It has been a wild read for shareholders of Acrux since listing...

It has been a wild read for shareholders of Acrux since listing in 2005. The spectacular success of Axiron took the business to giddy heights and in 2012 the share price exceeded $4. No doubt this success filled management with confidence and aspiration, and spurred them to pour substantial sums into R&D.

The recent stumbles with Axiron, culminating in the cessation of the licencee agreement and the now loss of all associated revenues, and thus the loss of all of Acrux’s material revenues, was delivered to shareholders as a series of blows, unmet assurances and disappointments. What’s more, all the R&D investment outside of Axiron has failed to provide meaningful revenue streams and thus failed provide Acrux with any real revenue diversification.

Shareholders have been bruised and expectations are now very low. It is probably, and understandably, now hard for shareholders to see beyond the gloom. It is hard to for instance, to remember that despite the substantial sums invested in R&D, Acrux has always held a very conservative balance sheet, and displayed very simple, non-nonsense accounting.

But every cloud has its silver lining. This negativity means that today Acrux offers substantial value (in my estimation).

By way of illustration, as at the last audited accounts (Dec 2017) Acrux had nearly $32m in cash and receivables, net of all balance sheet liabilities. But I suspect that much of Acrux’s value does not sit on the balance sheet. At Dec 17, it had cumulative R&D investments in its new generics pipeline in excess of $10m (my estimates). Today, some of the cash will have been further invested in R&D. Nevertheless, we can say that there is currently in excess of $42m in value which is directly traceable to, or earmarked for, the programs that are being targeted for commercialisation (the generics), at cost.

To be extra conservative, we can take the dim view that half of the operating costs (excluding R&D expenses) are unproductive. After all, Acrux is a tiny player and may be at a scale disadvantage (perhaps). I estimate that the company is currently bearing about $3m in annual operating costs that are not directly associated with R&D. So if half of this cost is fat, and we apply a multiple of 7 to it, then we can say that this is costing us 7 x 3/2 = $11m. On this basis, we can say that we are getting $31m of replacement value (42 - 11).

Today’s share price of about 16c, implies a market capitalisation of under $27m ($28m if we assume full dilution for all options currently on issue). As such, in my estimation, a buyer today is only paying for the generics pipeline at replacement value. Whilst that in itself is attractive, the truth is that a buyer today is getting much more, for free. In my estimation, a buyer today, is additionally getting the following:

• Technical know-how and experience acquired over decades. By way of illustration, I estimate that Acrux has invested over $70m in R&D since its IPO in 2005 (additional to the investment in the generics program I previously identified). It needs to be acknowledged that the current generics strategy is targeting the niche of topical/transdermal applications, which leverages this R&D.
• A growing royalty income stream from sales of Lanzetto (though still from a very low base).
• The value of commercial links established with customers, suppliers & partners as a result of current and prior commercialised products (Axiron, Evermist, Lanzetto, Recuvyra).
• The industry credibility that comes from the above commercial links and prior commercialised programs (this is not a startup!).

In my estimation, that’s a lot of freebies being thrown into a purchase. Of course, there is no guarantee (that I can see) that the generics strategy will bear substantial fruit. As such I shall be limiting my commitment to a small portion of my capital. However, this looks to me like an attractive risk versus reward opportunity.