|Shares Out. (in M):||45||P/E||0||0|
|Market Cap (in $M):||120||P/FCF||0||0|
|Net Debt (in $M):||-60||EBIT||0||0|
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Summary of Opportunity
AcelRx's stock is severely depressed due to mis-execution a couple years ago, which has driven significant shareholder turnover in the past year. The precipitous stock price drop has driven tax loss selling and a loss of analyst and investor coverage.
But the Company has made significant progress in this time and submitted a new drug application last month. The author believes the stock may be worth in excess of $10 per share in less than two years' time.
AcelRx is a pharmaceutical company developing two novel devices for moderate-to-severe pain relief in medically supervised settings. The company’s devices use an already approved opioid, sufentanil, in a new formulation that allows for intramucosal absorption sublingually (i.e. absorbs into the body under the tongue). AcelRx’s patented sufentanil formulation is novel and unique, but a more detailed discussion of the pharmacokinetics will be reviewed later.
AcelRx's patented sufentanil tablet:
The company’s first potential device for approval, DSUVIA (formerly ARX-04), is a single dose applicator of the sufentanil tablet, delivered under the tongue for rapid absorption, eliminating the need for intravenous (IV) delivery.
The second device, Zalviso, is a 40-dose dispenser of sufentanil tablets, primarily used for post-surgical settings in which the patient will stay in the hospital for multiple days after a surgery and requires regular doses for pain relief. This type of device is referred to as patient controlled analgesia (PCA), and the current standard of care is an IV delivering morphine or hydromorphone with the push of a button.
(Note that ACRX was written up nearly three years ago prior to the FDA's rejection of the company's first attempt to get Zalviso approved. The upside case for Zalviso, as described in the prior write up, is still in tact if the product is ultimately approved.)
The company has a stated sales target in the United States of over $1.1 billion for DSUVIA and over $440 million for Zalviso. At the current anticipated product pricing and cost of manufacturing and distribution, gross margins would be in the 70-80% range, generating over $1 billion of annual gross profits when both products achieve their market potential.
AcelRx submitted a new drug application for DSUVIA on December 9th, 2016, and plans to re-submit its drug application for Zalviso by the end of 2017.
The author believes that DSUVIA, if approved, may ultimately have a value to an acquirer in excess of $750 million, and Zalviso, if approved, may have a value in excess of $500 million. Further details for these estimates is provided in each drug's respective write-up below.
Opioids have generated a significant amount of negative press in recent years, and some investors view opioids as “off limits”.
First, investors should recognize that opioids are by far and away the most efficacious, heavily researched and well understood product on the market for the treatment of moderate-to-severe pain, and given there are no significant products on the horizon to displace them, opioids will likely continue to play an important role in pain relief for at least the next couple decades.
Second, there is a critical distinction between opioids used in a medically supervised setting (i.e. in a hospital) and opioids prescribed for private consumption (i.e. prescriptions for consumers to take at home).
The current opioid problem is driven by over-prescribing opioids to individuals for use in the home, and then many of these individuals reselling their prescriptions on the black market. The use of opioids within a hospital setting can be monitored and controlled, and the abuse risks are significantly less compared to opioids that are dispensed en masse over the counter.
While some may argue that any use of opioids can lead to addiction, it is difficult to carry that argument much further if you imagine a world where opioids are simply not available outside of hospitals.
I believe the opioid debate needs to bifurcate these two situations, and the focus needs to be on reducing prescriptions of opioids for use in the home.
Stock Price & Trading History
A review of the stock’s trading history will help investors understand why the opportunity today exists.
The company went public at $5.00 per share in 2011, showcasing the commercial opportunity of Zalviso. DSUVIA (then called ARX-04) and a couple other related products were very much in the backseat and barely worth mentioning at the time.
Then CEO Richard King, who was good at selling and promoting the company’s story, told investors to expect Zalviso approval in 2014 with commercialization starting shortly thereafter.
Indeed, after the company filed its New Drug Application with the FDA in September of 2013, AcelRx had already begun to hire a sales force to lay the groundwork for commercialization.
The stock price during this time hovered around $10-12 per share, implying a market cap of $450-500 million at the time (important note: virtually all this value was based on the success of Zalviso, as the other products were an afterthought at the time).
In July of 2014, the FDA rejected the company’s application. The stock fell over 40% that day to less than $6.50 per share.
What followed from here was both a regulatory process management disaster and investor communication disaster that led to a total abandonment of the company by the stock market.
As stated earlier, then CEO Richard King was a great promoter and salesman for the company’s story. He was not prudent at managing the regulatory process or the risks of new pharmaceutical product development.
