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Morningstar | Acrux Achieves Milestone With First-to-File Submission for Generic Topical Antifungal; Raising FVE

No-moat Acrux has achieved an important company milestone by confirming the U.S. Food and Drug Administration acceptance for review of its Abbreviated New Drug Application dossier for its generic version of antifungal topical solution, branded Jublia, manufactured by Valeant Pharmaceuticals. Further, the FDA confirmed the submission was made on the first possible date ahead of the data exclusivity period. Put simply, this means Acrux is well positioned to secure 180 days of generic market exclusivity on final approval. This heralds a new era for the company with its generic-focused pipeline and sets the stage for Acrux to enter commercial negotiations with potential licensing partners. This could see launch of the Acrux generic Jublia in the first quarter of fiscal 2020, following a 12-month review period by the FDA. Jublia, available only on prescription and applied daily over 48 weeks, was launched in 2014 for the treatment of onychomycosis (fungal infection of toenails and fingernails), growing to annual U.S. sales of around USD 280 million as March 2018.

Acrux intends to file two more filings in the near term for a total of three products, targeting an addressable market of around USD 440 million. We think today’s news bodes well for the filing of the remaining two products in the near term and move to incorporate a 75% probability of success for these in our valuation. Nonetheless, this assumes the other two generic candidates are targeting branded markets with competitive dynamics similar to Jublia.

As such, we raise our fair value estimate for Acrux to AUD 0.23 to reflect the impact of the generic Jublia opportunity and our probability-weighted assessment of the other two lead generic product candidates being filed in fiscal 2019. At current levels, shares in Acrux are trading at a 22% discount to our intrinsic assessment and are therefore undervalued, in our opinion, albeit with a very high fair value uncertainty rating.

We think onychomycosis is an attractive market, given the prevalence of nail bed infections in the general population and limited treatment options available prior to the launch of Jublia. As such, we expect the entry of at least two more generic competitors in the short term for a total of four market players, each with around 25% market share in fiscal 2020. We think Jublia’s best-in-class status and first-mover advantage support a pricing premium that makes it more susceptible to price erosion. As such, we model a relatively high 65% price decline in the first six months, followed by price deflation of 10% thereafter, given what we anticipate will be a competitively priced generic space. In our base case, we assume Acrux will most likely share the 180-day exclusivity period with two other players, not including the branded product, which will see each participant with a USD 54 million market share in fiscal 2020. We have assumed Acrux secures a licensing deal over the next 12 months on a royalty stream of 12%, broadly in line with the Axiron deal with Eli Lilly.