ACRX Falls on Financing, Creating Opportunity Ahead of Phase III Data

AcelRx (ACRX) will issue and sell up to 11.5M shares of common stock in the coming weeks, just months ahead of a pivotal period for the maker of post-operative analgesics. AcelRx expects to report the results of two Phase III trials for its lead candidate the Sufentanil NanoTab Patient Controlled Analgesia (PCA) System in the first quarter of 2013 - trials that, if positive, should support submission to the FDA for regulatory approval. The company expects net proceeds of around $40M from the offering - at an assumed share price of $4.16 - if the underwriter’s over-allotment options are fully exercised, increasing the company’s cash and equivalents from $23M at Sept. 30 to approximately $60M. Importantly, AcelRx has yet to price the offering, and their S-1 estimates are based on the stock’s December 3 closing price; we expect the offering to price below this rosy estimate. Nevertheless, the upcoming Phase III results and the market opportunity for a safe and effective IV morphine alternative suggest that ACRX may begin to climb higher into the first quarter of next year, and weakness offers an entrance point well in advance

Pricing yet to be announced; determinant of near-term price action. Shares dipped to $3.55 on Wednesday (-9%) as investors reacted to the impending dilution, however, details of the offering’s price will be highly suggestive of share movement in the near future. As a comparator, Supernus Pharmaceuticals (SUPN) announced a proposed stock offering on November 26th, causing shares to fall roughly 5% to $11.39. Three days later, when the company announced a severely discounted $8.00 per share offering price (SUPN closed the previous session at $9.83), the stock plummeted more than 20% to the $8.00 mark. The question then remains: where will AcelRx price the offering? Pricing is determined by the demand for, and potential of, the particular stock; i.e. can we make money from where we buy the shares? In the case of Supernus, it appears that large investors were unwilling to pay any higher than the 20% rebate to market price, a trend that began in May when the company went public at $5 per share, a marked discount to original hopes. ACRX has a similar history, pricing its IPO well-below expectations last year. On Thursday, ACRX fell another 8% to $3.33, and it appears that investors are pricing in a worst-case scenario and preparing for a notably discounted offering. Should the offering price close to current shares however, we expect ACRX to rally in relief.

A large post-operative pain management market. The NanoTab PCA System is a handheld device designed to allow patients to self-administer ‘NanoTabs’, a dissolvable formulation of the synthetic opioid analgesic sufentanil. Sufentanil NanoTabs are delivered sublingually (under the tongue) and providers can electronically limit dosing. Similarly, traditional IV PCA morphine allows patients to control the administration of analgesics as necessary, but the intravenous administration and side effects of morphine make it an imperfect therapy. The NanoTab system proved non-inferior to standard IV PCA morphine in a Phase III study that reported top-line data in mid-November, and both nurses and patients reported greater satisfaction with AcelRx's system. If the Sufentanil NanoTab PCA System receives approval from the FDA (New Drug Application expected mid-2013), the market for post-operative analgesics is immense and offers significant revenue potential, even if AcelRx achieves only marginal penetration. The post-operative analgesic market topped $5.9 billion in 2010 and is expected to grow at a CAGR of 3% through 2017. Including the rest of the company’s pipeline, AcelRx could potentially address a substantial portion of the total pain management market, which is expected to reach $35B by 2017.

Stock is cheap for a Phase III candidate ahead of catalysts. As the stock currently trades at a market capitalization of just $76M, we see considerable upside in the long-term if the NanoTab system proves safe and effective in further clinical trials. Due to report in the first quarter of next year, two Phase III trials compare the product to placebo following major joint replacement surgery and abdominal surgery. While we find it odd to compare the pain medication to placebo for efficacy purposes, the prior Phase III trial offers evidence of non-inferiority, and safety/tolerability will be more important indicators in the upcoming results. Additionally, sufentanil is a proven and well-understood analgesic mechanism, suggesting few problems in provider adoption.

The stock rallied considerably over the last month, gaining more than 60% in the two weeks following the top-line non-inferiority data. The ensuing sell-off this week has all but wiped out those gains, and despite uncertainty about the impending pricing, the continued declines on Thursday may come close to fully pricing in the announcement. A pricing well below current share price will likely pin the shares to that valuation for the near-term, but as Phase III data approaches, the stock should begin to climb. At the moment, it may be safest to wait for the company to finalize the current offering and gauge an entrance point following, but if the stock prices insignificantly below current share price, we expect a relief rally. Notably, the company burned roughly $7M quarterly through 2012 and anticipates that expenses will increase in the next six months as Phase III trials continue; AcelRx should be well-capitalized to reach upcoming trial and regulatory milestones. ACRX's weakness following the financing offers an entrance opportunity ahead of value-driving events.