What happened

Shares of AcelRx Pharmaceuticals (ACRX -2.78%) dropped over 18% today after the company announced a stock offering. The transaction will add up to 14.6 million shares to the market, an increase of 24% relative to the number of shares outstanding beforehand, and provide the company with gross proceeds of up to $46 million. As of 12:35 p.m. EST, the stock had settled to a 17.1% loss. 

It may be difficult to believe given today's massive decline in share price, but Wall Street appears to think the stock offering is a net positive for AcelRx Pharmaceuticals. That's because the decline in share price is less than the increase in shares outstanding. But why would that be the case?

A chart on a chalkboard showing steady gains and then a sudden decline.

Image source: Getty Images.

So what

The stock offering will pad the balance sheet with around $40 million in net proceeds once all transaction fees are paid. AcelRx Pharmaceuticals boasted $63.6 million in cash at the end of September, so this week's capital raise will go a long way to increasing the company's financial flexibility. It will need every penny. 

The drug developer recently scored a big regulatory approval for Dsuvia, a new opioid drug that received quite a bit of media attention. Some thought that the U.S. Food and Drug Administration, which has its hands full attempting to contain an ongoing opioid crisis that claimed over 30,000 lives in the United States last year, shouldn't be approving even more powerful opioids. But the regulatory body thought the company's plan for mitigating the risk of abuse was sufficient, and granted marketing approval.

AcelRx Pharmaceuticals will now begin the difficult and expensive transition from a development-stage to commercial-stage company. Thus, the recent stock offering and the capital it provides is being viewed by Wall Street as something that will increase the business's chances of success.

Now what

A market cap of just $250 million (including the new stock offering) implies that investors don't have much confidence in the market potential for Dsuvia. That's despite the fact that some analysts have projected peak annual sales for Dsuvia and Zalviso, the company's other approved pain medication, at a combined $1 billion or more.

Given the serious concerns over opioids, and the significant public pressure on the FDA and all levels of government to do everything they can to halt the worsening addiction crisis, investors can't discount the social and regulatory risks facing AcelRx Pharmaceuticals. Then again, the drug industry's political power in Washington can't be discounted, either.