AcelRx Pharmaceuticals: The $1 Million Questions (NASDAQ:ACRX)

I am going to address three questions in this article:

  1. Is DSUVIA / sublingual sufentanil too good to be true as a treatment for moderate to severe pain?
  2. What, if anything, was wrong with the third quarter financials as reported on November 5?
  3. What does all of that mean for investors?

I’ll start with a view into the rear mirror and discuss the latest numbers and management comments during the third quarter earnings call (hereafter: EC). The main part of this analysis is then devoted to looking to the future and what it might bring. Finally, I will also address one investment-related question that was raised in the comment section of my previous article on Acelrx Pharmaceuticals (ACRX). All of them: Potential $1 Million Questions.

3q20 Confusion

Shares of ACRX lost some 30% on the day after the company issued its 3q20 numbers. I am not a trader, so I don’t care all too much about short term price fluctuation, but drops like that make even me scratch my head.

So what happened? In fact, management confirmed results from recent news, including very encouraging third-party study results, order status with the DoD, and the general business development outlook. Plus, the 3q20 P/L (see current 10Q) revealed a massive increase in DSUVIA sales which is probably every investor’s basis to justify an investment in ACRX. More specifically, we talk about almost $1 million of DSUVIA sales in just the last quarter (it was $0.935 million, but this article’s title required some generous rounding).

What is not to like about this number, especially if you look at the development of DSUVIA sales over time:

Admittedly, there is not much point yet in making a CAGR-analysis or anything like that, but it is obvious in any case that some progress has been made.

And there is one thing that is even better that the mere spike in sales: This is not due to some one-off order, e.g. from the DoD. In fact, management confirmed during the EC that

To that end in 3Q, 73% of commercial customers were reordering customers, and greater than 90% of the commercial doses shipped were reorders as well.

So, this revenue is likely to stay, and I will discuss much stronger evidence for this assumption in the second (and main) part of the article.

With revenue starting to pick up, it is no surprise that analysts start asking questions about bottom-lines, be it with respect to cash or with the respect to earnings. Management retained its cautious stance of not providing any revenue guidance but got a little bit more specific regarding net cash generation:

In terms of cash flow breakeven, we’ve said publicly is by Q4, 2022, we will be a cash flow positive on that including debt service and everything.

Part of all these equations is the production cost for DSUVIA which is currently impacted by the still semi-automated process. Management gave an outlook here as well:

Importantly, once the high volume packaging line is installed and running commercial batches, we will realize a close to 60% reduction in unit cost. As an update, the factory acceptance test of this equipment began in Germany this week.

Frankly, I have discussed production costs in the past, but I did not find any numbers. Direct costs from contract manufacturers as per the recent 10Q is slightly north of 100% of revenue – but they cover both DSUVIA and Zalviso (and both still on rather low volume), so caution seems warranted with regards to drawing conclusions here.

But in any case, should DSUVIA unit costs actually drop by 60% around 1q22 (some 15 months from now), that would surely help either bottom line quite a bit:

Pending COVID related restrictions, our current estimate is for installation at our contract manufacturer to occur at the beginning of next year. With first commercial batches after all approvals are received beginning in the first quarter of 2022.

This leads me to a first interim conclusion: DSUVIA sales are picking up. According to management, September 2020 showed the “highest end user demand (…) to-date”. Sales are coming from the hospitals and ASCs (Pillar 3 of the four pillar strategy to strengthen sales growth) and there is reason to believe that these sales will keep growing. On the other hand, I would caution investors of some possible distortions in the upcoming months, since my European experience is that raising COVID-19 case numbers convert into COVID-19 hospitalisations which may lead to restrictions for certain types of surgical procedures due to ICU capacity issues (and, yes, I know this is controversial to some, but as investors, we should look at possible outcomes and not just those that we wish for).

