Acelrx Pharmaceuticals: Taking Stock (But Not Currently Buying It) (NASDAQ:ACRX) (2024)

This article covers the following events with respect to AcelRx Pharmaceuticals (ACRX) plus an updated assessment of the company's prospects:

1. Reverse Share Split (October 2022)
2. Capital Raise (December 2022)
3. Announcement of the DSUVIA sale to private Alora Pharmaceuticals, LLC (hereafter: Alora)
4. Management outlook to 2023 provided at the March 30, 2023 Earnings Call for fiscal 2022.

As a result of all these developments, I downgrade ACRX to Hold. The terms and conditions of the DSUVIA sale were too disappointing to maintain the previous Buy rating.

There is a lot of uncertainty as to whether and when ACRX will achieve revenue levels that will support its non-COGS (Cost of Goods Sold) expenses.

That said, my article aims to identify certain milestones during the next 6-9 months which should provide investors with guidance as to how ACRX prospects evolve.

I based the discussion in this article on the following sources:

• Form 8-K of the October 2022 Reverse Stock Split (hereafter: 8K.RSS)
• Form 8-K of the December 2022 Equity Raise (8K.ER)
• Form 8-K of the March 2023 DSUVIA Sale Announcement (8K.A)
• Form 10-K for Financial Year 2023 (10K)
• Transcript of the March 30, 2023 Earnings Call for FY 2022 (EC)
• Form 8-K for the April 2023 DSUVIA Sale Execution (8K.E)

I start with a quick summary on ACRX that readers familiar with the company can skip entirely.

Thereafter, I will discuss each of the aforementioned recent developments by order of occurrence. Based on such "status quo", I discuss a realistic best case for ACRX and the obstacles to it - and how that is reflected in the current share price of the company.

Quick Introduction To ACRX

I have covered AcelRx Pharmaceuticals before, so investors should view this as an update to my previous articles.

ACRX is a pharmaceutical company operating in the space of supervised medical settings, i.e. hospitals, ASCs (Ambulatory Surgical Centers), and procedural suites, such as individual dental or plastic surgeons. It does not sell its products to pharmacies or drug stores.

Currently, ACRX's active products are limited to sublingual sufentanil tablets (or SST). The main product is called DSUVIA and is sold in the US. It is an opioid-based analgetic for use against acute moderate to severe pain. It is sold to the above-mentioned supervised medical institutions (referred to as Commercial Sales by management), and also to the DoD (DoD Sales), which sponsored DSUVIA's development and is anticipated to become the largest single customer in the short-term by supplying SKOs (sets, kits, and outfits) of the US Army with DSUVIA for battlefield pain management.

A detailed discussion of the features of DSUVIA, or more generally SST, can be found here.

DSUVIA is approved in Europe under the name DZUVEO, and ACRX partners with private French company Aguettant to commercialise DZUVEAU in this territory. ACRX confirmed during the EC that DZUVEO's market launch is scheduled for the third quarter of 2022, and there was no substantial additional news.

DZUVEO was sold in Europe under the name Zalviso for use through SDA (single dose applicators), but the private German commercialisation partner Grünenthal cancelled the sales agreement. Zalviso is not yet approved by the FDA for commercialisation in the US.

ACRX sold DSUVIA / DZUVEO in March 2023, see separate discussion below.

Further, ACRX has licensed two syringe products with Aguettant for commercialisation by ACRX in the US. These products (the Syringes) are not yet FDA approved.

The syringes provide ephedrine and phenylephrine, substances used to regulate severe side effects that come with analgesia, i.e. products like DSUVIA. Readers are more interested in these substances and Aguettant find a detailed discussion here. I will discuss the current activities with respect to gaining commercialisation approval in the US below.

Finally, in January 2022 ACRX completed the acquisition of private Lowell Therapeutics, Inc. (hereafter: Lowell). Details of the transaction are discussed here. Lowell developed a product called Niyad, a Nafamostat-based regional anticoagulant for dialysis circuits during continuous renal replacement therapy for acute kidney injury patients in the hospital. Niyad is not approved by the FDA in the US.

