US & 3.5% EU '17 market share)

$219.9

 

PCRX Multiple Discount

 

 

 

 

15.0%

ACRX Forward EV/Sales Multiple

 

 

 

 

                                                   5.4

ACRX 2016E Market Cap

 

 

 

 

$1,193.0

Pro Forma Q2 2014 Net Cash

 

 

 

 

$71.8

Cummulative Free Cash Flow Q2 2014 - Q4 2016E

 

 

$118.3

Estimated Year End 2016 Enterprise Value

 

 

 

$1,383.2

Discount Rate

 

 

 

 

 

12.5%

NPV of 2016E EV to Today

 

 

 

 

$23.69

% Upside From Current Stock Price

 

 

 

 

136%

                      
    • Downside Is Cash And Value Of The European Royalties & Milestone Payments - On the downside, cash is 18% of market cap, there is another $215 million of potential payments from Grunenthal, ACRX’s European partner, and there would still be residual value for the three other products in the Company’s pipeline.  Down 80% would essentially value the company at cash and a liquidation and down 50% provides some value for the European filing (filed in July of 2014) and the pipeline.  Overall, this would suggest the market is equally weighting the chance for approval and non-approval, which we believe grossly underweights the skew in the distribution of outcomes in favor of approval.  Moreover, the fair value today of the cash, milestone payments and the European royalties is $8.17 using a 12.5% discount rate and a forward multiple of 12x in 2017 on 2018E FCF.

AcelRx Pharmaceuticals

 

 

 

 

Downside Scenario - Only European Royalty Revenue + Net Cash

 

 

 

 

 

 

 

 

 

 

 

 

 

2018E

 

 

European Revenue

 

 

 

$24.2

 

 

     Royalty Rate

 

 

 

18.5%

 

 

Cost Of Goods

 

 

 

$0.0

 

 

Research & Development

 

 

 

$1.0

 

 

Other Operating Expenses

 

 

$5.0

 

 

 

 

 

 

 

 

 

 

EBIT

 

 

 

$18.2

 

 

     Taxes @

35.0%

 

 

$6.4

 

 

Net Income

 

 

 

$11.8

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

                           1.5

 

 

Option Expense

 

 

 

                           1.0

 

 

Capex

 

 

 

                            -  

 

 

Change in WC

 

 

 

                            -  

 

 

 

 

 

 

 

 

 

 

Unlevered Free Cash Flow

 

 

$14.31

 

 

 

 

 

 

 

 

 

 

Discount Rate

 

 

 

 

12.5%

 

Forward Multiple Of Terminal Year FCF

 

 

 

          12.0

 

2017 Terminal Value

 

 

 

 

$171.7

 

Discounted Terminal Value

 

 

 

 

$113.7

Development Milestone Payments

 

 

 

$215.0

 

Discounted Milestone Payments

 

 

 

 

$169.9

Discounted Market Cap

 

 

 

 

 

$283.6

Current Net Cash

 

 

 

 

 

$71.8

Discounted Enterprise Value

 

 

 

 

$355.4

     Per Share Value

 

 

 

 

 

$8.17

Current Stock Price

 

 

 

 

 

$10.04

 

Downside To Current Stock Price

 

 

 

 

-18.6%


  • Approval Is Highly Likely Given That The Active Ingredient Is A Generic And Not Novel – The difficult FDA review is for drugs and biologics, where the approval rate in some years is substantially below 50% for novel molecules.  What’s different with Zalviso is that Sufentanil is a generic that has been around for decades with a strong record of safety and efficacy.  As opioids go, Sufentanil, when compared against morphine (in studies done by ACRX and by third parties literally decades ago) demonstrate clear statistically significant efficacy and safety over morphine, the main opioid used in IV PCA, the current standard of care.  Therefore, the biggest uncertainty around the approval of Zalviso is the device.  However, typical Class II medical devices have a much higher approval rate (80% in 2012), given they generally are seen as much lower safety concerns.  Devices have a different path through the FDA via the Center for Devices and Radiological Health (CDRH).  In the case of Zalviso, as a compound product, the CDRH does its own separate review, allowing the drug side of the FDA, CDER, to take lead.  This designation of CDER as the lead on the compound product demonstrates that the bigger concern is around the drug, which in this instance is a long standing generic, so Zalviso is not a difficult product to review for the FDA.
  • Sufentanil Has An Extremely High Therapeutic Index – The Therapeutic Index is defined as the median lethal dose divided by the lowest median effective dose.  The Index therefore provides a very clear ratio of safety and efficacy (the FDA’s two major hot buttons) in a single number.  Sufentanil has a score of 26,716.  The other major opioids are much lower with morphine at 71, hydromorhpine at 232 and fentanyl at 277.  Those are not typos, Sfentanil is literally 376x better than morphine on the most widely used safety-to-efficacy ratio.  This speaks well to the FDA looking favorably upon Zalviso and helps drives a very high probability of approval on the PDUFA date.
  • Extension Of ACRX’s PDUFA Equals Approval – The best outcome from our perspective is that the FDA requires an additional 3 months to review some aspect of the NDA.  The reason this is a great scenario is that the stock probably only goes up a small amount, which would provide bulls the chance to buy heavily  knowing that the odds of approval have just gone up significantly, from an already very high level.  The FDA almost never asks for a 3 month extension to then provide ACRX with a complete response letter (how the FDA turns down a drug).  Hence, the stock will likely go up on an extension as there are many investors that will increase position size and shorts will begin to cover.
  • Enough Cash To Hit Breakeven – Prior to July’s $5 million milestone payment from Grunenthal, ACRX had enough cash to make it to breakeven, so long as an approval is achieved on July 27th or October 27th (if there is a 3 month extension to the PDUFA date).  With the $5 million ACRX is in even a better position.  In Q1 2014, ACRX spent about $11.5 million in cash, which should increase by $2 million in Q3 as half the salesforce is hired.  This would mean that ACRX has over 6 quarters of cash available (starting with pro forma cash at end of Q2 2014) if there is a PDUFA extension or requirement to refile the NDA (even carrying the increased cost of the salesforce).  This is important as it will solidify ACRX’s ability to trade higher post PDUFA, as there have been instances where underfunded companies had an approval and traded down, knowing that a big equity raise would occur. 
    • Pacira Is A Prime Example Of A Great Product Approval Leading To A Falling Stock - This is the case with Pacira, the other new pain drug company, where it fell significantly post approval as it was forced to raise a new equity round that was 47% dilutive to share count, followed by yet another sale of equity several months later that was an additional 27% dilutive.  Pacira is now a $3B market cap company even after all of this dilution, trading at $85 a share or 8x greater than where it was after the approval of its drug Exparel.
    • Pacira Timeline

      -          Oct 31, 2011 – Exparel approval (PCRX Open $10.94; Closed at $9.78)

      -          Nov 16, 2011 – Priced  7 million shares at $6.50 (plus another 1.05 million overallotment)

      ** shares out as of 9/30/11 was only 17.2 million so the additional 8 million was a 47% increase

      -          Jan 2012 –  Announced they were having delays in producing / manufacturing

      -          April 9, 2012 – Launched Exparel commercially (eventually reports $2.3m for this first quarter of sales)

      -          April 11, 2012 – Sold another 6 million shares at $9.75 (plus another 0.9 million overallotment)

 
  • Current Standard Of Care For Post-Operative Pain Treatment Has Many Issues - IV PCA technology has limitations and challenges, which will allow Zalviso, once approved, to take significant share.  The major issues for IV PCA include:
-          (i) potential for programming and medication errors as nurses are needed to enter the right amounts (not an issue for Zalviso);

-          (ii) frequent monitoring required, especially for patients at risk for respiratory depression (something Zalviso greatly minimizes, as Sufentanil is 1,000x more powerful than morphine, so needs significantly less drug to be administered for the same level of pain relief);

-          (iii) pump failures or malfunctions that can lead to overdoses (not an issue for Zalviso as any failure in the device leads to an inability to dispense drug);

-          (iv) time consuming set up and programming (again, not relevant for Zalviso);

-          (v) restricted patient mobility with potential impact on length of stay (Not applicable to Zalviso);

-          (vi) variable and considerable cost impact to hospitals (Zalviso is much cheaper on total cost of care, as improving patient mobility shortly after surgery has been proven to cut down on length of stay, which adds greater costs and correlates to increased chance of acute pain becoming chronic pain);

-          (vii) risk of IV site infection (clearly not applicable to Zalviso); and

-          (viii) delay in pain relief given time of setup and delay in morphine making their way to the brain (Zalviso peaks in under 7 minutes vs 15 minutes for IV PCA to be 80% effective and 90 minutes to hit peak – Sufentanil also provides greater relief of pain after the first four hours of use). 

-             Zalviso Minimizes The Main Risk Of Opioids - The most significant issue with IV PCA out of all the issues listed above is the fact that morphine has a high rate of respiratory depression.  Respiratory depression results in patient discomfort and possibly death if opioid use is not stopped.  This leads to decreased doses, thereby significantly limiting pain control in these patients.  Needless to say, there are enough problems and cost with IV PCA and significant improvements from using Zalviso over IV PCA that AcelRx should be able to have a successful commercial launch and take substantial market share over the first five years.  In fact, doctor checks for high pain, high rehab need type operations such as orthopedic surgeries, suggests market share could go well over 50% for many doctors.

