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AcelRx Pharmaceuticals

BUY Target: US$9.00

AcelRx Pharmaceuticals is a specialty pharmaceutical company focused on the development and commercialization of innovative therapies for the treatment of acute and breakthrough pain. AcelRx’s lead product, ARX-01, is designed to provide patient-controlled analgesia (PCA) and overcome the issues currently encountered with IV PCAs.

We like AcelRx’s positioning here ahead of anticipated Phase III trial data with two key events now behind us, including (1) recent equity raise establishing a solid cash position into potential partnering discussions next year and (2) positive Phase III comparator data for its Sublingual Sufentanil NanoTab PCA System (ARX-01) versus IV PCA with morphine (current standard of care). The financing helps broaden the investor base while providing cash runway into fiscal 2014 with focus now turning to: (1) two remaining Phase III studies for major abdominal and orthopedic surgery versus placebo, with data expected in Q1/13; (2) potential Rest of World partnerships for lead program ARX-01; and (3) NDA submission, which remains on-track for Q3/13. We reiterate our BUY rating and $9 price target as we continue to see attractive risk/reward in AcelRx for small cap investors, with a host of key catalysts coming up in 2013.
Model update – reflects additional share issuance and net cash proceeds
We have updated our model to account for the 14.375 million shares issued in mid-December and net $44.2 million in net cash proceeds that should provide runway into 2014. For 2012-2017E EPS, we are now at ($1.44), ($0.39), ($0.46), $0.04, $0.63, and $0.98. We make no changes to our ARX-01 model assumptions and remain 60% risk-adjusted pending approval with an assumed early 2015 US launch, with Rest of World to follow one year later.
Valuation – no change to $9 price target
Our $9 price target is based on an equal-weighted 17.0x P/E on our 2017 risk-adjusted EPS forecasts discounted back, and NPV on the full US and partnered RoW ARX-01 opportunity using a 26% WACC rate (which we have lowered modestly post the raise).

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