AcelRx Pharmaceuticals To Submit NDA By End Of September And May Be Acquired Soon Print E-mail
By Scott Matusow   
Friday, 20 September 2013 07:47

Recently, we wrote a bullish piece on Halozyme (HALO) because we like its risk to reward ratio along with a good business model, significant insider buying, and strong management. Additionally, Halozyme is to present more extensive data on it pancreatic cancer therapy at the 32nd European Cancer Congress at the end of this month. As we mentioned in our Halozyme article, it's very rare that we come across a speculative biotech company that we feel warrants a longer-term hold. It is hard to find these companies because we not only look for an undervalued company with a deep pipeline, but also strong management that is driving shareholder value.

We feel that AcelRx Pharmaceuticals (ACRX) warrants a close look by both longer-term investors and shorter-term catalyst traders. The major difference between Halozyme and Acel is that we have been hearing some strong acquisition rumors concerning Acel, much like we heard about Obagi last year. The rumors on Obagi turned out to be correct, as the company was sold last year to Valeant (VRX) for $24 a share. We believe there is merit to the current rumors surrounding Acel, and will detail the reasons why further down in this article.

  • Technology: ZALVISO Sublingual Sufentanil Nanotab System

Acel is developing Zalviso, which is designed to address intravenous patient controlled analgesia (IV PCA) problems, which can cause harm following surgery. This includes side effects of the invasive IV route for morphine delivery and inherent potential programming and delivery errors associated with the complexity of infusion pumps. Zalviso uses the generic pain medication sufentanil, which is a common anesthetic agent. The difference is in the method of delivery through AcelRx's patented NanoTab technology. Patients receive their dosage of sufentanil sublingually (under the tongue) through this system, instead of the traditional IV drip. AcelRx emphasizes that sublingual delivery of sufentanil through its Nanotab system, which allows for more prolonged plasma levels relative to IV, a lower maximum concentration, as well as a more consistent concentration during dosing.

The post-operative pain market in the United States, Europe and Japan has been growing steadily over the last few years and is expected to reach $6.5 billion by 2018. Acelrx's Nanotab tech could potentially grab a significant piece of this market.

AcelRx has been studying its Sufentanil Nanotab (patient-controlled analgesia) system in several clinical trials for the treatment of acute and breakthrough pain, particularly in a post-operative hospital setting. Three Phase III trials have been completed rendering excellent results. Top-line data from the final pivotal trial treating pain after knee or hip surgery was released in May.

Phase III data was impressive in several ways. Patients experienced better, longer lasting, and more complete pain relief after orthopedic surgery. Additionally, nurses reported that it was much easier to use the Nanotab system. Traditional IV PCA is known for its confusing administering program and patient deaths have even resulted in a small percentage of cases.

The system also eliminates the need for and IV, which decreases patient mobility within the hospital, as well as increasing the chance for IV-related infections. These are huge advantages for both patients and nurses.

As for patients, there are meaningful advantages to using the Nanotab system over an IV PCA. Most importantly, sufentanil provides a faster onset of pain relief. Morphine is associated with some very nasty side effects, but those side effects have been reduced drastically with the use of sufentanil because it is a lot more potent and has much better sedative properties.

Phase III data showed statistical significance in all of these areas, while also reducing adverse effects. Not only did Phase III data show a prolonged relief of pain, but also a more durable relief with fewer gaps in between dosing.

  • Catalysts

Since the company produced positive Phase III data, they are now expecting to file a New Drug Application (NDA) in the third quarter of 2013. According to AxelRx CEO, they expect to file the NDA very soon:

We are now in the middle of putting together our New Drug Application, our NDA, to submit to the FDA. That should happen later this quarter. We are also preparing to launch the product in the United States on the back of an FDA approval, which we hope would occur about a year after submitting our NDA. Assuming that the FDA approves Zalviso, we would then look to begin to commercialize in the last quarter of 2014 and into 2015.

If the company is able to produce in this accelerated fashion, there is a good chance it will equate to more gains for long investors.

The company also intends to file in the European Union (EU) shortly after the U.S. submission. The CEO also states:

Our filing in the EU will be sometime after the U.S. submission. We are in the process of presenting full data from all Phase 3 studies of Zalviso at major medical meetings in 2013 and 2014 with the goal of raising awareness for product physicians, surgeons, nurses and pharmacists both in the U.S. and in Europe.

News could also come regarding another one of their products ARX-04. AcelRx recently received a grant from the US Army Medical Research and Materiel Command (USAMRMC) for $5.6M. As this product moves further along, we can speculate more money could be on the way.

In March of this year, we wrote an article on AcelRx, which gave one-year price target of $12/share. This was eclipsed in July when the stock briefly went above $13/share. It has now consolidated around $10/share and looks poised to move at least back toward yearly highs with additional clarity and positive signs regarding the company's future.

  • Other Small Cap Developing Pain Medications

Not surprisingly, a few companies are working to take a slice out of pain management's multi-billion dollar pie as well.