  • Large Opportunity – The US has over 12 million surgical procedures a year that result in moderate-to-severe pain and Europe has even more.  There is an additional 7.5 million hospital inpatients in the US that also suffer from moderate-to-severe pain.  Even assuming relatively minor market share gains, it is easy to see that Zalviso has the potential to generate hundreds of millions in US sales alone.  This is significant given that the enterprise value for ACRX is roughly $350 million today.  Since most patients complain of inadequate pain relief in post-operative situations, there is certainly room for new products such as Zalviso that offer faster and longer lasting pain treatment in the post-operative setting.  Simply put, if Zalviso captures just 10% share of postoperative and inpatient scrips to treat moderate-to-severe pain, with a $200 price, results in $360 million in revenue with a gross margin over 90%.  Europe has more volume than the US, but will have a lower price, so the market sizes will be roughly the same.
  • High Short Interest Will Accelerate Closing Of Gap To Intrinsic Value Post Approval  – There are approximately 6.8 million shares shorted in ACRX, representing about 16% of shares outstanding and 27% of free float (ie excluding shares held by the VCs).  The main short thesis is that Zalviso is not approved or faces serious delays (ie over a year).  In this case, yes, the shares will go down, but again, we see this as a small possibility.  The secondary short thesis is that other products like the pain patch from Medicines Company (this also has serious delay in providing pain relief – up to 45+ min for some patients besides the fact it was recalled years ago in Europe, so is not marketed in the US) and Pacira’s Exparel will limit the commercial opportunity for Zalviso.  However, post approval, this stock is going higher, so to be short on this secondary thesis will be exceedingly painful if the FDA approves the NDA.  Since we think that Zalviso will have a strong commercial launch given its superior efficacy and safety data versus current standard of care treatments, analyst estimates will need to trend higher as well.  The secondary thesis on additional competition from Pacira and Medicine Company’s, to the point of crowding out any real opportunity for Zalviso, also doesn’t hold water.  Pain treatment will continue to be multi-modal (ie several types of drugs used in combination – approximately 60% of all surgeries use multi-modal pain treatment) and so, Zalviso can grow rapidly and coexist with Exparel, Pacira’s foam matrix injection, as it is for local analgesia and only given while patients are still in the operating theater.  The patch from Medicine Company does not seem viable in the post-operative environment where quick and secure pain treatment is required, and it still faces regulatory hurdles.  Additionally, analysts are using “risked” numbers for ACRX which discount sales levels to better approximate the uncertainty with approval, but post approval, these discounts will drop significantly and estimates will go higher as analysts fine tune their models for launch.
  • Conservative Commercialization Forecast Leads To Substantial Upside – Even our Conservative Case which only has ACRX gaining 10% share of the addressable universe of patients by 2023 still leads to big upside in the stock.  In this case the DCF value for AcelRx, using highly discounted US and European sales expectations and a 15% discount rate points to a fair value of approximately $27.03.  Obviously this is highly dependent upon a lot of assumptions that go out many years, but our belief is that the actual outcome is likely to be a lot better so long as Zalviso is approved by the FDA.  With survey data pointing to market share gains by some docs in the 75-80%, 10% market share overall in 9 years seems very likely.
  • Quicker Than Expected Penetration Due To Pain Control Becoming A Major Driver For Hospital Reimbursement Rates – While several decades of use for IV PCA seemingly creates a significant incumbency dynamic and therefore a headwind for Zalviso’s product launch and penetration gains, the new post-operative patient survey should fully offset this.  The survey is comprised of 20 questions, 2 of which are for pain.  This survey will be used by payors to determine reimbursement rates for specific hospitals and doctors.  This makes pain treatment a C suite issue.  Given that Sufentanil offers significantly faster onset of pain relief with less side effects and greater patient mobility, it would be easy to understand how patients will react more positively when taking Zalviso than IV PCA (as demonstrated in ACRX’s comparator phase III study).  Seriously, if you were in significant post-operative pain and a doctor offered you a choice between a drug that would provide pain relief in 7 minutes with less associated adverse events or another drug that would require poking you with a needle and take 45 minutes to provide similar pain relief, which would you choose?  In the end, this survey and the lower all in cost for Zalviso should drive P&T applications leading to formulary adoptions beginning in 4Q14, and first commercial sales in 1Q15, and more rapid adoption thereafter.
  • ACRX Is Experiencing Unbelievable Success Recruiting Cadence Sales Reps -  Cadence is another new pain treatment company which was bought by Mallinckrodt last year.  Cadence had a successful launch of its acetaminophen injection product for the acute pain settings, so their sales reps are highly experienced and know hospitals and docs that will be early adopters and will be able to ensure the best launch possible.  ACRX has hired some Cadence sales reps already and have others on contingency deals, with them coming over to ACRX post approval.  Helping ACRX is that Mallinckrodt has a poor pay and benefits package and a big bureaucratic culture.  One Cadence sales rep thinks that ACRX could be successful in recruiting upwards of 25 Cadence reps.
  • High Gross Margins Even With A Low Price Tag For Zalviso – Because Sufitenal is a generic drug, the compound is very cheap to procure.  AcelRx should be able to achieve a 90%+ gross margin, even though its average one day prescription cost should be around $100/day.  The device is also very inexpensive, especially compared to IV PCA pumps.  AcelRx will sell the device at near cost and Zalviso will become a razor razorblade model, where AcelRx makes very high margins with stable revenue by selling nanotabs.
    • IV PCA Is Not Cheap – AcelRx’s recent study of the cost of various IV PCA treatments over thousands of surgeries concluded that the treatment will cost between $196 to $243 for a 2 day prescription and associated device and other costs.  This figure does not include the labor costs for the nurses required to setup, monitor and maintain the IV pump. Medicines Company did a similar study of the IV PCA cost and came up with numbers, including labor, that was even higher. The labor cost for AcelRx will be substantially less, as setup time is just a couple of minutes and there is virtually no monitoring required.
  • Low Operating Expenses – Besides the high gross margin, the opex for AcelRx should also be very low.  With Zalviso only being marketed to hospitals and acute care facilities, ACRX can get away with having fewer than 75 sales representatives and cover the entire country.  At $250,000 salaries, even with a sales team as large as 75 (ACRX aiming for 65 to cover the first 1,400 hospitals that represent 80% of all relevant procedures), the sales cost will be about $18.75 million.  Then throw in $20 million of R&D (probably growing to $40 million over time as sales ramp) and the typical costs associated with being a public company, EBIT margins should be substantial, with limited to no capex.
  • Significant Leverage To Higher Pricing – Our conservative DCF value goes up 21% with a price increase of just 15%.  Since this would represent a 2 day all in cost for Zalviso of only $230 and the cost of IV PCA is still well north of this all in, this is not farfetched.  Moreover, as Zalviso gains share, AcelRx can use the standard big pharma tactic of raising price as doctors embrace the new treatment.  There is no reason that Zalviso should not be priced at a premium to IV PCA over time, as most new and improved drugs are priced at a premium.
  • Strong IP With Significant Opportunity To Extend Patent Life – ACRX’s main patents extend through 2027.  However, given that AcelRx will likely improve upon the device and nanotab over the course of time and that the Company will have these new drug/device combinations approved by the FDA, the life of using pain medications delivered sublingually through a patient controlled device is likely to be extended even longer.  This should help the Company to maintain their dominance in this segment of the post-operative pain market for at least the next few decades.
  • Grunenthal Relationship Provides Further Upside Potential From European Sales – Grünenthal, a German specialty pharma company, signed an agreement last year to distribute Zalviso in Europe and providing ACRX a $30 million upfront payment, with $220 million of additional milestone payments, and a royalty between 16-20%.   Grünenthal brings its pain-focused organizational capability to support a successful launch of Zalviso in the EU and Australia.  Grünenthal is the number two pain company in Europe, so has all the necessary relationships to drive sales.   Zalviso’s success is strategically relevant for Grünenthal and fits well with their pain treatment portfolio.   Most sellside models do not put any European or Australian sales into their models, even though Europe has even more procedures resulting in moderate-to-severe pain (19 million) than in the US (12 million).  Even though AcelRx will only get a royalty, it will have 100% EBIT margin as there will be no associated costs. 
  • ACRX Is No One Hit Wonder – Many pre-approval biotechs usually only have one real drug in their pipeline, which makes them less a company and more just a product with a corporate shell.  AcelRx is different for an early stage biotech, as it has a strong pipeline with a second product probably 18 months away from an NDA in ARX-04.  AcelRx received a grant from the US Army Medical Research and Materiel Command (USAMRMC) for $5.6M to help develop the drug, as the Army sees it as a replacement for morphine syringes, one of the few standard issue pieces of equipment for a combat medic.  The problem is that when a soldier gets a serious wound, say being hit by an IED, a medic will inject the soldier with a syringe of morphine, but there is no immediate onset of pain relief given the delay in morphine hitting the brain as it is only water soluble (not lipid-soluble like Sufentanil).  This sometimes leads to multiple injections (“dose stacking”) as the pain continues, then leading to an overdose.  Behind AXR-04 and several years out are two additional pain drugs, both of which are promising and have good data early on.
  • AcelRx Is A Prime Takeover Candidate – There are several firms with pain franchises that likely would find AcelRx a great acquisition.  Mallinckrodt is the most likely given its desire build into a higher growth specialty pharma company.  Zalviso also fits well with the drug, Ofirmev, obtained in the acquisition of Cadence.  This MNK deal valued Cadence at $1.3 billion and Cadence only had $110 million of trailing revenue.  Perrigo can launch in 2020 a generic form of Ofirmev and that means MNK has a short window to capitalize on Cadence and a need to build around their existing salesforce more products with longer patent protection.  MNK is also the supplier of Sufentanil to ACRX, which means the operations are already well known and that the two can work together well.

-   Furthermore, to the odds of ACRX being sold, the current board members of AcelRx in aggregate have sold over 10 companies and for attractive premiums. 

-   Other potential buyers would be companies with strong hospital salesforces that could cut the entire SG&A line out in synergies, such as Hospira or the IV PCA pump manufacturers.  Zalviso would be a great fit strategically with Pacira, but the Pacira CEO does not want to diversify its product offering in pain, so this combination is unlikely currently.

-   Based on the valuation that Mallinckrodt bought Cadence, AcelRx is worth $26.87 today using a 12.5% discount rate in the Base Case, if a deal is completed two years from now.

AcelRx Pharmaceuticals

 

 

 

 

Acquisition Multiple Future Valuation

 

 

 

 

 

 

 

 

 

 

 

 

Cadance 2014E Sales @ Time Of Deal Announcement

$173.0

 

 

 

PCRX Enterprise Value

 

 

$1,276.3

 

 

 

PCRX Multiple

 

 

 

            7.4

 

 

 

 

 

 

 

 

2017E

 

 

ACRX 2017E Sales - Conservative Case (4.5% US & 3.5% EU '17 market share)

$219.9

 

 

PCRX Multiple Discount

 

 

 

 

15.0%

 

ACRX Forward EV/Sales Multiple

 

 

 

 

            6.3

 

ACRX 2016E Market Cap

 

 

 

 

$1,378.8

 

Pro Forma Q2 2014 Net Cash

 

 

 

 

$71.8

 

Cummulative Free Cash Flow Q2 2014 - Q4 2016E

 

 

$118.3

 

Estimated Year End 2016 Enterprise Value

 

 

 

$1,568.9

 

Discount Rate

 

 

 

 

 

12.5%

 

NPV of 2016E EV to Today

 

 

 

 

$26.87

 

% Upside From Current Stock Price

 

 

 

 

168%

 

  • Few FDA Approved Drugs Creates Scarcity Value – There are very few NDA approvals each year, making AcelRx a scarce commodity if Zalviso is approved, as one of the few small companies with an approved drug.  In 2013 the FDA’s Center for Drug Evaluation and Research only approved 27 new molecular entities.  The old rule of thumb is that few companies with a new approved drug is worth less than a billion, as there are many companies facing patent cliffs and with large sales forces that need to feed the machine.  While not something to fully hang one’s hat on, it does illustrate that the value of ACRX is probably going to be a lot higher post approval, if it happens as we expect.

