rbs morgans valuation $3.88, page-7

RBS Report:

Acrux

All systems go

Eli Lilly, ACR's marketing partner, has launched Axiron in the US market. This is a significant achievement and, as ACR moves to the generation of recurring and sustainable cash flows, we expect the company to be re-rated. Buy retained.

Axiron launched in the US

ACR's partner, Eli Lilly (NYSE: LLY, NR), has launched Axiron (testosterone) topical solution in the US market. Axiron is the first testosterone replacement product approved for administration via the armpit (underarm). The male testosterone therapy market in the US is worth US$1bn per annum and growing at 20% annually (IMS data). By way of background, Eli Lilly is the worldwide exclusive licensing partner for Axiron. To recap, the deal consists of an upfront payment of US$50m (received in FY10), US$3m on the transfer of manufacturing assets (US$1m received in FY10), US$87m on marketing authorisation (received in December 2010) and up to US$195m in potential commercialisation milestones, as well as royalty payments on future global sales.

Dividends have commenced

ACR also recently declared a special dividend of 60c (about A$100m). The dividend is unfranked and exempt from tax. The key dates are: ex-div 31 March 2011, record 6 April 2011 and an expected payment on 19 April 2011. As a result, we estimate ACR will conclude FY11 with A$28.3m in cash. We forecast an ongoing dividend payout ratio of 25%.

Focus on upcoming milestones

Upcoming milestones include the receipt of ongoing updates on the progress of the Axiron launch in the US and the filing of marketing applications for Axiron in a number of countries outside the US. ACR also expects a decision from the Swedish MPA in relation to its Ellavie product in 1HCY11 and, shortly following this, will look to secure a suitable distributor for the major European markets. In our view, as ACR moves to the generation of recurring and sustainable cash flows, the company is likely to be re-rated.

Buy maintained: A$3.88 target price

We make no changes to our forecasts or A$3.88 DCF valuation and target price. Risks to our target price include the group?s ability to commercialise its pipeline and ACR?s partner?s ability to drive revenues.