I will discuss the latest developments around Niyad below in detail.

Reverse Share Split (October 2022)

On October 25, 2022, ACRX after the market closed conducted a 1:20 reverse share split (see 8K.RSS). The share split became effective on October 26, 2022, before the market opened. With the reverse share split, ACRX achieved compliance with the NASDAQ listing rules that refer to the minimum share price of USD 1.00. Apparently, at a current share price (post-split) of about USD 0.60, this aspect of the listing rules is violated again.

In theory, there is no measurement-related effect from a share split (reverse or not) since it does not as such change the value of equity or the business. However, I will come back to market sentiment and how it does affect business outlook below. For the time being, it is most important to state that all comments on the number of outstanding shares in the next section are on a post-split basis.

In the context of the reverse stock split, ACRX also redeemed the preferred shares that were issued only shortly before for the sole purpose of achieving shareholder approval for the split. Thus, the preferred shares are no longer relevant, see next section which discusses ACRX's equity structure.

Equity Raise (December 2022) And Share Count

On December 27, 2022, ACRX issued shares and warrants to an undisclosed institutional investor. As per the 10K, ACRX's share structure as of December 31, 2022, was as follows:

In order to better understand what one may dub the "economic share count" it is helpful to take a slightly closer look at the warrants issued by the company:

Some comments:

First, this is a very coarse view. All warrants have a couple of years left until they expire, so I omitted any details. More importantly, most of the warrants have some mechanism that adjusts the exercise price in case of future stock offerings at prices below the exercise price of the respective warrant.

In any case, in essence, ACRX issued more than 6.8 million warrants with the December 2022 equity raise. In addition to the direct issue of 748,744 (cf. 8k.ER), this essentially implies a doubling of the share count on a fully diluted basis for net proceeds of USD 6.6 million (per 10K). Or, in other words: 3-4 months of cash for essentially half of the company's equity (on a fully diluted basis).

"Fully diluted" deserves some further clarification, though: First of all, the appr. 2.6 million pre-funded warrants with an exercise price of virtually zero have been exercised during 1q23, see 10K, Subsequent Events. This puts the number of outstanding shares to about 10.9 million:

The relevance of the remaining warrants depends to some extent on an investor's perspective. Any very recent investor who acquired shares at or even below USD 1.00 may be happy with any increase to up to USD 2.07 on some positive development as discussed further below. With this perspective, the warrants don't warrant too many worries.

For those, like the author, who have a USD double-digit cost base, there are some 5 million warrants that will turn into shares when things get anywhere near recovery (from a cost base perspective.)

The appr. 0.7 million stock options come with a wide range of exercise prices (USD 4.62 - USD 306.60) and an average exercise price of USD 52.98.

Since I believe that the realistic best case for ACRX is a USD 10-20 share price within the next 24 months I will use 16 million as the fully diluted share count as of March 31, 2023, in this article. But with the company being in the cash situation that it is, we need to return to the share count aspects below.

DSUVIA Sale (March / April 2023)

During the May 2022 Earnings Call (for 1q2022), ACRX management made the first public statement that it is evaluating a full or partial divestment of DSUVIA.

On March 14, 2023, the company finally announced a comprehensive sale, whose completion was announced on April 5, 2023.

I will first provide a summary of the terms of the divestment and then comment on it.

Disinvestment Terms

These items summarise selected aspects of the very limited information provided in the 8K.A. As per ACRX management, more comprehensive disclosures will be made in the company's 1q2023 10-Q.

1. The agreement covers DSUVIA and DZUVEO, but Zalviso is out of scope.
2. There was no cash payment from Alora for receiving commercialisation rights (except for the inventory sale, discussed below).
3. ACRX will be entitled to receive up to USD 116.5 million in sales-based milestones - no details are available at this point in time.
4. ACRX will receive quarterly payments in an amount equal to 15% of net sales based on sales of Product to all customers, other than sales to the United States Department of Defense and sales by or on behalf of Laboratoire Aguettant [note the discussion below].
5. ACRX will receive 75% of Product net sales to the DoD.
6. Aguettant will pay ACRX a complementary payment in the amount of EUR(!) 1.5 million, and ACRX's obligation to make a certain specified sales-milestone payment will terminate.
7. (Per the 8K.E only:] Alora agreed to acquire all assets related to DSUVIA, including inventories, equipment and intellectual property in exchange for consideration at closing of USD 1.1 million.