Valuation And Projections

Today, if Zalviso is approved sometime over the next 3 months, AcelRx, in the Blue Sky Case where Zalviso gains 25%+ share in the first five years using a 10% discount rate is worth $65/share today. In the Conservative Case ACRX is worth $27.03/share today (DCF valuation – 15% discount rate) and in three years $31.12/share (12x forward FCF) and with a Base Case valuation of $41.07/share today (DCF valuation – 15% discount rate) and in three years $55.44/share (15x forward FCF).  These Base Case numbers are based on the following set of projections and DCF:

AcelRx Pharmaceuticals - Base Case

 

 

 

 

 

 

 

 

 

 

 

 

Revenue Assumptions & Discounted Cash Flow Analysis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUE MODEL

 

 

 

 

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Surgeries Resulting In Moderate-To-Severe Pain

 

 

                      12,485

                            12,734

                  12,989

                13,249

         13,514

        13,784

        14,060

         14,341

        14,628

        14,920

         15,219

        15,523

 

% Suitable For Zalviso

 

 

 

 

 

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

 

Growth Rate

 

 

 

 

 

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

2.0%

 

Market Share

 

 

 

 

 

1.0%

3.6%

5.6%

8.7%

11.1%

13.5%

15.8%

16.7%

17.4%

18.0%

18.6%

US Pricing

 

 

 

 

 

$200.00

$203.00

$206.05

$209.14

$212.27

$214.40

$216.54

$218.70

$220.89

$223.10

$223.10

 

Price Inflation

 

 

 

 

 

 

1.5%

1.5%

1.5%

1.5%

1.0%

1.0%

1.0%

1.0%

1.0%

0.0%

US Non- Surgery Inpatients Resulting In Moderate-To-Severe Pain

 

                        7,624

                             7,738

                  7,854

                 7,972

          8,091

                  8,213

                8,336

          8,461

         8,588

          8,717

         8,848

         8,980

 

% Suitable For Zalviso

 

 

 

 

 

75.0%

75.0%

75.0%

75.0%

75.0%

75.0%

75.0%

75.0%

75.0%

75.0%

75.0%

 

Growth Rate

 

 

 

 

 

2.0%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

1.5%

 

Market Share

 

 

 

 

 

0.9%

3.3%

4.7%

5.6%

6.6%

7.5%

8.5%

9.4%

9.9%

10.3%

10.8%

Europe Surgeries Resulting In Moderate-To-Severe Pain

 

 

                      19,250

                           19,491

        19,734

         19,981

        20,231

       20,484

       20,740

       20,999

         21,261

        21,527

        21,796

       22,069

 

% Suitable For Zalviso

 

 

 

 

 

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

95.0%

 

Growth Rate

 

 

 

 

 

1.25%

1.25%

1.25%

1.25%

1.25%

1.25%

1.25%

1.25%

1.25%

1.25%

1.25%

 

Market Share

 

 

 

 

 

 

1.0%

3.5%

5.0%

7.0%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

Europe Pricing

 

 

 

 

 

$130.00

$131.95

$133.93

$135.94

$137.98

$139.36

$140.75

$142.16

$143.58

$145.02

$145.02

 

Price Inflation

 

 

 

 

 

 

1.5%

1.5%

1.5%

1.5%

1.0%

1.0%

1.0%

1.0%

1.0%

0.0%

European Royalty Rate

 

 

 

 

 

 

18.5%

18.5%

18.5%

18.5%

18.5%

18.5%

18.5%

18.5%

18.5%

18.5%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                 

 

 

 

 

IS & CF ($ in Millions)

 

 

 

 

2014E

2015E

2016E

2017E

2018E

2019E

2020E

2021E

2022E

2023E

2024E

2025E

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

US Revenue

 

 

 

 

$6.1

$34.8

$129.9

$203.4

$305.5

$394.3

$486.4

$581.7

$640.0

$686.1

$734.3

$774.9

European Revenue

 

 

 

 

 

 

              4.8

             16.5

            24.2

            34.8

            50.8

            54.5

            58.4

            62.5

            66.7

            70.3

Total Revenue

 

 

 

 

$6.1

$34.8

$134.7

$219.9

$329.7

$429.1

$537.2

$636.2

$698.4

$748.6

$801.0

$845.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost Of Goods

 

 

 

 

0.0

7.8

18.2

22.4

30.6

39.4

48.6

58.2

64.0

68.6

73.4

77.5

 

% Of US Revenue

 

 

 

 

- -

22.5%

14.0%

11.0%

10.0%

10.0%

10.0%

10.0%

10.0%

10.0%

10.0%

10.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research & Development

 

 

 

 

20.5

23.6

27.1

31.2

33.5

36.0

38.7

41.6

44.8

48.1

51.7

55.6

Other Operating Expenses

 

 

 

 

17.0

41.3

43.8

45.7

47.8

49.9

51.2

52.5

53.8

55.1

56.5

57.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBIT

 

 

 

 

($31.4)

($37.9)

$45.7

$120.6

$217.9

$303.7

$398.7

$484.0

$535.9

$576.7

$619.4

$654.2

     Taxes @

35.0%

 

 

 

 

0.0

0.0

0.0

76.2

106.3

139.5

169.4

187.6

201.9

216.8

229.0

Net Income

 

 

 

 

 

               (37.9)

45.7

120.6

141.6

197.4

259.1

314.6

348.3

374.9

402.6

425.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

 

1.1

1.3

1.5

1.5

1.5

1.5

1.5

1.5

1.5

1.5

1.5

1.5

Option Expense

 

 

 

 

2.5

3.0

3.5

4.0

4.5

5.0

5.5

6.0

6.0

6.0

6.5

6.5

Capex

 

 

 

 

0.0

0.0

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

(0.1)

Change in WC

 

 

 

 

(0.5)

(0.7)

(0.9)

(1.1)

(1.3)

(1.5)

(1.7)

(1.9)

(2.1)

(2.3)

(2.5)

(2.7)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unlevered Free Cash Flow

 

 

 

 

($34.3)

$49.7

$124.9

$146.2

$202.3

$264.3

$320.1

$353.6

$380.0

$408.0

$430.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Period

 

 

 

 

 

                    0.5

               1.5

              2.5

              3.5

              4.5

              5.5

              6.5

              7.5

              8.5

              9.5

             10.5

Discount Rate

 

 

15.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted Cash Flows

 

 

 

 

 

($32.0)

$40.3

$88.1

$89.6

$107.9

$122.5

$129.0

$124.0

$115.8

$108.1

$99.2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sum Of Discount Cash Flows

 

 

$992.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares

 

 

          43.50

 

 

 

 

 

 

 

 

 

 

 

 

 

Terminal Year FCF

 

 

$430.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Multiple Of Terminal Year FCF

 

 

               8.0

 

 

 

 

 

 

 

 

 

 

 

 

 

2025 Terminal Value

 

 

$3,443.4

 

 

 

 

 

 

 

 

 

 

 

 

 

Discounted Terminal Value

 

 

$793.7

 

 

 

 

 

 

 

 

 

 

 

 

 

DCF Enterprise Value

 

 

$1,786.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per Share Value

 

 

$41.07

 

 

 

 

 

 

 

 

 

 

 

 

 

 

% Upside From Current Price

 

309.0%

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Share Price

 

 

$10.04

 

 

 

 

 

 

 

 

 

 

 

 

 

Current Enterprise Value

 

 

$358.4

 

 

 

 

 

 

 

 

 

 

 

 

 


Catalysts

-          Approval for Zalviso on July 27th

-          First analyst day in early fall 2014

-          Latin American distribution agreement for Zalviso (likely with an upfront payment)

-          Pricing study and guidelines (early fall)

-          P&T Committee approvals at leading hospitals (throughout the fall and early winter)

-          First sales of Zalviso (Q1 2015)

-          Approval for Zalviso in Europe in Summer 2015

-          Phase III data on ARX-04 in H2 2015

 

Risks

  • Receiving A Complete Response Letter (“CRL”) On July 27th With No Recommendation Of Actions - A complete response letter stating Zalviso is not approved and with no recommendation of actions for approval is the worst case scenario, but a scenario with almost no chance of happening in our view.  The most likely reason for this would be that the FDA uses the Zalviso NDA as the driver for reviewing all opioid compounds.  This seems unlikely because (i) the FDA has become incrementally more comfortable with opioids given the recent fast-track approval of a take home opioid antagonist called Evzio, an auto-injectable device containing a single dose of naloxone (decreases chances of an overdoese), (ii) the fact that Zalviso is strictly for the acute-care setting which is significantly more secure than opioids used outside the hospital setting, and (iii) the significant issues with the current standard of care with IV PCA, which would only allow the continuation of less safe opioid treatments to continue and further accidental deaths.

- Of the many possible reasons for an NDA to receive a CRL over the last 5 years, the two most common reasons cited for receiving a CRL (there can be more than one reason often times) are roughly 50% of due to deficiencies in chemistry, manufacturing and controls (“CMC”) and 50% due to deficiencies in labeling.  While ACRX management had not indicated an issue with either of these, there clearly can be no certainty that the FDA doesn’t find issues that cannot be addressed simply with a three month extension.

- However, since Sufentanil has been around forever and is the safest major opioid and that it will be manufactured by Mallincrkodt, CDER is unlikely to have issue approving Zalviso.  On the other side of the FDA review process, CDRH, the threshold for approving a Class II device is very low.  Between 1999 and 2010, the average annual 510(k) approvals for Class II devices had been approximately 3,200.  Yes, that’s in the thousands of approvals per year.  510(k) is not an NDA, BLA or PMA where there are only a handful of approvals and with very high rates of non-approval.  The Class II devices that are turned down tend to also be due to a shody application.

  • Receiving A Complete Response Letter  On July 27th With Recommendation Of Actions - A complete response letter stating inadequate data and allowing for eventual resubmission, resulting in ACRX needing to fund an incremental study to provide more information on particular points that the FDA is concerned about.  This likely means 12 months before another PDUFA date and possibly requires, but still probably doesn’t result in additional capital being raised.  On average, a CRL with recommended actions will delay a product’s market entry for 14 months.  However, there are situations historically where a relatively benign CRL, such as with Navidea’s drug Lymphoseek, can be much faster:

           Navidea Timeline

-   Aug 10, 2012 - Navidea Biopharmaceuticals filed NDA for Lymphoseek injection;

-   Sep 10, 2012 - FDA issued a CRL citing labeling and facility deficiencies, and requested safety data;

-  Oct 30, 2012 - The company resolved all the issues raised in the CRL and resubmitted the NDA;

-  Mar 13, 2013 - FDA granted approval to Lymphoseek.

 

  • Cowen Research Report Which States Post Approval Returns 21% Negative For Biotechs – The basic claim that the Cowen biotech team makes is that looking over a large number of material PDUFA dates, the average small biotech trades up 84% in the year before, which sets up for a 21% average loss post PDUFA as commercialization starts up.  In Barrons, this Cowen analyst even mentioned AcelRx as a company that would trade lower.  Why he states this is a mystery for most investors, as ACRX has actually traded down 20% over the past 12 months, so AcelRx simply doesn’t fit the massively oversimplified trading pattern.  Also, a good deal of the stocks in the Cowen research had to raise capital post PDUFA to commercialize their product.  Again, ACRX could carry the full salesforce for 6 quarters with zero revenue coming in, so a capital raise and big dilution to valuation is exceedingly unlikely for ACRX so long Zalviso is approved.  This is a just a weak analysis on part of a small firm trying to get noticed, with no substantive backup to their claims.  Its important to note that even Cowen thinks there is a very high probability of approval for Zalviso.
  • IV PCA Has Been Around For Decades, So Docs Won’t Switch – This is the other most commonly cited bear argument, next to the Cowen study.  The problem with this is that IV PCA morphine is not a great product and that it accidently kills people all the time (eg broken pump, nurse error in programming).  First, directly relating to this incumbency issue is that Sufentanil has also been around for decades and many docs also prescribe it.  In China, it’s the main analgesic.  Second, Sufentanil has shown for decades to be faster and longer lasting than morphine, so it’s far more efficacious.  It historically has been hard to administer given how peaky it is, but Zalviso fixes that and allows for the fast acting relief which morphine is not able to provide given that it is only water soluble.  Third, Zalviso has far fewer adverse events and those events are far less serious.  In a comparator phase III study against IV PCA morphine, Zalviso had 30% less patients with oxygen desaturation of < 95%.  Fourth, the amount of nurse time required to administer an IV PCA pump is significant.  It requires two nurses to program the pump in the attempt to avoid programming errors and it constantly has alarms going off, requiring further nurse time.  Finally, in AcelRx’s hospital survey to determine penetration speed and market share, even the most doubtful subgroup (representing 19% of the total) stated that Zalviso on average could achieve a 29% market share and these specialists would test it for 7.4 months, while the eager users (representing 21% of the total) stated that Zalviso on average could achieve a 47% market share and they would test it for 3 months.  Obviously, even the low end of market share is multiples higher than our Base Case.  Altogether, while there are going to be some docs that refuse to change, the efficacy, safety and total cost data are overwhelmingly in favor of Zalviso and that will result in substantial market share gains over time and our checks with doctors would substantiate that point as well. 