The FDA rejected the Zalviso new drug application on the basis that Zalviso exhibited a dispensing error rate of 8% during its clinical trials of 768 patients. The most common error was the device jamming, and the optical system that tracks safe delivery recording an error and locking the device. In its rejection, the FDA asked AcelRx to reduce the error rate and clarify a couple other more basic issues relating to instructions and patient monitoring.
In response, the company told investors the FDA’s concerns could be addressed in the laboratory with bench testing and would not require an additional clinical study. Further, on its second quarter 2014 conference call, just a month after receiving the rejection letter, the company told investors to expect a re-filing of the application in just a few months - by the end of 2014.
Investors remained relatively optimistic and the stock returned to the $7-8 range, as it seemed the dispensing errors would be easy to correct and only delay the commercial launch by a few quarters.
Then, just a month later on September 26th 2014, AcelRx issued a press release stating that the FDA was not satisfied with the company’s plans, and the application would be delayed until at least the first quarter of 2015 and possibly longer. The stock fell 20% to fresh multi-year lows, below $5.50 per share.
On November 5th, 2014, AcelRx announced the departure of Richard King. The stock initially fell 10%, but recovered those losses and actually returned to over $9 per share, as perhaps the company would be better off with different leadership.
And now for the final nail in the coffin: former CEO Richard King had insisted to investors that an additional clinical trial would be unnecessary and that the FDA’s concerns were easily solved in the lab.
On March 9th, 2015, the company issued a press release stating the FDA required an additional clinical trial. The stock fell nearly 50% in two days’ time, below $5 per share.
A clinical trial alone would take at least another year, cost more money, and assuming success, approval would be another six months longer.
The stock has been dead money ever since. Anyone that had gotten involved in the high single digits on the hopes of Zalviso’s approval spent the rest of 2015 and 2016 selling their stock and taking advantage of the tax losses.
The sell-side either stopped covering the stock or relegated coverage to junior analysts.
Today, the market cap is less than $120 million, the stock trades for less than $3 per share, and the float is less than $75 million. It is simply not on anyone’s radar anymore.
The company’s products are all based on the opioid sufentanil. Sufentanil was discovered shortly after fentanyl, and when delivered via IV has very similar characteristics (i.e. very potent but short acting). As a result, despite sufentanil’s approval by the FDA in 1984, fentanyl has been the go-to standard of care for situations requiring strong pain relief in a short period of time.
Currently, the primary three opioids used in the hospital for moderate-to-severe pain are fentanyl, hydromorphone (also called Dilaudid) and morphine.
All of these are generally administered via IV in the hospital. Fentanyl is the strongest of the three, but also the shortest acting. Morphine and hydromorphone are often used interchangeably, with hydromorphone being the stronger of the two.
But sufentanil has unique characteristics that have been largely overlooked by the pharmaceutical industry. (For further review see “Sufentanil NanoTabs” on pages 68-70 of the IPO S-1 here: https://www.sec.gov/Archives/edgar/data/1427925/000119312510259081/ds1.htm)
First, it has the highest therapeutic index of the major opioids. Therapeutic index is a ratio of effective dose over lethal dose, and is a proxy for the safety of a drug. The therapeutic index of sufentanil is over 25,000, while fentanyl is 277, hydromorphone is 232, and morphine is around 70.
Second, sufentanil has no active metabolites. Active metabolites break drugs down into various by-products, and even if the drug itself is safe, the by-products can often create issues for a drug’s safety profile. As an example, the liver breaks down morphine into various by-products, one of which can cause problems with a patient’s liver or kidneys.
Third, published studies have demonstrated that sufentanil produces significantly less respiratory depressive effects relative to its analgesic effects compared to other opioids. This is important because one of the greatest risks with opioid administration is respiratory depression or failure.
Fourth, sufentanil is 5 to 10 times more potent than fentanyl. Note that this does not mean that a patient is going to have 5 to 10 times the pain relief. Instead, the dosage is adjusted to control for safety and efficacy, and the result is that a very tiny amount of sufentanil is required to achieve the desired effect.
Finally, sufentanil is the most lipophilic of the major opioids, meaning it absorbs into the body more easily when administered sublingually. Interestingly, and as better described and illustrated in the S-1 (link above), when sufentanil is absorbed by the body in this manner, it has significant favorable characteristics relative to IV administration – the peak concentrations in the body are more muted and the pain relief lasts longer.
