Biotech stock Acrux Limited (ASX: ACR) has seen its shares fall more than 25% today, after the company warned that it may not receive a US$50 million milestone payment this year.
Shares in Acrux are currently trading at around $1.23, after losing 42 cents in early morning trading.
Acrux licences US company Eli Lilly to distribute its Axiron testosterone drug globally. But on 31 January 2014, the US Food and Drug Administration (FDA) announced that it was investigating testosterone treatments, such as Acrux's Axiron, after two studies reported higher risk of stroke, heart attack and even death in men taking those FDA-approved drugs.
Early in February, the company blamed a broker report for its shares falling 10% on two consecutive days. The report by Macquarie research linked the two studies to potentially lower sales of the drug Axiron.
Acrux has criticised the studies, and noted that three professional medical societies and an international group of over 160 scientists and physicians have called for one of the study articles to be retracted, saying it was "no longer credible". Unfortunately, that's unlikely to have any less impact on Acrux. As Macquarie analysts noted, "Testosterone replacement therapy is predominantly used for lifestyle reasons, such as energy levels and sex drive, meaning sales volumes are more sensitive to safety concerns".
Axiron net sales dropped 27% in the first quarter to US$39.5 million from US$53.9 million is the December quarter 2014. As a result of the decreased sales, the US$50 million milestone payment is likely to be deferred to the 2015 or 2016 financial years.
As shareholders in fellow biotech QRxPharma Ltd (ASX: QRX) found out last week, running afoul of the US FDA can be hazardous to the share price. QRxPharma shares dropped 80% after the company failed for the third time to get its painkiller drug approved by the FDA.
Foolish takeaway
Investing in junior biotech stocks is highly risky. If investors feel the need to invest in this end of the market, positions should be limited to the speculative portion of their portfolios – in other words, a very small percentage of your wealth. Large cap healthcare stocks such as CSL Limited (ASX: CSL) or Resmed Inc (ASX: RMD) offer plenty of potential gains for a lot less risk.