-  Using The Low End Share From The ACRX Leads To Significant Upside - 29% Market share in Year 5 for Zalviso would result in a fair value today on a 15% discount rate and 10x forward FCF multiple of $37.71/share. 

  • FDA Extends The PDUFA Date - The FDA states that they need more time to review the data and application and require an additional three months.  It is wholly possible the stock trades up on this news, as it usually indicates the FDA will ultimately approve a drug, but there are other occasions where a 3 month delay leads to a selloff in a stock.  The only reason for ACRX to potentially selloff on the news of an extension is if the Company in its press release states the reason for the extension is something very negative, like the FDA has “serious” concerns around the efficacy data in the comparative phase III study.
  • Commercialization Is Perceived To Undershoot Expectations – Bears will point out that being short small company commercial launches for hospital drugs has been an attractive strategy.  However, the pain launches by Pacira and Cadence have both gone very well.  While they were good shorts for a period of time post PDUFA (Pacira due to needing to raise substantial capital and Cadence due to ligation around the validity of their patents) both of them were highly successful in launching their products and growing sales.  The fact that ACRX will have sales reps from both companies to aid in the Company’s launch of Zalviso will only make this risk decrease in probability.
  • Greater Than Anticipated Competition – Bears on ACRX would state that much greater cannibalization of IV PCA by Pacira’s injectable local analgesic called Exparel, will result in the total addressable market size for Zalviso to be smaller than expected.  Additionally, down the road one of several experimental pain treatments could be approved and experience fast adoption, cutting into Zalviso’s market penetration as well.  However, given penetration expectations by the sellside are exceedingly low to begin with and already don’t include Europe which is an even bigger market than the US, there is little chance that the Zalviso commercial launch will underwhelm, even with the bears being partially correct on a shrinking size of IV PCA.  Furthermore, Pacira does not even state that Exparel eliminates the use of opioids in patients, it just minimizes the use in certain circumstances.

Pain Is Complex And Needs To Be Treated With Multiple Drugs - At least ten independent neurobiological mechanisms may initiate or sustain pain. Each mechanism involves many targets, some unique, some shared.  That is why pain    specialists have come to determine that pain must be treated with a multi-modal regime of drugs that complement each other.  This is why the majority of patients with moderate-to-severe pain are provided more than one analgesic.

      • One scientific paper abstract sums up the situation very well and why more and more, multiple pain drugs will be utilized: “Persistent postoperative pain can cause long-term disability. It is the result of complex neurohormonal effects that can be prevented using preemptive analgesic therapy. Multimodal pain therapy can result in additive or synergistic analgesic effects and minimize adverse drug effects. Limitations of systemic opioid analgesics given by patient-controlled analgesia include adverse effects, a short duration of action, and nocturnal hypoxemia. Limitations of local anesthetics include unwanted motor blockade, which can interfere with postoperative mobilization and rehabilitation efforts. Inadvertent administration of analgesics into subarachnoid, subdural, or vascular spaces is a potential problem with the epidural route. Use of this route may be limited by the perioperative use of prophylactic anticoagulation.”  So if you believe this, it basically states that the best means of treating most postoperative pain is through the use of several different pain control medications acting together.  Zalviso will gain share, the question is how much and how fast.
  • Non-approval in Europe -  Though this seems highly unlikely as the bar for approval in Europe is even lower as the approval will focus more squarely on the drug component of Zalviso, Sufentanil, which is also a well-established generic in Europe.  This is why Grunenthal felt very comfortable making a $30 million upfront payment to gain exclusivity for the European distribution rights and was willing to put in another $5 million for just filing the application for Zalviso in the EU.

 

We currently own stock in AcelRx, along with certain friends, advisors, affiliates and peers and actively trade the stock and the corresponding options.  This is a very fluid situation and one needs to do significant amounts of their own due diligence before they either buy or short ACRX.

(note: multiples in the box at top of page above the write up reference 2016 and 2017 respectively, not 2014 and 2015).

I do not hold a position of employment, directorship, or consultancy with the issuer.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

  • Approval for Zalviso on July 27th.
  • First analyst day in early fall 2014
  • Latin American distribution agreement for Zalviso (likely with an upfront payment)
  • Pricing study and guidelines (early fall)
  • P&T Committee approvals at leading hospitals (throughout the fall and early winter)
  • First sales of Zalviso (Q1 2015)
  • Approval for Zalviso in Europe in Summer 2015
  • Phase III data on ARX-04 in H2 2015
    sort by    

    Description

    DESCRIPTION

    AcelRx (the “Company” or “ACRX”) is a clinical stage specialty pharmaceutical company focused on the development and commercialization of drugs for the treatment of moderate-to-severe acute pain.   The Company’s first product up for approval is Zalviso (or ARX-01), a combination opioid drug and patient controlled analgesia medical device for the hospital and acute care setting.  The opioid is a reformulated version of the long standing generic, Sufentanil, allowing it to be taken sublingually (ie under the tongue).  ACRX’s New Drug Application (“ NDA”) currently has a PDUFA date (ie the FDA decision date) of July 27th after having gone through years of successful testing with minimal safety issues and significant efficacy. 

    The current standard of care for patients with moderate-to-severe pain in the hospital (especially postoperative) is intravenous patient controlled analgesia pumps (“IV PCA”), which has been shown to cause harm (most opioids have significant side effects to older and sicker patients, ie the people who actually have most of the surgeries) and inconvenience to patients (they are tethered to the pump via the IV) and healthcare providers (many unintentional overdoses and constant nurse focus on the pump and the alarms – IV PCA pump alarms are what you will hear at all times of day and night in an ICU or recovery ward).

    AcelRx also has a legitimate pipeline of additional pain treatment products.  The most significant product is ARX-04 which is a product for short term acute care pain that can be utilized outside the hospital setting.  ARX-04 was originally funded by the US Army in hopes of it becoming a replacement to morphine syringes.  ARX-04 also is a potential substitute for acute care pain treatment in the emergency room and for paramedics at emergency sites. 

    Zalviso Product Description

    Zalviso is a pre-programmed, handheld device that delivers a sublingual formulation of Sufentanil, a synthetic opioid analgesic.  The Zalvis New Drug Application (“NDA”) was accepted for filing by the FDA on November 26, 2013 with a PDUFA date of July 27, 2013, as a combination product led by the CDER arm of the FDA.  Like an asthma inhaler, the approval will be for the combination of drug and device, providing significant patent protection. 

    Sufentanil is a rapid onset opioid which typically doesn’t get used as it peaks fast and is then metabolized by the liver very fast, making administering the drug very burdensome, even though it is highly efficacious and much safer than other opioids (multiple studies over time showing less oxygen desaturation, the most severe adverse event for opioids).  However, packaged in a patient controlled device that only allows one table every twenty minutes (so is non-programmable unlike IV PCA pumps) , Zalviso avoids the hassle of constant administration by nurses while allowing for very fast and significant pain relief.

    Zalviso is fast to set up for nurses, requiring only a new mouthpiece (to be attached to the dispenser), a tether for the device to the bed that sets automatically with the device, and the cartridge of 40 nanotabs.  Then the patient, who wears a bandaid like identification strip on their thumb, just presses the botton with that thumb on the dispenser to release a nanotab under their tongue.  The device is pre-programmed to dispense a nanotab no more than every 20 minutes, ensuring no overdose is possible. 

    Investment Thesis

    AcelRx is an extremely attractive investment because it is mispriced due to a lack of understanding by many investors into the probability of its first product of being approved by the FDA and subsequently the fact that Zalviso is a vastly superior treatment for moderate-to-severe pain from a safety and efficacy standpoint to the current standard of care, such that it will have quick success in its commercial launch.  With such a small market cap, even relatively small penetration rates would lead to significant upside in ACRX, because the profitability of the product is so significant even at pricing of just $100/day (the low cost will also help drive fast and substantial penetration).  With several pharma and biotech companies looking to further leverage their existing hospital focused salesforces and the fact that AcelRx has a very attractive pipeline, it is highly likely ACRX gets taken over within the first two years of approval of Zalviso.  Importantly, AcelRx has more than enough cash on hand to be able to launch Zalviso and hit breakeven without needing to raise any more capital, something many small biotechs reaching their PDUFA are never able to claim.  Altogether, this results in a 3 year price target of $50, based on a 12x forward FCF multiple.

                         
                        AcelRx Pharmaceuticals
                             Comparable Company Future Valuation

    PCRX 2016E Sales

     

     

     

    $475.9

     

     

    PCRX Enterprise Value

     

     

    $3,037.5

     

     

    PCRX Multiple

     

     

     

                                                          6.4

     

     

     

     

     

     

     

    2017E

     

    ACRX 2017E Sales - Conservative Case (4.5% US & 3.5% EU '17 market share)

    $219.9

     

    PCRX Multiple Discount

     

     

     

     

    15.0%

    ACRX Forward EV/Sales Multiple

     

     

     

     

                                                       5.4

    ACRX 2016E Market Cap

     

     

     

     

    $1,193.0

    Pro Forma Q2 2014 Net Cash

     

     

     

     

    $71.8

    Cummulative Free Cash Flow Q2 2014 - Q4 2016E

     

     

    $118.3

    Estimated Year End 2016 Enterprise Value

     

     

     

    $1,383.2

    Discount Rate

     

     

     

     

     

    12.5%

    NPV of 2016E EV to Today

     

     

     

     

    $23.69

    % Upside From Current Stock Price

     

     

     

     

    136%

                          

    AcelRx Pharmaceuticals

     

     

     

     

    Downside Scenario - Only European Royalty Revenue + Net Cash

     

     

     

     

     

     

     

     

     

     

     

     

     

    2018E

     

     

    European Revenue

     

     

     

    $24.2

     

     

         Royalty Rate

     

     

     

    18.5%

     

     

    Cost Of Goods

     

     

     

    $0.0

     

     

    Research & Development

     

     

     

    $1.0

     

     

    Other Operating Expenses

     

     

    $5.0

     

     

     

     

     

     

     

     

     

     

    EBIT

     

     

     

    $18.2

     

     

         Taxes @

    35.0%

     

     

    $6.4

     

     

    Net Income

     

     

     

    $11.8

     

     

     

     

     

     

     

     

     

     

    Depreciation

     

     

     

                               1.5

     

     

    Option Expense

     

     

     

                               1.0

     

     

    Capex

     

     

     

                                -  

     

     

    Change in WC

     

     

     

                                -  

     

     

     

     

     

     

     

     

     

     

    Unlevered Free Cash Flow

     

     

    $14.31

     

     

     

     

     

     

     

     

     

     

    Discount Rate

     

     

     

     

    12.5%

     

    Forward Multiple Of Terminal Year FCF

     