As referenced earlier, AcelRx has patented this sublingual formulation of sufentanil, and the patents last through 2027-2030. There are currently no other drugs on the market (nor in clinical trials that the author is aware of) that have a similar safety and efficacy profile that can be administered without an IV.
DSUVIA (formerly ARX-04)
While AcelRx, under former CEO King’s direction, was focused on the development and commercialization of the multi-dose dispensing Zalviso, the United States military took an interest in a single-dose version of sublingual sufentanil.
The current standard of care on the battlefield for wounded soldiers is to deliver morphine via a needle, usually intramuscularly (IM). Due to the nature of battlefield situations, it is very difficult to administer IV or IM opioids to wounded soldiers. Further, if the soldier is in shock, IM-delivered drugs are ineffective due to lack of circulation to the muscles.
In 2011, the Department of Defense provided AcelRx with an initial grant to fund clinical studies of DSUVIA. This DoD support was renewed in 2015, and to date the military has provided just under $20 million of funding to the Company for DSUVIA’s development, and has contracted to purchase the product when and if approved.
Pain relief ranks high on the military’s priority list for battlefield trauma, as Post-Traumatic Stress Disorder (PTSD) is a serious problem for combat veterans. Research suggests inadequate pain relief is a significant contributing factor to PTSD. DSUVIA helps address this problem.
In addition to the research that speaks to the safety and efficacy of AcelRx’s sublingual sufentanil formulation, the military asked AcelRx to measure whether sufentanil caused cognitive impairment – an important consideration for soldiers. Clinical trial SAP302 conducted by AcelRx showed no significance in cognitive impairment. This is an important marketing data point for hospital emergency departments that want to provide opioid pain relief to a patient but not ultimately admit them into the hospital.
In total, AcelRx’s clinical program for DSUVIA included over 900 patients, and the company submitted the new drug application to the FDA last month. The application falls under the category of 505(b)2, meaning it is seeking approval not for a new drug, but a new formulation of an existing approved drug. Typically (but not always) approval is easier using this application process, as much of the safety and efficacy is already well known and well researched (as is the case for sufentanil).
The company has laid out the commercial plans for DSUVIA on slides 19-27 of this presentation published a couple weeks ago:
Briefly, the company hired Quintiles/IMS Consulting Services to analyze the marketplace and surveyed over 479 healthcare professionals across emergency medical services (ambulances), emergency departments, and ambulatory surgical centers.
Quintiles/IMS estimates the drug’s peak market potential, assuming a ~$45 per dose price point, is $1.1 billion.
At AcelRx’s analyst day in December, the company had an expert panel on Emergency Medicine, and one of the panelists was Colonel John Holcomb, MD – one of the leading trauma surgeons in the country (he treated Rep. Giffords, AZ after her gunshot wound). While he has no economic interest in AcelRx, he has been a promoter of DSUVIA, touting its potential benefits to trauma victims, both in domestic emergency medical services and in military settings. Interestingly, when the company displayed the chart showing the expected number of patients that would ultimately use DSUVIA, Col. Holcomb commented matter-of-factly “I think those estimates are too low.”
AcelRx and Quintiles/IMS’s estimate of $1.1 billion is the result of more of a top-down market approach supplemented with surveys to validate forecasts. The analysis begins with looking at the total patient populations in Emergency Medical Services, Hospitals, Ambulatory Surgical Centers and Offices that present with moderate-to-severe pain, and then estimating what percent of those patients may ultimately receive DSUVIA. The company has stated it targets slightly less than a 10% share of these cases.
The author has constructed more of a bottoms-up analysis for the emergency department using data available specifically on opioid usage.
Emergency Department Analysis of Total Addressable Market for DSUVIA
Each year, around 110 million adult patients go to the emergency department. Of these, just over 50 million present with moderate-to-severe pain. About 70% of these patients with moderate-to-severe pain end up receiving opioids, or around 35 million patients.
Many of these patients come to the ER with broken bones, fractures, sprains, joint dislocations, contusions, lacerations and burns.
Opioids in the emergency department are currently delivered orally or via an IV. The common oral opioids are acetaminophen-hydrocodone (i.e. vicodin) and acetaminophen-oxycodone (i.e. percocet) and the common IV opioids are morphine and hydromorphone (dilaudid).
Oral opioids have two key drawbacks relative to DSUVIA:
1) Doctors prefer not to give oral medication if an easy alternative is available, because if a patient has to have an operation, liquids (i.e. water to swallow the pill) should not be consumed.
2) Oral opioids take longer to begin relieving pain than DSUVIA.
