Surprises for small biotechs are often of the unpleasant variety. But that wasn't the case for AcelRx Pharmaceuticals Inc. (NASDAQ:ACRX) on Wednesday.

The U.S. Food and Drug Administration (FDA) released a briefing document in advance of an advisory committee meeting scheduled to review AcelRx's opioid pain drug Dsuvia on Oct. 12, 2018. This document fueled optimism among investors that the drug could be headed for approval by the FDA.

AcelRx stock skyrocketed nearly 36% on Wednesday in the midst of investors' enthusiasm. But is the biotech stock a smart pick to buy now? 

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The safety dance

AcelRx hoped to win FDA approval for Dsuvia last year. The biotech submitted a New Drug Application (NDA) for the drug in February 2017. Two phase 3 clinical studies conducted by AcelRx appeared to show that Dsuvia was effective in alleviating moderate-to-severe pain in patients who either arrived at emergency rooms with trauma or injury or who had surgery.

However, the FDA decided against approving Dsuvia. The agency stated in a Complete Response Letter (CRL) in October 2017 that additional safety data was needed on at least 50 patients. The FDA also said that changes were required for the drug's directions for use to address potential problems with patients taking Dsuvia, especially the possibility that dropped or misplaced tablets could increase risks of overdose and children accidentally taking the drug. 

AcelRx subsequently met with the FDA to determine how it could move forward. The biotech completed a human factors study to help address safety concerns. In May 2018, AcelRx resubmitted its NDA for Dsuvia. Within a few weeks, the FDA accepted the revised NDA and set a PDUFA (Prescription Drug User Fee Act) date for Nov. 3, 2018, to complete its review of the drug.    

The FDA's Division of Medication Error Prevention and Analysis (DMEPA) reviewed the human factors study completed by AcelRx. There's one enormously important statement in the briefing document prepared by FDA staff as a result of this review:  

Based on the data from this study, DMEPA has determined the product-user interface supports the safe and effective use of the product by the intended users, for its intended uses, and intended use environments.  

However, there were still some concerns about the potential for dropped or misplaced tablets. But because the risk mitigation proposal for Dsuvia requires that qualified healthcare professionals administer the drug, those concerns appear to have been addressed.

What's next for AcelRx

There are three key hurdles now for AcelRx to jump.

First, the FDA advisory committee will make its recommendation. The briefing document provides some reason for optimism that the committee will make a decision in favor of Dsuvia. However, it's certainly not a slam dunk.

Second, the FDA will make its approval decision. The agency doesn't have to go along with the advisory committee's recommendation -- either positive or negative. Most of the time, though, the FDA's approval decision matches the advisory committee recommendation.

If AcelRx clears these first two hurdles, it then has perhaps the biggest challenge: commercializing Dsuvia. The biotech has projected peak annual sales for the drug of $1.1 billion. Assuming Dsuvia wins FDA approval, AcelRx plans to ramp up its sales force to promote the drug, with the goal of eventually having 40 or more sales reps.

Opioid drugs are very controversial because of the epidemic of opioid overdoses in the U.S. However, AcelRx could be able to overcome the negative environment since Dsuvia targets acute pain rather than chronic pain and will be administered by healthcare professionals rather than taken by patients themselves.  

Is the stock a buy?

My view is that the odds of Dsuvia winning FDA approval are relatively good. The drug has already secured regulatory approval in Europe. AcelRx estimates that peak annual sales for Dsuvia in the European market could be in the ballpark of $800 million. 

The biotech also has another opioid that is already approved in Europe: Zalviso. As with Dsuvia, AcelRx failed to win FDA approval for Zalviso on the first try. However, the company plans to resubmit the NDA for Zalviso in the fourth quarter of 2018.

AcelRx is absolutely not a stock for conservative investors. There is still a significant risk that the biotech's products either won't be approved or won't be successful in the marketplace.

However, I think it's a different story for aggressive investors willing to take on considerable risk. I'm more cautious than AcelRx is on the commercial prospects for Dsuvia. But I still think the company could be on track to reach $1 billion in annual sales over the next few years with both Dsuvia and Zalviso.

AcelRx's market cap currently stands at less than $220 million even after the big jump on Wednesday. My take is that the stock could go much higher on positive news from the advisory committee this week and the FDA within the next few weeks. AcelRx is admittedly a bet, but it's a bet that I suspect will pay off.   

Keith Speights has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.