     

     

              12.0

     

    2017 Terminal Value

     

     

     

     

    $171.7

     

    Discounted Terminal Value

     

     

     

     

    $113.7

    Development Milestone Payments

     

     

     

    $215.0

     

    Discounted Milestone Payments

     

     

     

     

    $169.9

    Discounted Market Cap

     

     

     

     

     

    $283.6

    Current Net Cash

     

     

     

     

     

    $71.8

    Discounted Enterprise Value

     

     

     

     

    $355.4

         Per Share Value

     

     

     

     

     

    $8.17

    Current Stock Price

     

     

     

     

     

    $10.04

     

    Downside To Current Stock Price

     

     

     

     

    -18.6%


     
    -          (i) potential for programming and medication errors as nurses are needed to enter the right amounts (not an issue for Zalviso);

    -          (ii) frequent monitoring required, especially for patients at risk for respiratory depression (something Zalviso greatly minimizes, as Sufentanil is 1,000x more powerful than morphine, so needs significantly less drug to be administered for the same level of pain relief);

    -          (iii) pump failures or malfunctions that can lead to overdoses (not an issue for Zalviso as any failure in the device leads to an inability to dispense drug);

    -          (iv) time consuming set up and programming (again, not relevant for Zalviso);

    -          (v) restricted patient mobility with potential impact on length of stay (Not applicable to Zalviso);

    -          (vi) variable and considerable cost impact to hospitals (Zalviso is much cheaper on total cost of care, as improving patient mobility shortly after surgery has been proven to cut down on length of stay, which adds greater costs and correlates to increased chance of acute pain becoming chronic pain);

    -          (vii) risk of IV site infection (clearly not applicable to Zalviso); and

    -          (viii) delay in pain relief given time of setup and delay in morphine making their way to the brain (Zalviso peaks in under 7 minutes vs 15 minutes for IV PCA to be 80% effective and 90 minutes to hit peak – Sufentanil also provides greater relief of pain after the first four hours of use). 

    -             Zalviso Minimizes The Main Risk Of Opioids - The most significant issue with IV PCA out of all the issues listed above is the fact that morphine has a high rate of respiratory depression.  Respiratory depression results in patient discomfort and possibly death if opioid use is not stopped.  This leads to decreased doses, thereby significantly limiting pain control in these patients.  Needless to say, there are enough problems and cost with IV PCA and significant improvements from using Zalviso over IV PCA that AcelRx should be able to have a successful commercial launch and take substantial market share over the first five years.  In fact, doctor checks for high pain, high rehab need type operations such as orthopedic surgeries, suggests market share could go well over 50% for many doctors.

    • Large Opportunity – The US has over 12 million surgical procedures a year that result in moderate-to-severe pain and Europe has even more.  There is an additional 7.5 million hospital inpatients in the US that also suffer from moderate-to-severe pain.  Even assuming relatively minor market share gains, it is easy to see that Zalviso has the potential to generate hundreds of millions in US sales alone.  This is significant given that the enterprise value for ACRX is roughly $350 million today.  Since most patients complain of inadequate pain relief in post-operative situations, there is certainly room for new products such as Zalviso that offer faster and longer lasting pain treatment in the post-operative setting.  Simply put, if Zalviso captures just 10% share of postoperative and inpatient scrips to treat moderate-to-severe pain, with a $200 price, results in $360 million in revenue with a gross margin over 90%.  Europe has more volume than the US, but will have a lower price, so the market sizes will be roughly the same.
    • High Short Interest Will Accelerate Closing Of Gap To Intrinsic Value Post Approval  – There are approximately 6.8 million shares shorted in ACRX, representing about 16% of shares outstanding and 27% of free float (ie excluding shares held by the VCs).  The main short thesis is that Zalviso is not approved or faces serious delays (ie over a year).  In this case, yes, the shares will go down, but again, we see this as a small possibility.  The secondary short thesis is that other products like the pain patch from Medicines Company (this also has serious delay in providing pain relief – up to 45+ min for some patients besides the fact it was recalled years ago in Europe, so is not marketed in the US) and Pacira’s Exparel will limit the commercial opportunity for Zalviso.  However, post approval, this stock is going higher, so to be short on this secondary thesis will be exceedingly painful if the FDA approves the NDA.  Since we think that Zalviso will have a strong commercial launch given its superior efficacy and safety data versus current standard of care treatments, analyst estimates will need to trend higher as well.  The secondary thesis on additional competition from Pacira and Medicine Company’s, to the point of crowding out any real opportunity for Zalviso, also doesn’t hold water.  Pain treatment will continue to be multi-modal (ie several types of drugs used in combination – approximately 60% of all surgeries use multi-modal pain treatment) and so, Zalviso can grow rapidly and coexist with Exparel, Pacira’s foam matrix injection, as it is for local analgesia and only given while patients are still in the operating theater.  The patch from Medicine Company does not seem viable in the post-operative environment where quick and secure pain treatment is required, and it still faces regulatory hurdles.  Additionally, analysts are using “risked” numbers for ACRX which discount sales levels to better approximate the uncertainty with approval, but post approval, these discounts will drop significantly and estimates will go higher as analysts fine tune their models for launch.
    • Conservative Commercialization Forecast Leads To Substantial Upside – Even our Conservative Case which only has ACRX gaining 10% share of the addressable universe of patients by 2023 still leads to big upside in the stock.  In this case the DCF value for AcelRx, using highly discounted US and European sales expectations and a 15% discount rate points to a fair value of approximately $27.03.  Obviously this is highly dependent upon a lot of assumptions that go out many years, but our belief is that the actual outcome is likely to be a lot better so long as Zalviso is approved by the FDA.  With survey data pointing to market share gains by some docs in the 75-80%, 10% market share overall in 9 years seems very likely.
    • Quicker Than Expected Penetration Due To Pain Control Becoming A Major Driver For Hospital Reimbursement Rates – While several decades of use for IV PCA seemingly creates a significant incumbency dynamic and therefore a headwind for Zalviso’s product launch and penetration gains, the new post-operative patient survey should fully offset this.  The survey is comprised of 20 questions, 2 of which are for pain.  This survey will be used by payors to determine reimbursement rates for specific hospitals and doctors.  This makes pain treatment a C suite issue.  Given that Sufentanil offers significantly faster onset of pain relief with less side effects and greater patient mobility, it would be easy to understand how patients will react more positively when taking Zalviso than IV PCA (as demonstrated in ACRX’s comparator phase III study).  Seriously, if you were in significant post-operative pain and a doctor offered you a choice between a drug that would provide pain relief in 7 minutes with less associated adverse events or another drug that would require poking you with a needle and take 45 minutes to provide similar pain relief, which would you choose?  In the end, this survey and the lower all in cost for Zalviso should drive P&T applications leading to formulary adoptions beginning in 4Q14, and first commercial sales in 1Q15, and more rapid adoption thereafter.
    • ACRX Is Experiencing Unbelievable Success Recruiting Cadence Sales Reps -  Cadence is another new pain treatment company which was bought by Mallinckrodt last year.  Cadence had a successful launch of its acetaminophen injection product for the acute pain settings, so their sales reps are highly experienced and know hospitals and docs that will be early adopters and will be able to ensure the best launch possible.  ACRX has hired some Cadence sales reps already and have others on contingency deals, with them coming over to ACRX post approval.  Helping ACRX is that Mallinckrodt has a poor pay and benefits package and a big bureaucratic culture.  One Cadence sales rep thinks that ACRX could be successful in recruiting upwards of 25 Cadence reps.
    • High Gross Margins Even With A Low Price Tag For Zalviso – Because Sufitenal is a generic drug, the compound is very cheap to procure.  AcelRx should be able to achieve a 90%+ gross margin, even though its average one day prescription cost should be around $100/day.  The device is also very inexpensive, especially compared to IV PCA pumps.  AcelRx will sell the device at near cost and Zalviso will become a razor razorblade model, where AcelRx makes very high margins with stable revenue by selling nanotabs.
      • IV PCA Is Not Cheap – AcelRx’s recent study of the cost of various IV PCA treatments over thousands of surgeries concluded that the treatment will cost between $196 to $243 for a 2 day prescription and associated device and other costs.  This figure does not include the labor costs for the nurses required to setup, monitor and maintain the IV pump. Medicines Company did a similar study of the IV PCA cost and came up with numbers, including labor, that was even higher. The labor cost for AcelRx will be substantially less, as setup time is just a couple of minutes and there is virtually no monitoring required.
    • Low Operating Expenses – Besides the high gross margin, the opex for AcelRx should also be very low.  With Zalviso only being marketed to hospitals and acute care facilities, ACRX can get away with having fewer than 75 sales representatives and cover the entire country.  At $250,000 salaries, even with a sales team as large as 75 (ACRX aiming for 65 to cover the first 1,400 hospitals that represent 80% of all relevant procedures), the sales cost will be about $18.75 million.  Then throw in $20 million of R&D (probably growing to $40 million over time as sales ramp) and the typical costs associated with being a public company, EBIT margins should be substantial, with limited to no capex.
    • Significant Leverage To Higher Pricing – Our conservative DCF value goes up 21% with a price increase of just 15%.  Since this would represent a 2 day all in cost for Zalviso of only $230 and the cost of IV PCA is still well north of this all in, this is not farfetched.  Moreover, as Zalviso gains share, AcelRx can use the standard big pharma tactic of raising price as doctors embrace the new treatment.  There is no reason that Zalviso should not be priced at a premium to IV PCA over time, as most new and improved drugs are priced at a premium.
    • Strong IP With Significant Opportunity To Extend Patent Life – ACRX’s main patents extend through 2027.  However, given that AcelRx will likely improve upon the device and nanotab over the course of time and that the Company will have these new drug/device combinations approved by the FDA, the life of using pain medications delivered sublingually through a patient controlled device is likely to be extended even longer.  This should help the Company to maintain their dominance in this segment of the post-operative pain market for at least the next few decades.
    • Grunenthal Relationship Provides Further Upside Potential From European Sales – Grünenthal, a German specialty pharma company, signed an agreement last year to distribute Zalviso in Europe and providing ACRX a $30 million upfront payment, with $220 million of additional milestone payments, and a royalty between 16-20%.   Grünenthal brings its pain-focused organizational capability to support a successful launch of Zalviso in the EU and Australia.  Grünenthal is the number two pain company in Europe, so has all the necessary relationships to drive sales.   Zalviso’s success is strategically relevant for Grünenthal and fits well with their pain treatment portfolio.   Most sellside models do not put any European or Australian sales into their models, even though Europe has even more procedures resulting in moderate-to-severe pain (19 million) than in the US (12 million).  Even though AcelRx will only get a royalty, it will have 100% EBIT margin as there will be no associated costs. 
    • ACRX Is No One Hit Wonder – Many pre-approval biotechs usually only have one real drug in their pipeline, which makes them less a company and more just a product with a corporate shell.  AcelRx is different for an early stage biotech, as it has a strong pipeline with a second product probably 18 months away from an NDA in ARX-04.  AcelRx received a grant from the US Army Medical Research and Materiel Command (USAMRMC) for $5.6M to help develop the drug, as the Army sees it as a replacement for morphine syringes, one of the few standard issue pieces of equipment for a combat medic.  The problem is that when a soldier gets a serious wound, say being hit by an IED, a medic will inject the soldier with a syringe of morphine, but there is no immediate onset of pain relief given the delay in morphine hitting the brain as it is only water soluble (not lipid-soluble like Sufentanil).  This sometimes leads to multiple injections (“dose stacking”) as the pain continues, then leading to an overdose.  Behind AXR-04 and several years out are two additional pain drugs, both of which are promising and have good data early on.
    • AcelRx Is A Prime Takeover Candidate – There are several firms with pain franchises that likely would find AcelRx a great acquisition.  Mallinckrodt is the most likely given its desire build into a higher growth specialty pharma company.  Zalviso also fits well with the drug, Ofirmev, obtained in the acquisition of Cadence.  This MNK deal valued Cadence at $1.3 billion and Cadence only had $110 million of trailing revenue.  Perrigo can launch in 2020 a generic form of Ofirmev and that means MNK has a short window to capitalize on Cadence and a need to build around their existing salesforce more products with longer patent protection.  MNK is also the supplier of Sufentanil to ACRX, which means the operations are already well known and that the two can work together well.