In August of 2012, Zalicus (ZLCS) announced that the U.S. Food and Drug Administration (FDA) had approved the supplemental new drug application filed by Mallinckrodt, for its 32 mg tablet of Exalgo. Exalgo is an extended-release tablet for opioid-tolerant patients with moderate-to-severe chronic pain requiring continuous around-the-clock opioid analgesia for an extended period of time. The FDA approved the 8, 12 and 16 mg tablets of Exalgo in March 2010. Zalicus receives tiered royalties on net sales of Exalgo by Mallinckrodt.

Because Zalicus receives a small royalty for Exalgo sales, the product really has had little effect on the company's top and bottom line, as evident in part by a continual declining stock price. Zalcius is a company that we do not like as we feel it's poorly managed.

Differing from Exalgo, AcelRx has developed novel packaging intended to provide dose-tracking capability to assist in managing patient's opioid use and deterring abuse. The warning on the Exalgo packaging refers to it containing hydromorphone, an opioid agonist and a schedule II controlled substance with an abuse liability similar to other opioid analgesics. So, this may be an advantage that AcelRx over other potential competitors moving forward as the FDA has shown to be favorable to companies demonstrating attention to detail with regards to the topic of abuse.

We saw an advisory committee (ADCOMM) of the Food and Drug Administration vote against recommending Zogenix's (ZGNX) Zohydro, a single-entity extended-release pure hydrocodone, (no acetaminophen) 11-2.

The committee said that while Zohydro met the goals of safety and efficacy, it expressed concern that people addicted to other opioids, including oxycodone, might abuse Zohydro. So, it's important that AcelRx has anti-abuse deterrents built into its solution. Based on the product now meeting all end-points on all Phase III trials, it plans to submit a New Drug Application (NDA) to the FDA at the end of this month.

  • Management has Helped Facilitate 13 Combined Buyouts

At we always stress about the importance of strong management. A common saying amongst successful investors is, "You don't invest in a company, you invest in its people." We believe this is one of the most important tenants of investing and always look for small cap companies with experienced management.

AcelRx has assembled a management team that has extensive experience in managing small cap biotech companies. This team of management and board of directors have led small cap companies into profitability, and many into buyouts. In fact, the management team has been involved in 13 different acquisitions. Below are the most notable members and their respective acquisition activity:

  • Adrian Adams, Chairman of the Board

1. Sold Inspire Pharmaceuticals to Merck & Co. (MRK): Mr. Adams served as President and Chief Executive Officer of Inspire Pharmaceuticals, Inc. Merck bought out Inspire for $430M, or a 26% premium over the current share price.

2. Sold Sepracor to Dainippon Sumitomo: Mr. Adams served as President and Chief Executive Officer of Sepracor Inc. Dainippon Sumitomo bought out Sepracor for $2.6B, or a 48% premium over the current share price.

3. Sold Kos Pharmaceuticals to Abbott Laboratories (ABT): Mr. Adams served as the President and Chief Executive Officer of Kos Pharmaceuticals, Inc. Abbott Laboratories bought out Kos Pharmaceuticals for $78 a share, or a 56% premium over the current share price.

  • Richard King, President & CEO

4. Sold Tercica to Ipsen: Mr. King served as President and General Manager of Tercica. Ipsen bought out Tercica for $404M, or a 104% premium over the current stock price.

5. Sold Kos Pharmaceuticals to Abbott Laboratories: Mr. King served as Executive Vice President of Commercial Operations of Kos Pharmaceuticals, Inc. See above section for details on that buyout.

6. Sold Solvay Pharmaceuticals to Abbott Laboratories: Mr. King served as Senior Vice President of Commercial Operations at Solvay Pharmaceuticals. Abbott Laboratories bought out Solvay Pharmaceuticals for $6.1B.

  • Steven J. Hoffman, Skyline Ventures

7. Sold Somatogen to Baxter International (BAX): Dr. Hoffman was the scientific founder of Somatogen Inc. Baxter bought out Somatogen for $189M.

  • Guy Nohra, Alta Partners

8. Sold ATS Medical, Inc. to Medronics Inc. (MDT): Mr. Nohra served on the Board of Directors of ATS Medical, Inc. Medronics bought out ATS Medical for $370M.

  • Howard B. Rosen, Director

9. Merged ALZA Corporation to Johnson & Johnson (JNJ): Mr. Rosen served as the President of ALZA Corporation. Johnson & Johnson merged with ALZA Corporation for a $10.5B stock for stock transaction.

10. Sold GenPharm International, Inc. to Medarex, which was then acquired by Bristol-Myers Squibb (BMY): Mr. Rosen served as Director of Corporate Development at GenPharm International. Medarex bought out GenPharm for $65M. Later, Bristol-Myers Squibb for $2.4B.

11. Sold Pharsight Corporation to Tripos International: Mr. Rosen served on the Board of Directors of Pharsight Corporation. Tripos International bought out Pharsight for $57M.

12. Sold CoTherix, Inc. to Actelion Pharmaceuticals Ltd.: Mr. Rosen served on the Board of Directors of CoTherix, Inc. Actelion Pharmaceuticals bought out CoTherix for $420M.