Further, IV opioids have key drawbacks relative to DSUVIA:
A) Setting up an IV station takes several minutes.
B) Setting up an IV station costs a lot of money (around $140 per slide 24 of Jan 2017 ACRX corp presentation, but note that IV pumps, which cost around $37, are a reusable item).
C) A patient receiving IV opioids requires a higher level of monitoring and supervision.
D) DSUVIA has been shown to have no significant impact on a patient's cognitive function, likely leading to shorter length of stay for patients that will not ultimately be admitted to the hospital.
E) Using DSUVIA in place of IV opioids will likely free up significant incremental resources within the Emergency Department.
Additionally, of all patients that receive an IV with opioids, roughly 55% of these patients are never admitted to the hospital. Most of these patients are prime candidates for DSUVIA, and this population is around 10 million patients per year.
So the total current market for opioids in the emergency department is over 35 million units per year. For oral opioids (which represent about 20 million units), the only argument against DSUVIA is price. DSUVIA will likely be priced at $40-50 per dose compared to $5-10 for oral opioids.
IV opioids, which represent about 15 million units, only make sense over DSUVIA if a patient also requires hydration or CT contrast (iodine). Even in these cases, an initial dose of DSUVIA can make sense if the emergency department is resource constrained and setting up the IV station cannot be done quickly.
Pacira Pharmaceuticals: An Existing Case Study of Commercializing a New Hospital Pain Medication
AcelRx plans to hire a sales force of 60 sales reps to cover the majority of hospitals in the United States. Indeed, of the emergency department patients referenced above, 84% of these are in urban areas. It should be quite easy for AcelRx’s sales force to cover most of the potential addressable market.
Luckily for AcelRx, a prior company has already developed a blueprint for how to build a sales organization to roll out a new pain medication for sales in to medically supervised settings.
Pacira Pharmaceuticals (ticker: PCRX) developed a new drug for local anesthesia after routine knee and hip surgeries called Exparel. After approval of their drug in late 2011, Pacira contracted with Quintiles to hire a sales force of 60 sales reps to start signing hospital accounts to market their drug to.
What follows below is a table of the actual quarterly hospital accounts signed by Pacira’s sales force:
1Q 2012: Exparel drug launched
2Q 2012: 428 total accounts signed (roughly 7 accounts per sales rep)
3Q 2012: 628 total accounts signed
4Q 2012: 819 total accounts signed
1Q 2013: 1,065 total accounts signed
2Q 2013: 1,435 total accounts signed
3Q 2013: 1,732 total accounts signed
4Q 2013: 2,106 total accounts signed
1Q 2014: 2,452 total accounts signed
2Q 2014: 2,815 total accounts signed
3Q 2014: 3,062 total accounts signed
4Q 2014: 3,293 total accounts signed
As illustrated above, it should be quite feasible for AcelRx to sign up most of the major hospital accounts in the United States in less than 3 years’ time. This coverage should allow AcelRx to market to over 80% of the total potential addressable market.
Given the safety and efficacy characteristics of DSUVIA, combined with its ease of use and economic cost profile relative to the current standard of care (IV opioids), I believe that DSUVIA will take meaningful market share in less than five years’ time.
The above bottoms-up analysis focused on Emergency Medical Services only. The company estimates that EMS will represent about 1/3 of the total market potential for DSUVIA. Unfortunately for independent analysts, it is much more difficult to gather accurate information to construct a bottoms-up analysis of the potential addressable market in the hospital and ambulatory surgical center settings. The best data point available is 7.2 million outpatient surgeries occur each year in the hospital, and presumably DSUVIA would be a good treatment for pain post-surgery for patients that are going home that day.
Further details and AcelRx’s view of the total addressable market for moderate-to-severe pain is available on slide 21 of their January 2017 corporate presentation filed with the SEC on January 9th, 2017 on form 8-K.
Financial Modeling DSUVIA’s Revenue, Gross Profits and Operating Profit Potential
The model below uses a similar sales force build out and new account growth that Pacira experienced. I drop the price of DSUVIA by 5% when the total market share exceeds 10%, and a further 5% when pentration exceeds 15%.
The cost to manufacture is currently around $5 per unit, but the company is commencing the commissioning of a manufacturing facility in the first half of 2017 that will be ready by the end of 2018, and will lower the total cost per unit to $2 per unit.
The cost of the sales force is fairly standard at around $250,000 a head. The other costs were estimated using other companies' (such as Pacira's) experience.
Finally, note the DCF is on pre-tax earnings. Everyone has a new opinion on taxes, so I've left this variable out so everyone can plug in their own estimate.