Before I turn to the long-term prospects of DSUVIA, I want to quickly touch upon the remaining pillars for driving revenue growth as defined by ACRX’ management:

The business with the DoD is referred to as Pillar 1. My impression is that the vast majority of work needed to secure the related revenue is done. Obviously, DSUVIA still needs to be produced – and management confirmed that according to its forecast even the semi-automated process will ensure sufficient production – but the ink is already drying on the various DoD related committee notes and contracts.

Management said that there was substantial uncertainty as to when the DoD will order which quantity of DSUVIA, but that the first such orders are expected to roll in in 4q20. I am not concerned about the practical implications of this uncertainty. However, I do hope that going forward management will separately disclose DSUVIA sales from Pillars 1/2/3, due to the different nature of the sales channels and in particular the potentially distorting effects from larger DoD orders (as discussed here, we talk about a total of DoD related revenue of some USD 50 million over the next three years).

Pillar 2 refers to “accessing large non-core specialty markets through partnerships”. An example is the recently closed cooperation with Zimmer Biomed (ZBH) for oral surgery procedures. During the EC, management essentially confirmed to go after opportunities in this pillar, with the known examples of plastic surgery or ENT doctors (ears / nose / throat). Apparently, in the field of plastic surgery, ACRX started “a small pilot with a couple of virtual sales representatives focused on office-based plastic surgeries”. No further details were provided.

However, there was a short but interesting more general discussion as to how certain procedures in plastic surgery have been moved from hospitals to ASCs to procedural suites. But regardless of the actual type of Pillar-2-procedure considered, the common denominator is that there is a lot of small “practices” – which makes it hard for the Sales set-up that ACRX is running with to address them – but because they are small, they don’t have the “committee overhead” that hospitals do. Thus they come to adoption much faster (but they are subject to REMS-certification as well).

This latter point is relevant from a ramp-up perspective: The three pillars discussed so far provide for a staged ramp-up of DSUVIA sales. The DoD business is right around the corner. The “partnership business” is expected to quick-start once the sales teams of the 3rd party distributors have been trained and hit the market. This is the short term foundation for revenue / revenue growth.

But the key driver is the development in the hospital and ASC market which extremely large institutions and potentially large and recurring revenue. The following sections discusses the outlook here – and why I believe the future looks brilliant.

But one final and quick comment on Pillar 4, i.e. non-organic growth / “business development”: Management’s only comment here was “(…) we continue to aggressively explore the addition of products to add to our portfolio to support the productivity of our commercial resources.” As I discussed in previous articles, it does make sense to include other hospital related products in order to scale the sales team efficiency.

But let’s now turn to

The prospects of DSUVIA in the US hospital and ASC Market

The discussion in this section is centred on a virtual investor event hosted by ACRX (link to recording available here at the time of drafting of this article). I will quote several statements made by Dr. Christian Tvetenstrand, Southern Tier Surgical Clinic, Johnson City, NY, and Dr. Koth Cassavaugh, Director of Pharmacy at Auburn Community Hospital, NY, (together: the Doctors, working in the Hospitals).

Each Doctor conducted a quantitative study of certain effects from administering DSUVIA in certain perioperative settings (i.e. during or immediately before or after a surgery) on the total use of opioids and other medication and the time patients had to stay in the PACU (post-anesthesia care unit). Both studies were designed and operated fully independently – but interestingly they showed almost exactly the same results.

Arguably, these studies were not perfect. Most importantly, for each patient it was known whether they were given DSUVIA or not. And secondly, at least to some degree there was no element of randomness in selecting patients for DSUVIA treatment. And sample sizes weren’t too big: a grand total of some 450 patients combined from both studies. I ask readers with more interest in the study design to watch the webcast or download the slides presented, available here at the time of drafting this article.

Both Doctors also made some comments regarding patient well-being on a more qualitative / anecdotal basis.

I am – and readers of this article should be – fully aware of the fact that the Doctors were paid by ACRX for their time on the event and that ACRX supported the publication of at least one of the studies.

But this does not mean that the statements made are not relevant from a practitioner’s perspective, as will become more evident when looking at the points discussed in more detail. Thus they are relevant for any investor, too, I believe.