  • David H. Chung, Chief Commercial Officer

13. Sold Conceptus to Bayer: Mr. Chung served as the Chief Commercial Officer at Conceptus. Just recently, Bayer bought out Conceptus for $1.1B.

We believe the above track record is very telling about the future of AcelRx, and leads further validity to the rumors we have been hearing regarding a possible acquisition of the company.

This management team has time and time again sold their companies for nice premiums. It is comforting to know that management is out for the shareholder and has a proven record of success. Many members of the management came from ALZA Corporation, which was one of the most successful mergers in the above list. It seems like the same team has assembled again to eventually sell AcelRx for a nice premium as well.

  • Company Financial Position

In July of this year, AcelRx raised $51M of which it cleared $48 via a public offering of 3.8 million shares of its common stock, offered at a price of $11.65 per share. Shortly after this offering, the stock hit its 52 week high of $13.50 per share. However, due to a "risk off" market condition and hedging by those who bought the offering, the stock has since retraced to as low as $8.94 in August.

When a company actually has a good drug and/or product with strong potential, investors will normally buy public offerings if executed and priced correctly. Once such example of a company we have covered before is Keryx Biopharmaceuticals (KERX), which did an offering that was received very well by investors. Keryx is a company that works on developing and commercializing novel therapies for the treatment of renal disease. In January of this year, Keryx offered 8,234,000 shares priced at $8.49 per share. The offering was quickly bought by investors and continued to run higher. As with AcelRx, after Keryx hit a fresh 52 week high, the stock fell back to as low as $6.33 in Febraury. Currently, Keryx stock trades near $10 a share. Keryx is but one example of how developmental biotechs that hit 52 week highs after offering, normally retrace, then make new 52 week highs not long afterwards. We feel AcelRx will follow the same pattern, and will make a new 52 week high very soon.

AcelRx has stated it believes it has enough cash to fund operations through 2014, which is always a good thing when it comes to developmental biotechs.

AcelRx believes its current cash, cash equivalents and investments, including funding from the recently completed public equity offering, are sufficient to fund operations at least through the end of 2014. The company expects its use of cash will decrease during 2H compared to 1H as expenditures, primarily R&D expenditures, decline for clinical activity and final payments are made to contract research organizations.

  • Insider Activity

High insider ownership of a company reflects a sense of confidence in the future of that company. More often than not, there are good reasons for these insiders to be steadily buying shares. When we look at all the sells and buys over the last few months of AcelRx, we find that lots of institutions and insiders have been buying. About 28% of AcelRx is owned by insiders as well as almost half of shares being owned by institutions such as Perceptive Advisors LLC (owning almost 6 million shares), Blackrock Fund Advisors, and Vanguard. Perceptive Advisors have recently been very successful with their its Aegerion Pharmaceuticals (AEGR) investment. Director Mark Wan is the largest shareholder of AcelRx with over $6 million shares

This past week has seen activity from 9 insiders, 8 of them acquiring stock options with no sales, and 1 insider selling 128k shares.

The 128k sold were in accordance with the rule 10b5-1 trading plan, which means it's an automatic sale. Some might think an acquisition is not likely with this type of activity. However, in an article we wrote covering Trius Therapeutics, we predicted it would be acquired. Trius saw similar 10b5-1 selling approximately 1 month before it was actually acquired.

AcelRx Director Guy Nohra after selling the 128k shares, now holds 2,666,127 shares of the company. 10b5-1 plans are frequently adopted by top notch management in order to avoid the appearance of any inappropriate actions, such as acting on inside information. Under 10b5-1, an insider must buy or sell as scheduled, and are not subject to trading blackout periods, which occur when companies are negotiating an acquisition. We have seen this many times before buy-outs occur. Often times directors of companies that are acquired receive "sweet-heart deals," in which they are awarded additional shares under director incentive programs. Nohra's sell here further strengthens the buy-out rumors we have been hearing in our opinion.

  • Chart

Above, we see a bullish rising wedge pattern forming, which is often times misinterpreted as a head and shoulders bearish pattern. In some ways, the chart looks a lot like the S&P 500 over the last year or so. We have drawn an arrow pointing to the red MACD signal converging with the yellow Histogram. Each time this has occurred with this stock, the price has gone up.

  • Conclusion

Acelrx's Nanotab tech could potentially grab a significant piece of the $6.5B pain medication market. With a current market cap around $429M, cash to fund the company through 2014, ($80M) an NDA filing to come likely by the end month, and likeliness of FDA approval, we feel AcelRx is significantly undervalued, especially considering the company is more de-risked that most other developmental biotechs.

Additionally, based on the rumors we have heard, and comparing these rumors to the past performance of BOD members, we believe the company will be acquired within 6 months. Several BOD members own over 1M shares, with total insider ownership near 50%, which indicates strong confidence in their own company. Based on these factors, our short term price target opinion is $14, with a one year target price opinion of $17 to $20 a share.

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