    -   Furthermore, to the odds of ACRX being sold, the current board members of AcelRx in aggregate have sold over 10 companies and for attractive premiums. 

    -   Other potential buyers would be companies with strong hospital salesforces that could cut the entire SG&A line out in synergies, such as Hospira or the IV PCA pump manufacturers.  Zalviso would be a great fit strategically with Pacira, but the Pacira CEO does not want to diversify its product offering in pain, so this combination is unlikely currently.

    -   Based on the valuation that Mallinckrodt bought Cadence, AcelRx is worth $26.87 today using a 12.5% discount rate in the Base Case, if a deal is completed two years from now.

    AcelRx Pharmaceuticals

     

     

     

     

    Acquisition Multiple Future Valuation

     

     

     

     

     

     

     

     

     

     

     

     

    Cadance 2014E Sales @ Time Of Deal Announcement

    $173.0

     

     

     

    PCRX Enterprise Value

     

     

    $1,276.3

     

     

     

    PCRX Multiple

     

     

     

                7.4

     

     

     

     

     

     

     

     

    2017E

     

     

    ACRX 2017E Sales - Conservative Case (4.5% US & 3.5% EU '17 market share)

    $219.9

     

     

    PCRX Multiple Discount

     

     

     

     

    15.0%

     

    ACRX Forward EV/Sales Multiple

     

     

     

     

                6.3

     

    ACRX 2016E Market Cap

     

     

     

     

    $1,378.8

     

    Pro Forma Q2 2014 Net Cash

     

     

     

     

    $71.8

     

    Cummulative Free Cash Flow Q2 2014 - Q4 2016E

     

     

    $118.3

     

    Estimated Year End 2016 Enterprise Value

     

     

     

    $1,568.9

     

    Discount Rate

     

     

     

     

     

    12.5%

     

    NPV of 2016E EV to Today

     

     

     

     

    $26.87

     

    % Upside From Current Stock Price

     

     

     

     

    168%

     

    • Few FDA Approved Drugs Creates Scarcity Value – There are very few NDA approvals each year, making AcelRx a scarce commodity if Zalviso is approved, as one of the few small companies with an approved drug.  In 2013 the FDA’s Center for Drug Evaluation and Research only approved 27 new molecular entities.  The old rule of thumb is that few companies with a new approved drug is worth less than a billion, as there are many companies facing patent cliffs and with large sales forces that need to feed the machine.  While not something to fully hang one’s hat on, it does illustrate that the value of ACRX is probably going to be a lot higher post approval, if it happens as we expect.

    Valuation And Projections

    Today, if Zalviso is approved sometime over the next 3 months, AcelRx, in the Blue Sky Case where Zalviso gains 25%+ share in the first five years using a 10% discount rate is worth $65/share today. In the Conservative Case ACRX is worth $27.03/share today (DCF valuation – 15% discount rate) and in three years $31.12/share (12x forward FCF) and with a Base Case valuation of $41.07/share today (DCF valuation – 15% discount rate) and in three years $55.44/share (15x forward FCF).  These Base Case numbers are based on the following set of projections and DCF:

    AcelRx Pharmaceuticals - Base Case

     

     

     

     

     

     

     

     

     

     

     

     

    Revenue Assumptions & Discounted Cash Flow Analysis

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    REVENUE MODEL

     

     

     

     

    2014E

    2015E

    2016E

    2017E

    2018E

    2019E

    2020E

    2021E

    2022E

    2023E

    2024E

    2025E

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    US Surgeries Resulting In Moderate-To-Severe Pain

     

     

                          12,485

                                12,734

                      12,989

                    13,249

             13,514

            13,784

            14,060

             14,341

            14,628

            14,920

             15,219

            15,523

     

    % Suitable For Zalviso

     

     

     

     

     

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

     

    Growth Rate

     

     

     

     

     

    2.0%

    2.0%

    2.0%

    2.0%

    2.0%

    2.0%

    2.0%

    2.0%

    2.0%

    2.0%

    2.0%

     

    Market Share

     

     

     

     

     

    1.0%

    3.6%

    5.6%

    8.7%

    11.1%

    13.5%

    15.8%

    16.7%

    17.4%

    18.0%

    18.6%

    US Pricing

     

     

     

     

     

    $200.00

    $203.00

    $206.05

    $209.14

    $212.27

    $214.40

    $216.54

    $218.70

    $220.89

    $223.10

    $223.10

     

    Price Inflation

     

     

     

     

     

     

    1.5%

    1.5%

    1.5%

    1.5%

    1.0%

    1.0%

    1.0%

    1.0%

    1.0%

    0.0%

    US Non- Surgery Inpatients Resulting In Moderate-To-Severe Pain

     

                            7,624

                                 7,738

                      7,854

                     7,972

              8,091

                      8,213

                    8,336

              8,461

             8,588

              8,717

             8,848

             8,980

     

    % Suitable For Zalviso

     

     

     

     

     

    75.0%

    75.0%

    75.0%

    75.0%

    75.0%

    75.0%

    75.0%

    75.0%

    75.0%

    75.0%

    75.0%

     

    Growth Rate

     

     

     

     

     

    2.0%

    1.5%

    1.5%

    1.5%

    1.5%

    1.5%

    1.5%

    1.5%

    1.5%

    1.5%

    1.5%

     

    Market Share

     

     

     

     

     

    0.9%

    3.3%

    4.7%

    5.6%

    6.6%

    7.5%

    8.5%

    9.4%

    9.9%

    10.3%

    10.8%

    Europe Surgeries Resulting In Moderate-To-Severe Pain

     

     

                          19,250

                               19,491

            19,734

             19,981

            20,231

           20,484

           20,740

           20,999

             21,261

            21,527

            21,796

           22,069

     

    % Suitable For Zalviso

     

     

     

     

     

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

    95.0%

     

    Growth Rate

     

     

     

     

     

    1.25%

    1.25%

    1.25%

    1.25%

    1.25%

    1.25%

    1.25%

    1.25%

    1.25%

    1.25%

    1.25%

     

    Market Share

     

     

     

     

     

     

    1.0%

    3.5%

    5.0%

    7.0%

    10.0%

    10.5%

    11.0%

    11.5%

    12.0%

    12.5%

    Europe Pricing

     

     

     

     

     

    $130.00

    $131.95

    $133.93

    $135.94

    $137.98

    $139.36

    $140.75

    $142.16

    $143.58

    $145.02

    $145.02

     

    Price Inflation

     

     

     

     

     

     

    1.5%

    1.5%

    1.5%

    1.5%

    1.0%

    1.0%

    1.0%

    1.0%

    1.0%

    0.0%

    European Royalty Rate

     

     

     

     

     

     

    18.5%

    18.5%

    18.5%

    18.5%

    18.5%

    18.5%

    18.5%

    18.5%

    18.5%

    18.5%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

                     

     

     

     

     

    IS & CF ($ in Millions)

     

     

     

     

    2014E

    2015E

    2016E

    2017E

    2018E

    2019E

    2020E

    2021E

    2022E

    2023E

    2024E

    2025E

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    US Revenue

     

     

     

     

    $6.1

    $34.8

    $129.9

    $203.4

    $305.5

    $394.3

    $486.4

    $581.7

    $640.0

    $686.1

    $734.3

    $774.9

    European Revenue

     

     

     

     

     

     

                  4.8

                 16.5

                24.2

                34.8

                50.8

                54.5

                58.4

                62.5

                66.7

                70.3

    Total Revenue

     

     

     

     

    $6.1

    $34.8

    $134.7

    $219.9

    $329.7

    $429.1

    $537.2

    $636.2

    $698.4

    $748.6

    $801.0

    $845.2

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Cost Of Goods

     

     

     

     

    0.0

    7.8

    18.2

    22.4

    30.6

    39.4

    48.6

    58.2

    64.0

    68.6

    73.4

    77.5

     

    % Of US Revenue

     

     

     

     

    - -

    22.5%

    14.0%

    11.0%

    10.0%

    10.0%

    10.0%

    10.0%

    10.0%

    10.0%

    10.0%

    10.0%

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Research & Development

     

     

     

     

    20.5

    23.6

    27.1

    31.2

    33.5

    36.0

    38.7

    41.6

    44.8

    48.1

    51.7

    55.6

    Other Operating Expenses

     

     

     

     

    17.0

    41.3

    43.8

    45.7

    47.8

    49.9

    51.2

    52.5

    53.8

    55.1

    56.5

    57.9

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    EBIT

     

     

     

     

    ($31.4)

    ($37.9)

    $45.7

    $120.6

    $217.9

    $303.7

    $398.7

    $484.0

    $535.9

    $576.7

    $619.4

    $654.2

         Taxes @

    35.0%

     

     

     

     

    0.0

    0.0

    0.0

    76.2

    106.3

    139.5

    169.4

    187.6

    201.9

    216.8

    229.0

    Net Income

     

     

     

     

     

                   (37.9)

    45.7

    120.6

    141.6

    197.4

    259.1

    314.6

    348.3

    374.9

    402.6

    425.2

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Depreciation

     

     

     

     

    1.1

    1.3

    1.5

    1.5

    1.5

    1.5

    1.5

    1.5

    1.5

    1.5

    1.5

    1.5

    Option Expense

     

     

     

     

    2.5

    3.0

    3.5

    4.0

    4.5

    5.0

    5.5

    6.0

    6.0

    6.0

    6.5

    6.5

    Capex

     

     

     

     

    0.0

    0.0

    (0.1)

    (0.1)

    (0.1)

    (0.1)

    (0.1)

    (0.1)

    (0.1)

    (0.1)

    (0.1)

    (0.1)

    Change in WC

     

     

     

     

    (0.5)

    (0.7)

    (0.9)

    (1.1)

    (1.3)

    (1.5)

    (1.7)

    (1.9)

    (2.1)

    (2.3)

    (2.5)

    (2.7)

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Unlevered Free Cash Flow

     

     

     

     

    ($34.3)

    $49.7

    $124.9

    $146.2

    $202.3

    $264.3

    $320.1

    $353.6

    $380.0

    $408.0

    $430.4

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Period

     

     

     

     

     

                        0.5

                   1.5

                  2.5

                  3.5

                  4.5

                  5.5

                  6.5

                  7.5

                  8.5

                  9.5

                 10.5

    Discount Rate

     

     

    15.0%

     

     

     

     

     

     

     

     

     