Headwinds from P&T Committees

Apparently, one key pushback for a faster acceptance of DSUVIA with the US hospital space is scepticism within the P&T committees that essentially have to approve the use of a (NEW) drug. According to Dr. Tvetenstrand, the P&T committee’s reaction at his hospital was essentially “Who needs another opioid? We have an opioid crisis out there.”

However, when the committee saw the results from the study, they immediately changed their minds. This is essentially because DSUVIA – as discussed below – actually reduces the use of opioids.

Going forward, this type of headwinds from P&T committees is likely to weaken, since I would assume that members of different committee talk to each other – and because more and more studies like the ones discussed here will become available. There are at least two investigator initiated studies in the pipeline from renowned hospitals (Cleveland Clinic and Brigham and Women’s Hospital). If they show the same results as the known studies, this will give the yet-to-be-convinced committees additional support for opening. In the next sub-section I will discuss the reasons for my confidence that there will be more and more positive study results:

Who has seen it wants to use it

Both Doctors stated that DSUVIA use spread fast within their hospitals. It was typically a very small number of e.g. surgeons who saw the potential benefit and gave DSUVIA a chance, but when they showed the results to their colleagues in other sub-specialties these colleagues joint the DSUVIA camp soon.

The reasons are manifold: Reduced use of opioids (as measured in MME, i.e. morphine milligram equivalents); less use of other medication (e.g. Adrenergic Agonist to deal with opioid side-effects); improved patient well-being; reduced PACU time; easier application and dosing.

All of this was to be expected from the results of the clinical studies conducted for the DSUVIA approval which now find confirmation from practitioners. And readers are advised that DSUVIA was essentially designed around known characteristics of sufentanil and its sublingual administration.

In other words, this is the result of scientific progress – and thus I have no doubt at all that we will see further positive study results in the near future. One of the Doctors actually said, that DSUVIA actually seems too good to be true.

Initial Concerns from Emergency Department Physicians

Long-term investors of ACRX are well aware that the case initially made by management for DSUVIA was ER-use. There were intense discussions as to whether DSUVIA was able to replace IV fentanyl for at least certain patient groups.

Well, first of all, the studies discussed here did not cover Emergency Room use. However, they showed that IV fentanyl and DSUVIA can work hand in hand. So, generally, it is not necessarily an either-or-situation.

On top of that, both doctors reported that patients were not “knocked-out” by DSUVIA (see next sub-section). This is clearly an advantage in the ER: Think of a guy who cuts his wrist because of inapt knife-handling and who needs a few stiches to fix it (I am talking first-“hand” experience here). Even for a larger wound and acute pain, any ER-physician would want the patient to stay alert so they can free-up space in the ER once the stitches are done. This is what DSUVIA promises to offer. And apparently, the ER-doctors in the Hospitals have started to use DSUVIA once they saw the study results and talked to nurses etc.

There is one additional aspect that may have slowed down the acceptance of DSUVIA in an ER setting so far: Apparently ER-doctors were concerned about drug seekers in the ER. However, in the words of one of the Doctors, “DSUVIA provides pain control, not a ‘high’.” My guess would be (no first-hand experience here, though) that this is the kind of information that spreads relatively fast within the drug seeker community.

So, I expect the ER-use of DSUVIA to accelerate in the coming months despite the additional concerns that may have to be overcome in this field.

Third state of patient well-being

One of the key discussion point during the investor call was the patient well-being. Both Doctors in their own words referred to a “third state of patient well-being”. Simply put, before using DSUVIA patients were often either pain controlled but not alert or even confused; or they felt fine but had pain issues. DSUVIA fixed both issues – and in fact there was a statement made that the nurses could tell which patient had received DSUVIA even if they had not been involved in administering the drug. The relevance of these kind of qualitative judgements cannot be overrated.

And there is one more thing to notice: All Doctors on the call agreed that mental impairment is the first sign of potentially progressing side effects. So if there is no such impairment, this is a very strong indicator that there will be no severe issues later in the recovery process.