Discussion of Terms

To be totally clear: I did expect ACRX to collect some cash when selling DSUVIA. In fact, I was hoping for double-digit USD amounts to be received. This was totally wrong. Consequently, it was a huge disappointment to learn that there will be hardly any cash in-flow from Alora (further aspects below). This is disappointing from a cash availability perspective, especially when considering how tight ACRX is on cash. But it is also disappointing from an alignment of interest perspective: Even initial payments that need to be repaid from royalties (as in the typical non-recourse structure) should motivate the buyer to achieve certain sales volumes. There is no other conclusion than: Those that were sceptical about DSUVIA's broad market perspectives were right.

So this was bad news. Not just to me as one can conclude from the share price decline after the transaction's announcement (an up to 50% decline).

But what about the other elements?

First, I understand the summary of the transaction that it covers DZUVEO as well. ACRX remains a partner of Aguettant for the PFS business, but the DZUVEO ties are mostly cut. But I find the wording in the 8K.A's section on the "Asset Purchase Agreement" not fully clear. However, such a cut would fit the one-off payment from Aguettant and the release from the obligation to make certain sales-based payments.

With regards to the agreement with Alora:

• We do not know any details regarding the USD 116 million potential for DSUVIA / DZUVEO sales-based milestones. And frankly, this is nothing to worry too much about at this stage.
• Also irrelevant at this stage is the out-scoping of Zalviso.
• We note that ACRX remains the relationship with the DOD.
• More relevant are the terms of the net sales share for ACRX on net commercial sales and net sales to the DOD.

With regard to the DOD, the 75% appears to be a reasonable deal. As I have discussed in depth here, the per dose price for a sale of DUSVIA to the DOD is most likely somewhere in the USD 20-25 range. I also believe the ultimate direct expense for a DSUVIA dose to be around USD 5 (in 2022 it seems to be in the USD 8 range, per data in the 10K and the assumptions in my article on the topic).

Thus, assuming that ACRX is doing the actual sales-related work and Alora would provide the product and shipping, this 75-25 split of the net sales seems reasonable.

The 15%-only share on commercial sales reflects that t will be Alora's task to develop this market and do the actual sales in it. In case Alora is successful here, this should trigger some milestone payments to ACRX in the future.

To sum up: The ongoing commercial terms seem reasonable, but the lack of any initial payment, other than payments for inventory, etc., is a huge disappointment.

But in any case, investors need to look ahead and that is what the remaining sections are about.

Management Outlook (March 2023 Earnings Call)

Unless otherwise stated, all quotes in this section are taken from the YE2022 Earnings Call. Here, management discussed three main topics that I will shed a light on in the following subsections:

• Planned development path for Niyad.
• Planned development path for the PFS (pre-filled syringes) products.
• Planned 2023 cash burn.

Once I have discussed these basic inputs, I will offer my view on the commercial prospects in the following main sections.

But let's start with aforementioned items and let's start with the least relevant one, at least for the time being, i.e. the PFS products.:

Pre-Filled Syringe Products

First of all, I remind readers that ACRX had licensed two different products: One holds ephedrine, and one holds phenylephedrine as the active substance. Quoting from the 2q21 Earnings call, "ephedrine is used when both heart rate and blood pressure need to be increased, such as after anesthetic induction" and "phenylephedrine is used when the peripheral vascular resistance has dropped, often due to spinal anesthesia, and only the blood pressure needs to be increased".

Meanwhile, ACRX found a name (and created a trademark) for the ephedrine product, Fedsyra. And it is Fedsyra (and only Fedsyra from the PFS) where management expects things to visibly move forward beginning in 2023:

As such, our other near-term corporate milestone expected by the end of Q2 2023 is the filing of a new drug application for our prefilled syringe of ephedrine branded as Fedsyra.

