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The Rise and Fall of 3 Market Darling Healthcare Stocks

By Bob Kohut | 25.05.2015

Within the upward trending Healthcare Sector lurks the siren call of the explosive potential of Biotech and Medical Equipment stocks. Investors flock to companies touting new drugs or devices to treat a variety of medical conditions.  Unfortunately, that explosive potential is a double-edged sword, as a dramatic rise in share price can later see an equally dramatic fall.
In the last three months three companies once favored by investors and analysts alike have seen share price declines ranging from 12% to 30%.  Here are the three stocks and the percentage drop of each:

•   Acrux Limited (ACR) -30%
•   ResMed Inc. (RMD) -15%
•   Sirtex Medical Limited -12%

Each has a story behind the fall but all share common catalysts – a communication from the US FDA (Food and Drug Administration) or the release of negative late Phase Clinical Trial results. Nothing sets investor appetites on fire like the prospect of cracking the lucrative US market. Conversely, even the hint of negativity from the FDA can send a stock plunging to the nether regions. Negative trial results outside the FDA sphere are not exactly candidates for later submission to the FDA.
Let’s examine the story behind the rise and fall of ACR, RMD, and SRX to see if the fall in share price represents a possible buying opportunity or a classic value trap.
The Acrux problems are not of recent vintage, going back to the closing months of 2013.  The company’s share price exploded on the news it had reached a marketing agreement with Eli Lilly and Company, one of the biggest pharmaceutical houses in the US, to distribute its treatment for testosterone deficiencies in men, Axiron.
Investors who bothered to look into the company at that time rather than punt on market hype found the company had two products already in distribution, and one in final clinical trials:

• Axiron® --   marketed by Lilly in the US and other territories for testosterone deficiencies
• Evamist® (Estradiol Spray) -- marketed in the US and Europe for menopausal hot flushes
• Recuvyra® --- final trials of a treatment for post-operative pain in dogs.

In addition, the business model called for licensing marketing partners to commercialise its treatment, which reduces risk by cutting costs associated with marketing and distributing. Revenue comes in the form of signing fees and ongoing royalties.  
A check of the Acrux product pipeline would have revealed three other treatments in very early stages of development; one for non-melanoma skin cancers, one for treatments for pain and inflammation, and one anti-fungal treatment. At the time it appeared Axiron® would be the main driver of this company’s growth.
From the time Axiron® completed Phase 3 Trials in late 2009 the share price began to rise, boosted by the agreement with Lily and FDA approval in 2010.  The share price on the day Axiron® completed its trials was $1.47 and rose to $3.47 on 24 December when it received FDA approval, later rising to $3.87 as sales began in the US.  There were dips along the way but the stock was still trading above $3.00 in October 2013, before the slide began.
First there had been concerns about the timing of royalty payments from Lily.  Then in November 2013 a research study appeared in Journal of the American Medical Association (JAMA) associating testosterone treatments with cardiac problems. On 31 January 2014 the company announced the FDA would investigate the risk of “stroke, heart attack and death in men taking FDA-approved testosterone products.” Investors abandoned the stock in droves.  Here then is the rise and fall of ACR over a five year period.
On 4 March of this year the FDA finally issued its findings.  Here is what they said, in part:

•   We are requiring that the manufacturers of all approved prescription testosterone products change their labeling to clarify the approved uses of these medications. We are also requiring these manufacturers to add information to the labeling about a possible increased risk of heart attacks and strokes in patients taking testosterone. Health care professionals should prescribe testosterone therapy only for men with low testosterone levels caused by certain medical conditions and confirmed by laboratory tests.

In addition, the agency asked all manufacturers of testosterone therapy treatments to conduct further clinical trials to study the risk of stroke or heart failure with the treatment.
The few remaining bulls on ACR take heart in the fact the FDA did not pull the treatments.  In addition, Acrux sales of Axiron reported for Q1 of 2015 were essentially flat, dropping from $39.5 million in Q1 of 2014 to the current $39.1 million.  The numbers were reported on 24 April and the share price shot up about 12%.
Potential investors at this point will be hard-pressed to find much in the financial news regarding the future of Axiron® and Acrux.  Common sense would indicate it bears watching.
First of all, Axiron® is a prescription medication that already came with warnings of potential side effects.  Physicians may be more cautious in prescribing testosterone treatments, but some may see the FDA calling on the manufacturers to keep studying the issue of stroke and cardiac risk as puzzling.  
Second, will new warning labels make that much of a difference?  In March 1998 the FDA approved a drug called Viagra and by November of that same year the agency asked for new labels, advising caution for anyone with a history of cardiovascular disease, including heart attack, stroke, angina, or high or low blood pressure.
Third, the FDA is not targeting Axiron® directly but rather all forms of testosterone treatment and Axiron® is considered one of the safest treatments available.
Fourth, Axiron® is being sold around the world and the market for testosterone treatments is expanding with an aging population.  Acrux management stated in the announcement of the FDA recommendations that Lily was “working closely” with the FDA in the best interests of patients needing treatment.  Common sense says the thing to watch here is Axiron® sales in the next two Quarters to see the impact of the FDA recommendations.  Given the declining Acrux market share it is not beyond the realm of possibility that Lily could step in and acquire the company.
The story behind the fall of ResMed and Sirtex Medical is recent and far less complicated.  In addition, both these companies have a solid history of performance. The following table includes some relevant statistics.

	Column 1	Column 2	Column 3	Column 4	Column 5	Column 6
0	​	52 Wk % Change​	3 Year Total Shareholder Return​	5 Year Total Shareholder Return​	10 Year Total Shareholder Return​	5 Year AverageEarningsGrowth​
1	ResMed Inc.​ (RMD)​	+33%​	33.9%​	15.2%​	14%​	17.2%​
2	Sirtex Medical​ (SRX)​	+65%​	69.3%​	44.3%​	35.8%	9.7%​