Acrux: The bear case

Acrux is the second most shorted stock on the ASX but, as Graham Witcomb explains, the bear case doesn't stack up.

Just a month after we upgraded Acrux, the Financial Review has published the case for selling. That’s despite the most recent research finding testosterone replacement therapy (TRT) is safer than earlier studies suggested.

Acrux’s share price has more than halved since the unfavourable studies triggered an investigation by the US Food and Drug Administration (FDA) in February, with a decision expected early next year.

The bear case centres on three main points: (1) growth for testosterone replacement therapies is slowing; (2) competition from generic and new products is increasing; and (3) Acrux’s main product, Axiron, is an inferior treatment. Let’s examine each claim in turn.

(1) Growth expectations

Monthly prescription volumes for TRT are currently 25% lower than they were in mid-2013. While it’s true that Axiron prescriptions are down by a similar percentage, sales have actually increased around 10% in dollar terms. That’s primarily because US pharmaceutical giant Eli Lilly, which distributes Axiron and pays royalties to Acrux, has been able to increase prices and reduce rebates to health insurers that subsidise Axiron now that it's well established – market share has increased from zero to 14% in just three years.

The FDA investigation has certainly led to a decline in TRT prescriptions, and volumes were already falling before the investigation was announced. The question is whether prescriptions for Axiron will continue to fall, as the bears believe.

While total TRT sales only grew 9% in 2013, compared to roughly 20% a year over the preceding decade, only 10% of men with low testosterone are being treated. Outside the USA treatment is almost non-existent. The market today is six times larger than a decade ago partly because our improved understanding of testosterone’s role in the body has expanded its use as a therapy.

Where testosterone was once purely viewed as a sex hormone, it’s now also used to treat depression and increase muscle mass. That trend looks set to continue as TRT is being trialled as a treatment for diabetes, osteoporosis and obesity. GIA, one of the world’s largest industry research firms, forecasts the testosterone market will more than double to $5bn by 2018.

Bottom line: Sales may continue to decline in the short term, but market fundamentals over the long term remain favourable.    

(2) Is competition increasing?

Undoubtedly. Several generic versions of existing therapies will become available over the next few years, on top of new long-lasting injections and less irritating oral capsules. That will place pressure on volume growth and pricing, but shouldn’t render Axiron obsolete.

For starters, Axiron is the safest of all TRT alternatives currently available – Axiron is applied under the arm, so the risk of poisoning a loved one with physical contact is reduced. As other approved therapies, like Androgel, lose patent protection and are sold as generics, that fact won’t change. They may put pressure on Axiron’s price but doctors will still want to prescribe the safest product to avoid getting sued.

As for new therapies still trying to get FDA approval, injections are tricky because they can cause a sudden spike of testosterone in your blood, triggering aggression and anxiety, unlike slow release options such as gels and Axiron.

Improved oral capsules are probably the biggest threat but, as they aren’t approved for sale, it’s difficult to predict their popularity. They’re likely to steal market share from inferior therapies before they replace Axiron. They can also produce side effects, such as nausea, so capsules won’t suit everyone.

It's also some comfort that Eli Lilly only bought the rights to Axiron four years ago. The nature of pharmaceutical registration means the entrance of generics and substitutes has been well known for years. Yet Lilly was willing to pay Acrux hundreds of millions for the right to sell Axiron, and its global distribution network for men’s health products is widely regarded as the best.

Bottom line: Competition is rising and capsules are a threat, but there's still plenty of room for Axiron to maintain or grow market share.

(3) Is Axiron inferior?

The Financial Review article opened with a reference to Cafepharma – 'a forum for pharmaceutical sales representatives' – which is the most contentious aspect of the case for selling Acrux. The website contains comments describing how patients hate Axiron and how it’s getting killed by the competition. There were also suggestions that Lilly wants to sell the Axiron licence, but unfortunately the vast majority of negative comments were left anonymously.

This contrasts with almost every other review website and forum, such as those for body builders or people undergoing gender reassignment surgery, where contributors generally leave their name, are contactable and appear less biased. These reviews were overwhelmingly positive and users had often tried multiple products.

Bottom line: Patients seemingly regard Axiron as among the best TRT products on the market, if not the best.

In contrast to the research that triggered the FDA investigation, a study of 25,000 men published earlier this month by the University of Texas found that testosterone doesn't increase the risk of heart attack. What's more, for men most at risk, testosterone was actually found to be 'modestly protective'. It’s too early to declare victory as the FDA investigation is ongoing but the evidence appears to be piling up in Acrux’s favour.

Axiron is currently a leading product in a market loaded with potential. We’re not selling, but as Acrux is a company with one royalty stream at risk from an ongoing investigation we’re sticking with a strict portfolio limit of 2%. The stock has fallen 18% since 8 Jul 14 (Hold – $1.25) but is up 28% since we upgraded it on 13 Jun 14 (Speculative Buy – $0.80). Our margin of safety is diminished but there’s still plenty of reason to HOLD.

Note: Our model Growth Portfolio owns shares in Acrux

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