Management added, with respect to the FDA's standard process for NDA review:

So that will be on a 10-month review clock.

And by combining the two timeframes, management said:

With potential approval of the NDA for Fedsyra, commercialization could occur as soon as the first half of next year.

There are two reasons why I will not spend much time on this Fedsyra path:

First, even if things go as per this aggregate projection, this is too far in the future for a meaningful contribution to ACRX's cash needs. But more importantly, ACRX's track record with regard to this specific NDA submission is just too poor for me to base any projection on it. More specifically, back in August 2021, management stated at the 2q21 Earnings Call that they were expecting to submit NDAs for both PFS "within the next 12 months" - this expected date has been deferred ever and ever again. We don't know the exact details of these deferrals but by now they have eroded my trust in management's skills to predict such a process.

I really need to see this first PFS NDA actually being submitted before making any forecasts. And I note that management decided to submit the two PFS separately. This may well make sense in order to apply lessons learnt from one submission to the second one. But, in fact, it implies an even longer - and currently unspecified - term until we see the NDA for the phenylephedrine product.

Niyad

The Status Quo with regard to Niyad and its process for applying for the EUA (Emergency Use Authorisation) is not too different from that just discussed for Fedsyra. The main questions are:

When will ACRX submit its application and how long will it take for the application to be approved? With respect to each aspect, management made a couple of comments during the EC, and I remind readers that this reflects the situation as of March 30, 2023.

I'll start with the quotes related to the submission timing for the Niyad EUA (numbering added by the author to facilitate discussion below):

[1] We've already completed the production of the initial development batch in Niyad and are now completing stability product testing in preparation for planned EUA submission. [2] We remain on target to submit this EUA in the second quarter.

See Also

AcelRx Stock: Battered And Bruised But Ready For Recovery In 2022 (ACRX)

And:

[3] And as we mentioned, we've got product up on stability. It's important that we've got accelerated stability. (…) What that really means is stability testing beyond the normal ranges of temperature and humidity. (…) For us, humidity is a nonevent. It's obviously a sealed vial. We've got three months of good solid data at room and accelerated temperatures, that being 25 degrees centigrade 40 degrees integrate in the accelerated portion. [4] And our GMP initial release test data looks very good with only one test still remaining, and that's in sterility.

[1], [3] and [4] per my above numbering describe the current state of affairs for preparing the EUA. From the outside, it is impossible to assess how things stand.

So, on the hand, all previously made statements regarding ACRX management's ability to reliably forecast application submissions, by default would apply to Niyad as well. On the other hand, here we have an API (active pharmaceutical ingredient) that is well established in countries with similar levels of healthcare and I would expect with a similar design of admission criteria. Since, also per the EC, ACRX is collaborating with an ex-US manufacturer of the drug, I am optimistic here, that this is a reliable estimate.

If this was true, according to [2] above, we should expect EUA submission during the course of 2q23.

This takes us to the question of how long it will take until approval. Here, ACRX management made three statements during the EC alone:

Yes. So for Niyad, again, under the EUA, we're confident in our ability to submit I'm sure there'll be dialogue with the FDA as it goes through the process hopefully, for that approval this year.

And:

We don't know when that would come. There's no specific time frame on the FDA review of that. So we don't know if that's going to come in one month or it's going to come in six months. (…) I think we can give more detail when we receive an EUA later this year.

And:

So as we research EUAs that have been reviewed in the past, month or two months could be longer. So we just can't give you a defined time line on that.

The bottom-line is: They don't know, and it is very hard to predict. That's not what investors like to hear, but to be clear, this uncertainty is really not in ACRX's hands. In the end, the 'E' in EUA refers to "Emergency" and so one would hope that such application is getting the corresponding attention from the regulating authority.

I also remind readers that Niyad, due to its ex-corporal use, is regulated as a device. History shows that Device EUAs have been granted for the treatment of much slower developing individual circ*mstances such as in vitro diagnostic tests.