     

     

     

     

    Discounted Cash Flows

     

     

     

     

     

    ($32.0)

    $40.3

    $88.1

    $89.6

    $107.9

    $122.5

    $129.0

    $124.0

    $115.8

    $108.1

    $99.2

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Sum Of Discount Cash Flows

     

     

    $992.6

     

     

     

     

     

     

     

     

     

     

     

     

     

    Shares

     

     

              43.50

     

     

     

     

     

     

     

     

     

     

     

     

     

    Terminal Year FCF

     

     

    $430.4

     

     

     

     

     

     

     

     

     

     

     

     

     

    Multiple Of Terminal Year FCF

     

     

                   8.0

     

     

     

     

     

     

     

     

     

     

     

     

     

    2025 Terminal Value

     

     

    $3,443.4

     

     

     

     

     

     

     

     

     

     

     

     

     

    Discounted Terminal Value

     

     

    $793.7

     

     

     

     

     

     

     

     

     

     

     

     

     

    DCF Enterprise Value

     

     

    $1,786.3

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Per Share Value

     

     

    $41.07

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    % Upside From Current Price

     

    309.0%

     

     

     

     

     

     

     

     

     

     

     

     

     

    Current Share Price

     

     

    $10.04

     

     

     

     

     

     

     

     

     

     

     

     

     

    Current Enterprise Value

     

     

    $358.4

     

     

     

     

     

     

     

     

     

     

     

     

     


    Catalysts

    -          Approval for Zalviso on July 27th

    -          First analyst day in early fall 2014

    -          Latin American distribution agreement for Zalviso (likely with an upfront payment)

    -          Pricing study and guidelines (early fall)

    -          P&T Committee approvals at leading hospitals (throughout the fall and early winter)

    -          First sales of Zalviso (Q1 2015)

    -          Approval for Zalviso in Europe in Summer 2015

    -          Phase III data on ARX-04 in H2 2015

     

    Risks

    • Receiving A Complete Response Letter (“CRL”) On July 27th With No Recommendation Of Actions - A complete response letter stating Zalviso is not approved and with no recommendation of actions for approval is the worst case scenario, but a scenario with almost no chance of happening in our view.  The most likely reason for this would be that the FDA uses the Zalviso NDA as the driver for reviewing all opioid compounds.  This seems unlikely because (i) the FDA has become incrementally more comfortable with opioids given the recent fast-track approval of a take home opioid antagonist called Evzio, an auto-injectable device containing a single dose of naloxone (decreases chances of an overdoese), (ii) the fact that Zalviso is strictly for the acute-care setting which is significantly more secure than opioids used outside the hospital setting, and (iii) the significant issues with the current standard of care with IV PCA, which would only allow the continuation of less safe opioid treatments to continue and further accidental deaths.

    - Of the many possible reasons for an NDA to receive a CRL over the last 5 years, the two most common reasons cited for receiving a CRL (there can be more than one reason often times) are roughly 50% of due to deficiencies in chemistry, manufacturing and controls (“CMC”) and 50% due to deficiencies in labeling.  While ACRX management had not indicated an issue with either of these, there clearly can be no certainty that the FDA doesn’t find issues that cannot be addressed simply with a three month extension.

    - However, since Sufentanil has been around forever and is the safest major opioid and that it will be manufactured by Mallincrkodt, CDER is unlikely to have issue approving Zalviso.  On the other side of the FDA review process, CDRH, the threshold for approving a Class II device is very low.  Between 1999 and 2010, the average annual 510(k) approvals for Class II devices had been approximately 3,200.  Yes, that’s in the thousands of approvals per year.  510(k) is not an NDA, BLA or PMA where there are only a handful of approvals and with very high rates of non-approval.  The Class II devices that are turned down tend to also be due to a shody application.

    • Receiving A Complete Response Letter  On July 27th With Recommendation Of Actions - A complete response letter stating inadequate data and allowing for eventual resubmission, resulting in ACRX needing to fund an incremental study to provide more information on particular points that the FDA is concerned about.  This likely means 12 months before another PDUFA date and possibly requires, but still probably doesn’t result in additional capital being raised.  On average, a CRL with recommended actions will delay a product’s market entry for 14 months.  However, there are situations historically where a relatively benign CRL, such as with Navidea’s drug Lymphoseek, can be much faster:

               Navidea Timeline

    -   Aug 10, 2012 - Navidea Biopharmaceuticals filed NDA for Lymphoseek injection;

    -   Sep 10, 2012 - FDA issued a CRL citing labeling and facility deficiencies, and requested safety data;

    -  Oct 30, 2012 - The company resolved all the issues raised in the CRL and resubmitted the NDA;

    -  Mar 13, 2013 - FDA granted approval to Lymphoseek.

     

    • Cowen Research Report Which States Post Approval Returns 21% Negative For Biotechs – The basic claim that the Cowen biotech team makes is that looking over a large number of material PDUFA dates, the average small biotech trades up 84% in the year before, which sets up for a 21% average loss post PDUFA as commercialization starts up.  In Barrons, this Cowen analyst even mentioned AcelRx as a company that would trade lower.  Why he states this is a mystery for most investors, as ACRX has actually traded down 20% over the past 12 months, so AcelRx simply doesn’t fit the massively oversimplified trading pattern.  Also, a good deal of the stocks in the Cowen research had to raise capital post PDUFA to commercialize their product.  Again, ACRX could carry the full salesforce for 6 quarters with zero revenue coming in, so a capital raise and big dilution to valuation is exceedingly unlikely for ACRX so long Zalviso is approved.  This is a just a weak analysis on part of a small firm trying to get noticed, with no substantive backup to their claims.  Its important to note that even Cowen thinks there is a very high probability of approval for Zalviso.
    • IV PCA Has Been Around For Decades, So Docs Won’t Switch – This is the other most commonly cited bear argument, next to the Cowen study.  The problem with this is that IV PCA morphine is not a great product and that it accidently kills people all the time (eg broken pump, nurse error in programming).  First, directly relating to this incumbency issue is that Sufentanil has also been around for decades and many docs also prescribe it.  In China, it’s the main analgesic.  Second, Sufentanil has shown for decades to be faster and longer lasting than morphine, so it’s far more efficacious.  It historically has been hard to administer given how peaky it is, but Zalviso fixes that and allows for the fast acting relief which morphine is not able to provide given that it is only water soluble.  Third, Zalviso has far fewer adverse events and those events are far less serious.  In a comparator phase III study against IV PCA morphine, Zalviso had 30% less patients with oxygen desaturation of < 95%.  Fourth, the amount of nurse time required to administer an IV PCA pump is significant.  It requires two nurses to program the pump in the attempt to avoid programming errors and it constantly has alarms going off, requiring further nurse time.  Finally, in AcelRx’s hospital survey to determine penetration speed and market share, even the most doubtful subgroup (representing 19% of the total) stated that Zalviso on average could achieve a 29% market share and these specialists would test it for 7.4 months, while the eager users (representing 21% of the total) stated that Zalviso on average could achieve a 47% market share and they would test it for 3 months.  Obviously, even the low end of market share is multiples higher than our Base Case.  Altogether, while there are going to be some docs that refuse to change, the efficacy, safety and total cost data are overwhelmingly in favor of Zalviso and that will result in substantial market share gains over time and our checks with doctors would substantiate that point as well. 

    -  Using The Low End Share From The ACRX Leads To Significant Upside - 29% Market share in Year 5 for Zalviso would result in a fair value today on a 15% discount rate and 10x forward FCF multiple of $37.71/share. 

    • FDA Extends The PDUFA Date - The FDA states that they need more time to review the data and application and require an additional three months.  It is wholly possible the stock trades up on this news, as it usually indicates the FDA will ultimately approve a drug, but there are other occasions where a 3 month delay leads to a selloff in a stock.  The only reason for ACRX to potentially selloff on the news of an extension is if the Company in its press release states the reason for the extension is something very negative, like the FDA has “serious” concerns around the efficacy data in the comparative phase III study.
    • Commercialization Is Perceived To Undershoot Expectations – Bears will point out that being short small company commercial launches for hospital drugs has been an attractive strategy.  However, the pain launches by Pacira and Cadence have both gone very well.  While they were good shorts for a period of time post PDUFA (Pacira due to needing to raise substantial capital and Cadence due to ligation around the validity of their patents) both of them were highly successful in launching their products and growing sales.  The fact that ACRX will have sales reps from both companies to aid in the Company’s launch of Zalviso will only make this risk decrease in probability.
    • Greater Than Anticipated Competition – Bears on ACRX would state that much greater cannibalization of IV PCA by Pacira’s injectable local analgesic called Exparel, will result in the total addressable market size for Zalviso to be smaller than expected.  Additionally, down the road one of several experimental pain treatments could be approved and experience fast adoption, cutting into Zalviso’s market penetration as well.  However, given penetration expectations by the sellside are exceedingly low to begin with and already don’t include Europe which is an even bigger market than the US, there is little chance that the Zalviso commercial launch will underwhelm, even with the bears being partially correct on a shrinking size of IV PCA.  Furthermore, Pacira does not even state that Exparel eliminates the use of opioids in patients, it just minimizes the use in certain circumstances.

    Pain Is Complex And Needs To Be Treated With Multiple Drugs - At least ten independent neurobiological mechanisms may initiate or sustain pain. Each mechanism involves many targets, some unique, some shared.  That is why pain    specialists have come to determine that pain must be treated with a multi-modal regime of drugs that complement each other.  This is why the majority of patients with moderate-to-severe pain are provided more than one analgesic.

        • One scientific paper abstract sums up the situation very well and why more and more, multiple pain drugs will be utilized: “Persistent postoperative pain can cause long-term disability. It is the result of complex neurohormonal effects that can be prevented using preemptive analgesic therapy. Multimodal pain therapy can result in additive or synergistic analgesic effects and minimize adverse drug effects. Limitations of systemic opioid analgesics given by patient-controlled analgesia include adverse effects, a short duration of action, and nocturnal hypoxemia. Limitations of local anesthetics include unwanted motor blockade, which can interfere with postoperative mobilization and rehabilitation efforts. Inadvertent administration of analgesics into subarachnoid, subdural, or vascular spaces is a potential problem with the epidural route. Use of this route may be limited by the perioperative use of prophylactic anticoagulation.”  So if you believe this, it basically states that the best means of treating most postoperative pain is through the use of several different pain control medications acting together.  Zalviso will gain share, the question is how much and how fast.
    • Non-approval in Europe -  Though this seems highly unlikely as the bar for approval in Europe is even lower as the approval will focus more squarely on the drug component of Zalviso, Sufentanil, which is also a well-established generic in Europe.  This is why Grunenthal felt very comfortable making a $30 million upfront payment to gain exclusivity for the European distribution rights and was willing to put in another $5 million for just filing the application for Zalviso in the EU.

     

    We currently own stock in AcelRx, along with certain friends, advisors, affiliates and peers and actively trade the stock and the corresponding options.  This is a very fluid situation and one needs to do significant amounts of their own due diligence before they either buy or short ACRX.

    (note: multiples in the box at top of page above the write up reference 2016 and 2017 respectively, not 2014 and 2015).