How patients feel post-operative is obviously linked to how they think about their hospital experience:

Hospital Rating

Both Doctors reported that the patient ratings improved for those treated with DSUVIA. I will close this sub-section with a discussion of the economics of using DSUVIA, but it is obvious that patient ratings – while hard to quantify from a monetary perspective – need to be taken into the equation. And they do so favourably from a DSUVIA perspective (“Patients like us better.”).

There is one additional aspect that is of more internal nature: Both Hospitals run “Opioid Stewardship Programs”, i.e. they try to address the opioid crisis. Even though the drivers of this crisis are not found in the perioperative setting it is a good initiative. And in fact, using DSUVIA reduces the total amount morphine equivalents and this will further support its acceptance from the perspective of responsible opioid use (there is an interesting discussion of how such reduction is possible with such a potent drug starting at around 1h15min of the Conference recording for those interested in further details).

Real Cost Comparison

There is a lot of things to like about DSUVIA from a purely medical and patient well-being perspective. But hospitals have to look after their financials, too, so there remains one question: Is using DSUVIA economically reasonable? This is not obviously clear, given the extremely low costs for IV fentanyl (close to nothing) and USD 58.31 wholesale listing price for one dose of DSUVIA.

But remember the key advice from your backpacking days:

You get what you pay for.

Or, in other words, there is a higher upfront price to be paid for DSUVIA, but the benefits further down the road are significant and are likely to offset the higher cost per dose.

The following numbers were compiled by ACRX, they are explicitly based on the findings in the study run by Dr. Tvetenstrand – i.e. the reduction in medication or PACU time according to just his numbers – so it may not be applicable in other situations. But remember that the findings in Dr. Cassavaugh’s study were very similar. With further studies likely to become available in the upcoming months, the data basis will improve further.

The comparison also makes use of an estimate of PACU-time costs, which may vary from hospital to hospital. So the exact numbers should be taken with a grain of salt, but they clearly give an idea. Here is the summary slide, more details can be found in the presentation:

Source: Company Presentation

Simply put: In a fairly regular situation, DSUVIA may help to serve around USD 100 per surgery. If DSUVIA were to help prevent slowdowns in the in the operating rooms because of faster PACU turnover, the total savings may shoot north.

And note that this calculation does not even allow for the average claim due to severe side effects – DSUVIA is simply safer than IV fentanyl because of its better therapeutic index (a result of the PK profile) and because it eliminates dosing issues (which actually lead to yet another cost factor with IV fentanyl not included in the above numbers).

Bottom line: DSUVIA is a better product for doctors, nurses, patients – and the hospital controllers and accountants.


Now, what does all of that mean for investors?

In the comments to article discussing 2q20 numbers, I was essentially asked to become more specific about the path ACRX may take and what investors should do.

Well, I can’t do that. What I can do is to lay out why I believe DSUVIA is a superior product that solves an actual problem (the side effects of IV fentanyl bolus administration). But it solves a problem in an industry that adopts slowly. So the exact path to Revenue level X, Y or Z is unclear (and how would I know at which level a given investor would feel comfortable). The exact path to broader recognition of DSUVIA’s benefits has become clearer, though: Dr. Tvetenstrand’s study is published, Dr. Cassavaugh’s study is about to be published, other studies are in the pipeline.

As investors, the ride is bumpy. The first (almost) 1 million dollar quarter triggered a massive sell-off. The future may provide many more million dollar quarters, given the expected stickiness of the hospital business. We still need to see, if DSUVIA is in fact too good to be true.

And then there is the one million dollar question for each investor: I actually believe that ACRX could be at USD 30 / share in 10 years’ time. You do your own math with regards where that could take you.

I’ll close with a statement made during the investor event from a surgeon commenting other surgeons’ attitude, but I believe it is a fair recommendation for ACRX investors, too:

You don’t want to be the first one, but you surely don’t want to be the last one.

Disclosure: I am/we are long ACRX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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