With this, I stick to some optimism for a Niyad EUA in the course of 2023. I will come back to this below and in that context, I will also discuss the milestone payments that ACRX owes to Lowell for "certain regulatory progress".

But for now, let's just note that ACRX management are also preparing for an upcoming commercialisation:

And in addition, having already received an ICD-10 CMS procedural code for reimbursem*nt, we're proceeding with early commercial planning.

We shall see.

2023 Projected Cash Consumption

One of the key statements during the EC was made by the CFO:

We expect our cash operating expenses in 2023 to range from $16 million to $20 million, which include costs related to a planned launch of Niyad under an EUA, initiating the single registrational study for Niyad and the PDUFA fee for [Fedsyra (TM)] for which an NDA submission is expected in the second quarter of this year.

Obviously, cash is THE main concern for ACRX, so this statement deserves the closest analysis. And in fact, there is a lot to note:

• It's a 22.2% range around the midpoint of USD 18 million. First, there is general uncertainty for expense planning with any company in times of high inflation. Also, as discussed above a bit more, there is uncertainty as to the processes within the FDA or even how well the final CMC (Chemistry, Manufacturing, and Controls) tests run. I would further expect this range to reflect management discretion about at least certain expenses, in particular with regard to the timing of the single registrational study for Niyad. The PDUFA (Prescription Drug User Fee Act) fees are not discretionary once the NDA for Fedsyra has been submitted.
• The statement explicitly refers to "expenses". So, I assume it does not consider any inflows and, in this sense, represents a "gross" view.
• However, clarity differs by type of in-flow: In my opinion, there is little doubt that this range excludes the one-off payment from Arguettant and also the payment for the inventory and equipment sale to Alora. Less clear to me is whether any reimbursem*nts from Alora for the "hand-over" support by ACRX is netted. As a matter of prudence, I do assume that the latter effect is not incorporated.
• I will take the term "expense" literally and assume that it does not cover any working capital needs in the otherwise very welcome scenario of Niyad production starting in the course of 2023. This view is consistent with the view on the Niyad sale. And it implies additional cash needs in case of a successful EUA in 2023 which I will come back to below.
• I also assume that it does not include any milestone payment to Lowell for any progress made with respect to Niyad commercialisation. We know very little of these obligations, but one would expect that achieving a EUA would represent a key milestone. We do know, though, that it is at ACRX's full discretion to make such payments in cash or its own shares (the latter implying, of course, further dilution).

For the remaining discussion, I will use the midpoint of management's range as an estimate for the operating 2023 expense. The resulting USD 18 million have the pleasant side effect of translating nicely into a monthly cash burn of USD 1.5 million (where I am aware that assuming level spending during the calendar year is a strong assumption, but let's keep things simple here).

As a sanity check, per the 10-K operating cash burn in 2022 and 2021 was USD 28.3 million and 30.0 million, respectively. As discussed above, ACRX does save a lot of previous cash burn from selling and manufacturing DSUVIA and reduced other expenses as well. Thus, the range seems a bit ambitious but is not totally implausible either.

I remind readers that any DOD order of USD 2 million would trigger a payment of USD 1.5 million (75%) to ACRX. In other words, any such order translates into one month's additional cash.

I would further expect that no management team will want to run its business with less cash needed for three months at hand. So, with my above (admittedly somewhat simplified) assumptions, ACRX would have to raise cash once the bank account has been run-down to some USD 4.5 million.

Let's now put this number into context:

Cash Situation

It is sensible to start with an analysis of the cash situation as of December 31, 2022, adjusted for some known effects.

Cash Outlook (Author)

This table deserves a couple of comments:

• Available cash as of 31. December 2022 in the top-line is directly taken from the company's 10K.
• So is the amount of remaining debt - I remind readers, that ACRX by now paid back the entire outstanding notional.
• I make an assumption about the cash interest expense until repayment, which is based on a 10% annualised rate (a blend of the floating rate actual interest and zero prepayment fee - as per the 8K.E).
• Then we know of the two payments received in the context of the DSUVIA sale, see separate section above.

