Axiron Sales Deliver Milestone Payment; FDA Concerns for...

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

Analyst Note 04/28/2014
Axiron net sales, as announced by Eli Lilly, for the quarter ended 31 March 2014 totaled USD 39.5 million, a decrease of 27% on a sequential basis, compared with net sales of USD 53.9 million in the previous quarter. Although disappointing given its magnitude, the decline was not unexpected and largely reflects, in our opinion, the short-term negative impact of the Drug Safety Communication, or DSC, issued by the U.S. Food and Drug Administration, or FDA, on 31 January 2014 on uptake of the product in North America. The DSC highlighted an investigation of adverse events reported among men taking FDA-approved testosterone products and in particular the risk of stroke, heart attack (myocardial infarction) and death. Notably, the assessment process is ongoing, does not have a defined time period, and has not rendered any conclusive data to date. Furthermore, the FDA has advised patients not to stop using the products without consulting their physicians. Acrux management has, however, flagged the potential of a miss in sales targets with a USD 50 million milestone amount not being paid until fiscal 2015, versus fiscal 2014 as previously indicated.

Our investment thesis remains intact. We do not consider Acrux to have a moat given its single-product focus, and limited control over sales under the Eli-Lilly agreement, and reiterate our very high uncertainty rating. Current weakness in sales is not necessarily indicative of the longer-term commercial potential of Axiron and highlights the high, but inherent, level of regulatory risk and sensitivity to end consumer demand. We have revised our sales estimates for fiscal 2014 and 2015 downwards to AUD 55 million from AUD 64 million, and AUD 96 million from AUD 99 million, respectively. Nonetheless, our longer-term forecasts remain unchanged pending the final conclusions by the FDA. The stock is well below our fair value estimate, which remains unchanged at AUD 2.50, and is therefore significantly undervalued.