Pharmaceutical business and testosterone therapy manufacturer Acrux Limited (ASX: ACR) has lost more than three-quarters of its market value in the past year to trade from almost $4 to around 90 cents today.
This follows the issue of a Drug Safety Communication by the U.S Food and Drug Administration (FDA) on 31 January 2014, over potential adverse affects of FDA-approved testosterone therapies such as those produced by Acrux.
Acrux's North American sales licensee, Eli Lilly, announced net sales of $39.5 million for the quarter ending March 31, 2014, down 27% on the prior quarter and evidently impacted by the FDA's communication. Acrux also flagged the sales drop means the $50 million milestone payment due to it if Eli Lilly meet certain sales thresholds is likely to be delayed to the 2015 financial year.
Here are six reasons Acrux may be the ASX's outstanding opportunity at today's prices.
1) The problem around the FDA investigation turns out to be short-term in nature. The whole world already knows that testosterone therapy can carry health risks. Since the announcement the FDA has reiterated its current view is that the benefits of testosterone therapy outweigh the risks, no timeframe has been set for it to announce the results of its investigation however.
2) The FDA has not advised patients to stop using the products. Simply that it is investigating adverse events reported among men taking the FDA-approved products. Given the safety-first approach around these types of products this may suggest the FDA sees its investigation as precautionary in nature.
3) Acrux turns out to be correct in protesting that the observational studies that suggest testosterone therapy carries greater health risks "were found to contain multiple inaccuracies and misreporting of results". By looking at the climate change debate it is evident that some scientists will always come to conclusions (correct or not) that draw attention to themselves.
4) The company's key product Axiron has already been approved and launched in Canada, Australia, Germany, Brazil and is approved and planned for launch in Korea in June. However, a safety investigation has also been announced in Europe, perhaps following the FDA's lead.
5) Testosterone treatment is a growth area and if the newly reported concerns turn out to be a negative short-term impact, not relevant to the big long-term picture, Acrux estimates it can distribute the product into another 142 countries and sales will very likely resume a strong upward trajectory.
6) Although a big drop sequentially the sales decline was not a surprise and at current prices the market is clearly expecting another big sequential drop for the quarter ending June 2014.
There are investing risks though!
Axiron is an underarm spray used by men and prescribed by doctors for low testosterone to treat low sex drives, low energy levels and so forth. Any internet search would also suggest there is an underground use of it amongst bodybuilders. In other words it is not a sticky health product, therefore any "health rumours" have perhaps put more recreational users off and seen the sales drop.
The bottom line remains that if the product is pulled disaster looms, if the storm blows over and Acrux prevails, then this is one insanely cheap stock!