Until including these two payments, as of the writing of this article, everything is based on actuals - even though, some estimates were necessary.

All further items, as discussed hereafter, (partially) relate to future events:

• I also added some cash interest earned during all of 2023 on the liquidity that ACRX actually holds, considering the more favourable conditions in that area. It's a very simplistic approach by assuming 1% interest on a linearly decreasing starting balance of USD 20 million.

Including this adjustment, ACRX would have USD 18.06 as available cash to spend across all of 2023 before it runs out of liquidity (entirely, see above comment on cash margin). This matches with the midpoint of management's operational cash consumption 2023 forecast discussed above.

I also added three more items, all set to zero in the table above, due to the significant uncertainty around them. But despite such uncertainty, they could easily become very relevant, thus I added them "pro memoria" (p.m.):

• First is the (or rather: any) expense reimbursem*nt from Alora, as discussed above. We don't know whether this effect is included in ACRX's guidance on net(?) cash spending, so it seems prudent not to allow for any positive contribution here. Plus, it is impossible to come up with a not-totally-random estimate. So, from a cash modelling perspective, this leaves room for upside, but most likely very moderately.
• Next is royalty payments to ACRX for commercial DSUVIA sales by Alora. I used nil contribution, which is the smallest possible amount because everyone who read until here is well aware that these sales have been tiny to date. I will not speculate about the long-term prospects for such commercial sales, since I am focussing on a 9-12-month view here. But again, there is actual upside, and again it is probably just moderate.
• Things could be different with regard to DOD sales. Admittedly, expectations about past sales have been considerably higher than actual sales, and expectations have always been moved to the next year, but there has been selling to the Army and others, plus there is a 75% share for ACRX of any net proceeds by Alora. Thus, I recall that any such USD 2 million sales will translate into USD 1.5 cash inflow to ACRX. Nonetheless, the above table does not take any revenue from DOD sales into account, which is excessively prudent, as discussed below.

Cash In Context

Summarising the key items from the previous discussion we get:

• A midpoint for ACRX cash use of USD 18 million in the course of 2023.
• Adjusted cash available for use in 2023 of USD 18 million, too. This excludes any upside especially from DSUVIA sales to the DOD and also some smaller items.
• My working assumption is that ACRX wants to hold at least three months of cash spending in their accounts.

Combining these data points (which are all modelled items), ACRX would need additional funds by the end of 3q2023.

This roughly reconciles with the following statement in the 10K:

Considering our current cash resources and current and expected levels of operating expenses for the next twelve months, we expect to need additional capital to fund our planned operations prior to the twelve-month anniversary of the filing date of this Annual Report on Form 10-K.

Interestingly, this is also close to what I consider the realistic best case with respect to ACRX receiving the EUA for Niyad.

And such EUA, regardless of when exactly it is being granted, would have all sorts of implications that are linked to cash and thus the balance sheet structure:

1. As discussed above, when acquitting Niyad / Lowell, ACRX agreed to make certain milestone payments. We don't know the exact details, but it seems reasonable to assume that a EUA in or around fall of 2023 would trigger such payment. It is at ACRX's sole discretion to make such payment in cash - triggering additional cash needs (but again, we don't know the conditions) - or in its own stock - causing further dilution. The latter would be extremely painful at the current share price.
2. Further, if ACRX were to actually start with commercialisation of Niyad immediately after being granted a EUA, this would probably trigger further (working capital) cash needs. Here, vendor financing may be an option: It's expensive, but could still be more favourable than dilution.
3. So, dilution is a massive risk for a company so tight with capital like ACRX. However, the stock market is all too often a huge "positive feedback-loop", i.e. it fuels existing trends: For example, worries about equity raises and the resulting dilution make investors sell their stock, which drives share prices down, which makes equity raise more painful, which makes investors worry even more and sell the stock. A vicious circle - and as with any vicious circle, one simply needs some good news to break it.

How does all this turn into valuation?

Outlook, Obstacles and Valuation

In this section, I first summarise my realistic best case, then discuss valuation implications and close with what could go wrong.