    I do not hold a position of employment, directorship, or consultancy with the issuer.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    • Approval for Zalviso on July 27th.
    • First analyst day in early fall 2014
    • Latin American distribution agreement for Zalviso (likely with an upfront payment)
    • Pricing study and guidelines (early fall)
    • P&T Committee approvals at leading hospitals (throughout the fall and early winter)
    • First sales of Zalviso (Q1 2015)
    • Approval for Zalviso in Europe in Summer 2015
    • Phase III data on ARX-04 in H2 2015

    Messages


    SubjectRE: RE: CRL
    Entry08/19/2014 12:58 PM
    Membercompass868
    Post the CRL, we still think ACRX is a very compelling opportunity.  Clearly we overestimated the chance of a first review approval in the context of the FDA having a very high workload.  With that said, if not for the two private companies that had a PDUFA date within the same few day period as ACRX (bc the companies were private, no one knew there what the PDUFA dates were), Zalviso would likely have received a 3 month extension and not a CRL.  The CRL had very specific points and none of them seem difficult to overcome in management's opinion.  Of the 12 items mentioned by the FDA in the CRL, the company had addressed 9 in amendments which they think solved the issues, but had gone unread by the FDA, as the FDA apparently stopped reading company comments 40 days prior to the PDUFA date.  The best piece of news was the Company does not need to do any more clinical testing which would have delayed resubmission of the NDA by 12-18 months.  With only three items in the CRL that need new work on behalf of the company to fix, resubmission should be by year end.  Of those three items needing more work, one, a question around a 24 month shelf the company wants on the label  (vs the 12 months the originally asked for in the NDA) the FDA specifically said was not an item that impacted approvability.  Of the other two, one was to change instructions for patients and nurses when pills are lost (they lost 7 of 30k pills dispensed in phase III trials) which will require a couple hundred people testing the device with the new instructions over the course of a few days, which should be wrapped up by the beginning of November.  The other CRL item is to reduce an optical error rate on the device which caused the system to shut down and the nurse to switch in a new cartridge of pills, which is likely to satisfy the FDA.  The company has already lowered the error rate since the CRL was given and have tested their fix.  The lack of severity or complexity of the CRL itemized issues would suggest, that on the resubmittal, the odds of approval are very high.  Moreover, while this resubission will delay approval by 9 months (+/- 2 months) the company has enough cash to last it until they start selling Zalviso.  In the mean time, the company will continue to market sufentanil to doctors and will be able to reduce the time of commercial launch post approval, down from 6 months to about 2 months, which will make up for some of the delay.  The next catalyst is the Type A meeting in late Septemeber when the company and the FDA sit down to discuss the CRL.  Post the meeting, the company will issue a press release which will confirm the timing to resubmission and the work it will take to make the resubmission have the highest odds of approval.  Obviously, if the FDA states that certain items in the CRL need to have substantially more work done than the company believes, the resubmission could be pushed into Q1 2015 vs December 2014 as the company currently estimates.  Another big positive is that the company mentioned on their Q2 conference call that the FDA pre-approved their REMS (this is the labeling, handling and instructions to mininize risk for a drug or device), post the CRL being issued.  REMS is the last thing CDER (the drug side of the FDA) will work on prior to approval, and given management stated the FDA had few comments, it means that the REMS is something that is very favorable to the company.  The two implications for this is that (i) a good REMS helps with commercialization as a bad REMS could make it so onerous on a doctor, nurse or patient to use the product that there will be limited demand for the product and (ii) the fact the FDA continued to work on the NDA even post the CRL to finalize the REMS means that CDER thinks Zalviso is approvable, as the FDA usually stops any and all work on an NDA once a CRL is delivered.  Our upside target actually went up post the CRL as approvability in our opinion has gone up, warranting a lower discount rate.  By the time approval happens in the US, the company will also be worth more than if was approved in late July of this year, given that the EU approval will be imminent and the phase III trials of ARX04 will be nearly complete and soon after ACRX will have a second drug submitted to the FDA.  Still risk that we are missing something that the FDA is highly concerned about, but that risk of unknown unknowns should diminish significantly post the Type A meeting, as that is the meeting where the unknowns come out.  We are going to be long into the Type A meeting, as we see it as a significant derisking event, but there is always a chance, no matter how small, that something new and unexpected crops up at the meeting that would dramatically change our view on AcelRx's intrinsic value.

    SubjectRE: RE: RE: CRL
    Entry09/26/2014 02:38 PM
    Membermm202
    compass, love to hear your thoughts on ACRX post the FDA requirement that they now have to resubmit for approval of Zalviso? 

    SubjectRE: dual product
    Entry09/26/2014 03:11 PM
    MemberAggie1111
    Risk-Reward seems to have turned favorably to anyone willing to sit for a year at this current price. Any thoughts?

    Subjectcompass-ACRX
    Entry10/14/2014 10:53 AM
    Membermajic06
    Been a few weeks, any thoughts?  I'd agree with Aggie that R/R seems pretty good here if willing to hold for the next 12 months.

    SubjectRE: RE: RE: RE: CRL
    Entry10/15/2014 04:47 PM
    Membercompass868
    Met with management recently and risk reward is very compelling here, but admit, we thought that before and it didn't turn out that well.  However, having more information post the Type A meeting with the FDA pointed to a significant decrease in uncertainty.  First, we know now that the FDA only wants ACRX to hit a certain threshold for the optical error rate in bench testing and that number is not zero.  Bears would say that the FDA wanted a zero rate, which now we know is simply not true.  ACRX and the FDA have agreed on a number.  This in our opinion was the biggest cause for concern, as maybe the FDA would pick an optical error rate that the device, even with significant reegineering would not be able to hit.  Company feels confident they can get well below the FDA accepted error rate, but the FDA will have to be able to recreate the results in their own bench testing post the resubmission, so there is still some risk.  Second, the lost tablet issue is also not a game stopper, something the bears have also said to be the case.  Yes, during trials, ACRX had 9 tablets out of tens of thousands dispensed, 5 to the same person.  However, the FDA thinks this as more of a training issue (patient and nurses) and cares about it due to the analgesic gap it creates, which IV PCA has very high rates of, so the FDA accepts that there will always be some issues.  ACRX will do the new training writeup and test it for a month with nurses and patients to make sure the instructions are good.  Additionally, the FDA wants to approve the protocols for both of the two issues above which were stated in the CRL, which is  a good thing.  Both of the issues seem pretty easily solved, but there was a risk that management designed testing for both that after submitting the new data, the FDA shoots down because they didn't think the tests were conducted properly.  That risk is now eliminated, as the FDA will approve them.  Yes, it delays resubmission of the NDA by 2 months, but 2 months on a stock that could go up 4x over 24 months if Zalviso is finally approved and the commercial launch goes well, not a big deal to us.  Lastly, the company does not need to raise any equity.  They have more credit lines, they will get $15m next year so long as Zalviso is approved in Europe, and Hercules still has an obligation to provide more loans to them under ACRX's credit facility.  That and all the cash, so long as Zalviso is approved, raising equity is a not going to happen.  Then for all the sellsiders who say this thing is dead money with no catalysts between here and the final approval date, they are wrong.  Management is going to be releasing information and data as the FDA approves the protocols, on commercialization progress, new Zalviso distribution agreements in Asia and LatAm, announce new milestones in the phase III trial for ARX-04, and the list goes on.  None on their own are huge, but together, the amount of risk in the situation will continue to decrease.  Doctors we have spoken with really like this product, nurses love it even more, and no one if given a choice between some pain killer that takes 45 min to really kick in vs like 10 min, would ever chose the former, especially after a very painful surgery. This will eventually drive wide spread adoption and the studies comparing IV PCA and Zalviso, are compelling and stastically significant.  Lastly, the market sizing for ARX-04 is even bigger than management originally believed.  This could easily be $150-$300 million sales product, with a launch in 2016. A two product company out 2 years that only has a market cap of $300 million is far too low and as the situation derisks, this stock should continue to move higher. 

    SubjectRe: CEO Departure
    Entry02/27/2015 08:17 PM
    Membercompass868

    Yes, but it was not for business reasons from my understanding.  Having talked to many people, it was obvious that one board member wanted change and the CRL provided a reason to do so, even if it wasn't really King's fault.  We suspect there may also have been one other non-business related reason which lost King his support of a board that genuinely liked him, but we strongly believe it had nothing to do with Zalviso or the fundamentals/outlook of/for the company.  In end, there are very few reasons to suddenly dismiss a CEO, but yet then retain them for several months while a company searches for a new CEO.  This provides us comfort that while it was unfortunate to lose the CEO, as we think he would have been great at launching Zalviso and later ARX-04, there was nothing materially relevant to the stock in the decision to go in another direction with a new CEO.  King will easily find a new job, because he is good biotech executive in the hospital space, but we also think the new CEO will probably be just as capable.  We likely find out the new CEO sometime over the next 2-3 months.  This should prove to be a catalyst for the stock.


    SubjectRe: compass - any new thoughts?
    Entry02/27/2015 08:38 PM
    Membercompass868

    Yes, fully on track for end of March submittal.  Maybe it runs into the first week of April, but that will be to do with the lengthly process of putting all the data and paperwork together in the appropriate format and the need to have their legal team and consultants do a final review.

    The big issues were to have the human factor testing protocols approved by the FDA (which they were just recently) and finalizing the patient setting testing of the new instructions (ACRX already finished the testing in the non-hospital setting, ie a room full of nurses and theortical patients).  THe bench testing protocols had been approved a while back and that testing is done.  ACRX achieved an error rate substantially below the agreed upon level with the FDA.  Those were the two main items to address in the resubmission, and management sounds confident of the deadline.

    This is probably one of the least informed set of shorts we have ever come across.  We agree, the size of it is mind boggling for the fundamentals of the company.  Many biotech investors have ACRX as part of a broader short basket against their longs.  To the credit of the shorts, up until this year and post the CRL in July, its been a fabulous short against any credible biotech long.  With that said, we also know many of the shorts will simply cover the name once it starts working as they don't have a fundamental reason to short it prior to the PDUFA data in Q3.  We think as the PDUFA date approaches, certain investors will make a bet that ACRX gets another CRL, but it gets a lot trickier this time around, as the EU approval could actually come before the PDUFA date and in Europe, where the device is not as relevant in the approval process, sp the approval likelihood is even greater in the EU.  Sufentinal is one of the most efficacious and safest opiods on the market and has been around literally for decades, hence why we have strong conviction in seeing Zalviso approved int he EU.  Sine we belive the EU will likely approve Zalviso and if it happens prior to the PDUFA, that would blow the shorts up.  Some shorts may see the risk of this happening as too great, further limiting short pressure leading into the PDUFA week.  Its also possible the FDA aprpoves it prior to PDUFA, because they have already reviewed most of the information the first time and there is limited new information being provided with the resubmission.

    Additionally, the final study for ACRX's next product, ARX-04 is going to be almost complete by the PDUFA date.  ARX-04 at likely a $100-150 million in sales produce and would be valued at 2x the current market cap, as its has great long term IP, and 95% gross margins with a very small sales team to support it.  There would be a large number of buyers for the product and with the Department of Defense now paying for the accelerated Phase III trials, moving this product to filing will cost AcelRx almost nothing.

    We believe that the stock moves upwards to $14 prior to PDUFA given that (i) the odds of approval this time around are very high in our opinion, (ii) the fact filing for ARX-04 will be only a few months following the Zalviso PDUFA and (iii) that European approval will come very close to the PDUFA date and the odds of approval in the EU are also very high.

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