the bp view

Acrux (ACR)
March quarter revenues disappoint


Revenue decline defies volumes
Ely Lilly reported March quarter revenues for Axiron last Friday at US$39.5m which is significantly below our expectation of US$55m and the previous sequential quarter (US$55m).
This revenue result comes despite a period of stability in the independently reported prescription volumes for Axiron as taken from Bloomberg data. Despite this, the company’s statement this morning attributes the lower revenues to declining volumes associated with the recent controversy over testosterone replacement therapy. Eli Lilly management did not refer to Axiron revenues in its 1Q14 earnings call.
Next Milestone now looking unlikely in 2015
In the short term it is increasingly unlikely that Axiron revenues will exceed the estimated US$220m for calendar 2014 required to achieve the next US$50m milestone (due for payment in 2015). We have downgraded earnings by 66% in FY15 to reflect this change and upgraded FY16 earnings assuming the milestone is earned then. The timing of special dividends associated with the milestone changes accordingly. Changes to FY14 earnings are minimal.
Recommendation downgrade
We downgrade our recommendation to HOLD from BUY pending further enquiry with management. Target price lowered to $1.76 reflecting the now remote likelihood that the next milestone will be paid in March 2015.
Management will present today at Bell Potter in Sydney at 4pm.