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Biotech Stock Mailbag: AcelRx, Yellen Aftermath, Nymox

BOSTON (TheStreet) -- Welcome back to the Biotech Stock Mailbag.

Unless something goes horribly wrong, AcelRx Pharmaceuticals (ACRX - Get Report) should win FDA approval for the Zalviso pain-killing device on July 27. I won't go into details here, but the Zalviso phase III studies were all well designed and positive. The painkiller in Zalviso is a tiny sublingual (under the tongue) tab of sufentanil, which is already FDA approved for intravenous use. Regulators aren't likely to be concerned about approving a new formulation of a proven drug. The biggest risk to approval is if FDA finds an unresolved problem with the Zalviso dispensing device or the software which runs it, but again, no issues appeared to crop up in the clinical trials. 

Zalviso works like a high-tech Pez dispenser, except instead of a small brick of flavored sugar, the device doles out an even tinier, dissolvable sufentanil pill for patients in the hospital recuperating from surgery. If you've ever had surgery or just watched a TV show about hospitals, you know about the "red button" which patients press when experiencing pain to deliver a dose of morphine through an intravenous line in their arm. AcelRx is developing Zalviso to replace the so-called "IV PCA" delivery of morphine for post-surgical hospital patients.

AcelRx has a very good description of Zalviso, including a video showing how the device is used, on its web site. You should definitely check it out. Some of the device's features, including an RFID-embedded bandage worn on the patient's thumb to prevent unauthorized diversion of the sufentanil, are pretty cool.  

I spoke to a Top 10 holder of AcelRx. He believes Zalviso can capture 30% of the IV PCA post-op surgical market in U.S. hospitals with parity pricing, generating peak sales of $400 million. Upside revenue in the U.S. could come from broader use of Zalviso beyond the surgical setting, i.e. to control moderate-to-severe pain. The stock's current market cap of $400 million only bakes in about $100 million in Zalviso sales -- too low, he believes. AcelRx has a partner pursuing Zalviso approval in Europe, so any revenue generated there is also upside to these estimates. 

The bear thesis on AcelRx focuses mostly on Zalviso adoption. Will hospitals ditch the long-entrenched IV PCA morphine pumps and replace them with Zalviso devices to treat patients experiencing post-surgical pain? Bears say no, there's little incentive for hospitals to make the switch. And shorting the stocks of companies trying to sell products into hospitals has been a winning trade, historically. 

AcelRx bulls, like the shareholder mentioned above, believe doctors and nurses hate IV PCA enough to embrace Zalviso because it's more convenient and less prone to user error. Hospital administrators and bean counters will like Zalviso because it won't cost more than IV PCA but will improve quality care and patient satisfaction scores. And shorting companies selling into hospitals has not always been a winning trade -- just ask the guys short Cadence Pharma before it was bought for $1.3 billion by Mallinckrodt (MNK), or short Pacira Pharma (PCRX) before the Exparel commercial launch ran them over. 

The July 27 FDA decision is important for AcelRx, obviously, but Zalviso's approval won't settle the debate. For that, we'll need to watch the company's commercial execution. I was much more skeptical about Zalviso before taking a closer look at the device and the issues hospitals and patients have with IV PCA. Zalviso is very well thought out and addresses real problems with the current approach to post-surgical pain relief in the hospital. Count me bullish on AcelRx.

Fed Chair Janet Yellen called the valuation of small-cap biotech stocks "substantially stretched" in a report to Congress on Tuesday. As you might expect, biotech stocks tumbled on Yellen's remark. Here's what the IBB and XBI -- widely followed ETFs -- looked like at Thursday's close:

IBB Price Chart
IBB Price data by YCharts

The XBI is more heavily weighted towards small-cap biotech stocks, which explains why it's down more on Yellen's comment. World events aren't helping the overall stock market, either.

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