EUR 850.00 For Business Accounts Only

Morningstar | All Eyes on Licensing Partners and Shape of the Deal; Maintaining FVE for Acrux

No-moat Acrux reported full-year results in line with expectations both at the top and bottom lines marking the end of a difficult 12 months. Reported full-year loss of AUD 9 million, excluding impairments, on group revenue of AUD 2.7 million compared with our forecast loss of AUD 9 million on group revenue of AUD 2.6 million. Nonetheless, Acrux ended fiscal 2018 on a high note with AUD 28.5 million in cash on hand and 13 products in the generic pipeline. Given the recent announcement of its Abbreviated New Drug Application dossier submission for review by the U.S. Food and Drug Administration for its generic version of antifungal topical solution, branded Jublia, there was little in the result that would alter our medium-term view of the company.

As such, our fair value estimate remains unchanged at AUD 0.23 per share. This reflects current royalty streams from existing out-licensed products, as well as our assessment of the generic Jublia opportunity based on the branded drug's annual U.S. sales of around USD 280 million as at March 2018 and our probability-weighted assessment of the two more generic product candidates being filed in fiscal 2019. We have applied a 75% probability of success to these potential products and assumed target markets similar to that of Jublia in terms of competitive dynamics and formulation complexity. At current levels, we consider Acrux to be trading roughly in line with fair value.

From a balance sheet perspective, Acrux is in reasonable shape given AUD 28.5 million in cash and no debt. Further, we think management's prudent decision to suspend the dividend in fiscal 2016, and conserve cash following the demise of Axiron was appropriate and remains in place. Nonetheless, and notwithstanding the staged nature of drug development which allows projects to be parked subject to capital constraints, we think this should support around two or three years of R&D spend at current levels, adding urgency to securing a commercially attractive deal in the near term. Although this will vary in terms of milestones and royalty streams, our modelling assumes no upfront payments and a flat royalty stream of about 12% of gross sales based on our estimates of the Axiron deal with Eli Lilly. As such, our very high fair value uncertainty rating remains intact.

As outlined in the note "Acrux Achieves Milestone With First-to-File Submission for Generic Topical Antifungal" published on Aug. 2, 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.