Realistic Best Case

So, here is the starting point for the valuation and how investors can monitor the progress:

• Management sticks to their forecasted cash spending for 2023, targeting the mid-point - this is hard to track from the outside, simply because we do not know the exact time pattern for the overall amount and we do not know what decisions were made with respect to discretionary spending, especially with accelerating or decelerating certain initiatives. That said, future quarterly reports will provide some idea.
• DOD sales pick up in 2023 and provide low-to-mid single digit USD million additional cash to ACRX, in other words buying a month or two of additional cash runway. - This will surely be reported by management in the quarterly financials at the latest.
• ACRX submits the Niyad application by the end of 2q2023 at the latest (and it has the due quality). - Again, investors will learn about the progress here through quarterly financials, or even a timely press release.
• ACRX receives the Niyad EUA within three months after submission. - No doubt, investors will learn very soon once the EUA is granted.

In a way, the above list of items is sorted by ascending "monitorability" and also by ascending relevance.

We need some additional assumptions though: First, the ramp-up of sales. Here, I assume, that ACRX will manage to go achieve an annual sales volume of USD 35 million within a year's time. And I assume that the net cash contribution margin from such sales is sufficient to cover the ongoing cash need.

Valuation (1)

In such scenario, ACRX has 16 million shares issued, and some USD 6-9 million of cash at hand by the end of 3q2023. It holds a license for selling Niyad in the US and has prepared commercialisation. The latter refers to contacts with ex-US suppliers, and contact to the relevant users and buyers of Niyad.

Combining all of the above, I think that in this scenario the share price will go soon up to USD 10. Why is that?:

• As I mentioned above, the stock market is self-enforcing. Once the risk of significant dilution is gone, the market will focus on revenues and earnings.
• I use a 3.2 P/S ratio for ACRX - this is well below the P/S of large pharmaceuticals of 4 and above. And with 16 million shares outstanding it turns into USD 5 million revenue required for any 1 USD of share price (= 16 / 3.2).
• In that case, a share price of USD 10 would translate into USD 50 million of mid-term revenue, and I think that - in such a scenario - this is a realistic assumption given the product pipeline.

Any investor believing that this scenario has a probability of 10% - even assuming that ACRX is completely worthless in all other scenarios - could find ACRX at the current stock price of USD 0.66 as providing a reasonable margin of safety.

Plus, should ACRX indeed move along the path of my realistic best case, it may attract other investors - especially, after getting rid of most of its most controversial asset, an opioid. This would provide for some additional favourable paths.

Obstacles

But of course, there are tons of risks. I mentioned many of them above, but for all clarity, if things just take longer than expected, dilution will come, and it will most likely be very ugly.

Many of the elements of my best case are outside the control of ACRX, in particular the time the FDA will take for approving the EUA or the sales volume with the DOD. And as stated above, ACRX management team has lost a lot of credibility in my view when it comes to their forecasting of timing for submissions to the FDA.

So, there is a large risk that the capital needs of the company will ask for very painful measures that do not leave much "value for our shareholders" - at least not for the current shareholders. This does not mean zero value, but one should prepare for at least doubling the share count, especially when considering the adjustment clauses to most of the current warrants.

Valuation (2)

I think it is impossible to come up with a price tag for ACRX for now. The range of possible outcomes is huge, in my view from USD 0 to USD 10 within the next 6-9 months.

Putting some weights to those outcomes as I have done above yields a valuation somewhere in the current range of around USD 0.66 and USD 1.00, depending on the risk-taking approach, especially for some kind of all-or-nothing stock (throwing an unfair coin).

But we will probably learn soon which path ACRX is on. As information unveils, the range is likely to narrow. This should provide investors with some guidance during the next 6 months or so.

Conclusion

I am not a buyer currently. First, because I have a large position already - a painful experience. But mostly, because I want to see management deliver at least in those areas that they do control. And I need to get more comfortable in the other areas.

Thus, I am downgrading ACRX again to Hold. In my view, the current market price does reflect the risks and I would need further evidence before deciding on a Buy or Sell rating.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Stephan Otzen