Back IssuesHuntley's Recommendation: Acrux...

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Huntley's Recommendation: Acrux Limited

Recommendation: Hold

ACR is trialing a range of applications of its patented transdermal drug delivery technology. These include treatments for menopause, sexual dysfunction, chronic pain, and nausea and a contraceptive application. All these markets are large. Trials are relatively cheap and of short duration. ACR is well funded, has one of the best quality Boards in the biotech sector and with products close to commercialisation. Despite its positive characteristics, as an R&D company the stock must be considered speculative.

Event04-Jun-2009
We think the strong recovery in the share price from below $0.50 largely reflects a broad recovery in investor risk appetite and ACR’s considerable near-term earnings potential. During the recent sharemarket depths, investors indiscriminately sold stocks that lacked earnings. As a result some better quality, high-risk situations reached very oversold levels. ACR is arguably one of those.

Business Impact: While ACR has a licensed product in market and several others under development, the primary value-driver is currently Axiron, a treatment for testosterone-deficient men. With 20%-39% of men over the age of 50 in this category the market is large, US$900m and growing 20% annually. There appears to be significant upside with only 5%-10% of cases currently diagnosed and treated. ACR expects Axiron to enter market in late 2010. Patents run to 2017 with another patent application pending for an additional nine years protection. Deals of similar products at similar stages of development typically capture around 40%-50% of a product’s value. In the case of Axiron we estimate this would translate to $240m+, although we more than halve this in our valuation to reflect commercialisation risk.

Forecast Impact: --

Recommendation Impact: The stock has moved well beyond our valuation and Accumulate limit of $1.05. We expect the next market correction to provide another, more attractive entry opportunity.

Event Analysis
We think the strong recovery in the share price from below $0.50 largely reflects an overall recovery in investor risk appetite and considerable near-term earnings potential. During the recent sharemarket depths, investors indiscriminately sold stocks that lacked earnings. As a result some better quality, high-risk situations reached very oversold levels. ACR is arguably one of those. While ACR has a licensed product in market and several others under development, the primary value-driver is currently Axiron, a treatment for testosterone-deficient men. With 20%-39% of men over the age of 50 in this category the market is large, US$900m and growing 20% annually. There appears to be significant upside with only 5%-10% of cases currently diagnosed and treated. Market research indicates two thirds of patients would prefer AXIRON to their existing gel and 87% of physicians would offer it to existing gel patients. Convenience advantages over existing products are likely to expand the market. The market leader in the category generates annual sales over US$400m. We expect AXIRON to take significant share and generate US$200m+ of sales. On satisfactory conclusion of product development, we estimate ACR could sell the technology for US$100m. A licensing deal may capture more value, particularly in the current capital-constrained environment. ACR expects Axiron to enter market in late 2010. Patents run to 2017 with another patent application pending for an additional nine years protection. Deals of similar products at similar stages of development typically capture around 40%-50% of a product’s value. In the case of Axiron we estimate this would translate to $240m+, although we more than halve this in our valuation to reflect commercialisation risk. The transfer of the manufacturing process to manufacturing partner Orion Corporation in Europe is complete. ACR expects its Evamist hormone treatment for menopausal women to generate peak annual royalties of US$15m in the US market and roughly twice that in Europe. The licensee in the US, KV Pharmaceuticals, had a major setback late in 2008 when a government audit found its manufacturing quality below acceptable standards. KV had to recall most of its products. Fortunately, while KV markets ACR’s product, it outsourced its manufacture to a third party. Still this could not have been positive for Evamist sales. KV paid Vivus – the original US licensee - US$150m for the US rights to Evamist, a significant endorsement of the product and delivery technology that underpins all ACR’s products under development. ACR retains the rights to Evamist in Europe. Until we see evidence of meaningful sales traction we attribute only $30m of value. ACR also licensed the technology to Eli Lilly for animal health applications, the first of which we understand is close to market launch. For commercial reasons few details are available regarding these products. As at March 31, 2009 ACR had cash of $19.6m. Should it receive upfront licensing fees in 2009 for Axiron it is unlikely to need further funding for the current development pipeline, any additional funds would be for new product development so theoretically not dilutive. The stock has moved well beyond our valuation and Accumulate limit of $1.05. We expect the next market correction to provide another, more attractive entry opportunity.