EUR 850.00 For Business Accounts Only

Morningstar | Generic Pipeline News Flow Imminent; Acrux Approaching Significant Milestone

We are raising our fair value estimate for Acrux to AUD 0.15 from AUD 0.13, after incorporating forward currency assumptions for USD/AUD exchange rates and remain cautiously optimistic on the upcoming filing of the first of 12 generic product candidates for the U.S. Food and Drug Administration, or FDA, with approval expected imminently. This will represent the first generic product for the company developed in-house to reach filing stage since Axiron back almost a decade ago. Two more filings are also expected in the near term for a total of three products, if approved, will target an addressable market of around USD 440 million. Contingent on licensing, we anticipate late fiscal 2019 as the earliest these could reach the market given a typical 12-month review process. According to management, the topical generic pipeline contains the 12 product candidates and is targeting addressable topical markets totaling around USD 1 billion of which 65% currently have no other generic competitors. We think this lack of competition provides something of a buffer to the price erosion dynamic seen in the oral generics purchasing environment in the U.S. in 2017.

The black box nature and inherent lack of transparency associated with generic drug development limits our ability to value the Acrux pipeline product candidates at this point. This includes visibility on competitor pipelines, whether the incumbent branded product is out of patent, and the potential implications for price erosion. As such, our fair value estimate is driven by forecast cash flows from licensed products Evamist in the U.S., Lenzetto in Europe, and Recuvyra, and at AUD 0.15 per share, screen as fairly valued.

Nevertheless, based on a variety of assumptions around the timing of the FDA filing process, first to file status, number of generic competitors upon launch, price erosion, successful out-licensing, and ultimately, royalty stream, we estimate a hypothetical upside valuation of AUD 0.19 per share, or 26% above the current share price, all else equal. Specifically, this assumes all three generic submissions are approved by the end of fiscal 2019, and are first to market allowing for 180-day exclusivity alongside the branded products authorised generic, 40% price erosion upon launch, followed by a steady 10% decline thereafter. In this scenario, we assume another competitor entering after the 180 days and diminishing market share to around 25% with price erosion trending towards negative-5% over the longer term. Our hypothetical scenario assumes all three products are out-licensed on a royalty stream of 12% in line with the Axiron deal with Eli Lilly.

Despite proprietary drug delivery technology, we continue to view Acrux as a no-moat company given its reliance on licensee partners to bring products to market. Acrux therefore needs appropriate partners with access to financial resources and established distribution channels to achieve attractive royalty terms on a consistent basis. Further licensing opportunities and ultimately royalties will vary according to the product's competitive profile. At this stage, management has not discussed potential partners.

The company remains in good financial health with AUD 32.4 million in cash on hand at the end of the first half and no debt. We think this represents a cash runway of around three years and comfortably within the timeframe expected to allow for commercial licensing and distribution deals pending FDA approval of expected near-term filings.