the ms view - tp 2.50

Axiron Sales Deliver Milestone Payment; FDA Concerns for Category a Potential Negative for Demand

Analyst Note 03/04/2014
Following the recent Drug Safety Communication, or DSC, issued by the U.S. Food and Drug Administration, or FDA, we met with Acrux management and have undertaken a review of growth assumptions underpinning the transdermal testosterone therapy market opportunity. Following the review, our fair value estimate for Acrux decreases from AUD 4.20 to AUD 2.50. Notwithstanding the USD 25 million milestone payment and the recent launch of Axiron in Germany, the lower fair value largely reflects a slower ramp-up of future sales as a result of a lower-than-expected uptake of Axiron in the U.S. The shares look moderately undervalued, trading at a 15% discount to our revised fair value, but we reiterate our very high uncertainty rating. The lower fair value reflects changes to forecasts of cash flow during the remaining life of Axiron's key patent, which expires in 2027. Our valuation includes a consideration of the company's three other products, namely; Estradiol MDTS (U.S.) or Evamist, Recuvyra, and Estradiol MDTS (ex-U.S.) which are marketed respectively under licence by KV Pharmaceuticals, Eli Lilly, and Gedeon Richter. On a combined basis, the contribution of these three products to our new fair value is negligible. We have not at this stage attributed any value to two pre-clinical stage novel therapeutic candidates flagged, but as yet not detailed, by management.

Our investment thesis is unchanged. We do not consider Acrux to have a moat because of its single-product focus and limited control over sales given the out-licencing deal to Eli Lilly. Although the testosterone supplementation category has grown significantly in the U.S. during the past 10 years, based on evidence of increases in muscle mass and strength in healthy older men, we continue to view Axiron as largely a lifestyle product and remain cautious given the evolving dynamics of that market and the sensitivity of sales to end consumer demand.


Investment Thesis 02/24/2014
Acrux is a medical research and development company. The company was formed to develop applications of a patented transdermal drug delivery technology. Trials are relatively cheap and of short duration. Acrux is well funded, and has a high-quality board of directors, although recently lost its longstanding CEO.Acrux's technology, metered dose transferal spray, or MTDS, appears unique. Advantages over existing technologies include minimal skin irritation, dosage flexibility and ease of manufacture. Transdermal delivery provides generic drugs with a marketing point of difference. Patient surveys showed 100% of patch and 88% of tablet users would prefer Acrux's transdermal spray. Two out-licensed products have reached market, the most valuable being Axiron, a testosterone supplement for men. The product is the subject of a high-value licensing deal with Eli Lilly. Acrux fully developed Axiron so maximising its share of product value. Axiron is rapidly growing share in the fast-growing U.S. market. Acrux has also licensed several animal product applications to Elanco, Eli Lilly's animal health-care division. Acrux is a high-risk investment proposition. An out-licensing business model implies minimal control over sales. This lack of control implies the company has no moat. The majority of enterprise value deriving from only one product also increases business/investment risk. Investors in Acrux do not pay tax on dividends and capital gains because of its pooled development fund status.


Valuation 03/04/2014
Following the Drug Safety Communication, or DSC, issued by the U.S. Food and Drug Administration, or FDA, we met with Acrux management and undertook a review of growth assumptions underpinning the transdermal testosterone therapy market opportunity. As a result, our fair value estimate for Acrux decreases from AUD 4.20 to AUD 2.50. Notwithstanding the USD 25 million milestone payment and the recent launch of Axiron in Germany, the lower fair value largely reflects a slower ramp up of future sales resulting from a lower expected uptake of Axiron in the U.S. We reiterate our very high uncertainty rating. The lower fair value reflects changes to forecasts of cash flow during the remaining life of Axiron's key patent, which expires in 2027. Our valuation includes a consideration of the company’s three other products, namely; Estradiol MDTS (U.S.) or Evamist, Recuvyra , and Estradiol MDTS (ex-U.S.) which are marketed respectively under licence by KV Pharmaceuticals, Eli Lilly, and Gedeon Richter. On a combined basis, the contribution of these three products to our new fair value estimate is negligible. We have not at this stage attributed any value to two pre-clinical stage novel therapeutic candidates flagged, but as yet not detailed, by management.

Our investment thesis is unchanged. We do not consider Acrux to have a moat because of ts single-product focus and limited control over sales given the out-licencing deal to Eli Lilly. Although the testosterone supplementation category has grown significantly in the U.S. during the past 10 years, based on evidence of increases in muscle mass and strength in healthy older men, we continue to view Axiron as largely a lifestyle product and remain cautious given the evolving dynamics of that market and the sensitivity of sales to end consumer demand. The market's negative reaction following DSC, issued by the FDA, although in our opinion overdone, highlights the still significant regulatory risk inherent in Axiron.


Risk 02/24/2014
Risks relate to the staged development of new products leveraging its proprietary drug-delivery technology, regulatory decisions, poor execution by marketing or out-licensing partners, success of competitor products, and general funding challenges.


Management 03/04/2014
Not available.


Overview

Profile:

Acrux is an Australian drug delivery company developing and commercialising a range of patient-preferred pharmaceutical products for global markets, using innovative, patented technology to administer drugs through the skin. Acrux conducts its operations in Australia, Switzerland, USA and overseas, with three marketed products including Axiron, Evamist and Recuvyra.