Testosterone therapy manufacturer Acrux Limited (ASX: ACR) recently reported net sales of US$47.6 million for the final quarter of 2014 to take the full year total to US$170 million.
The full year sales are marginally down on 2013, although the final quarter's result of US$47.6 million is significantly up on the prior quarter and was the strongest quarter in 2014.
Volatile
It's been a topsy turvy year for Acrux shares as sales of its key Axiron product in the US market fluctuate heavily and investors continue to worry about regulatory risk.
Since May 2014 the stock has almost doubled in price only to fall in half again and then rise almost 50 per cent to sell for $1.45.
The regulatory risk carried by Acrux is the potential for the U.S. Food and Drug Administration (FDA) to issue an adverse finding against the safety of its testosterone therapy product.
Alternatively the FDA may require Axiron to carry even heavier health warnings (it already carries heavy health warnings), or it may change guidelines for medical professionals as to when to prescribe the product.
Short interest
Stocks that carry regulatory risk are a tempting target for short sellers with Acrux being one of the most heavily shorted stocks on the ASX, with nearly 10% of the equity on issue sold short as at 30 January, 2015.
The strong quarterly sales number seemingly not enough to squeeze the short holders out of their positions – presumably they are digging in to see how the regulatory risk plays out in the belief that Acrux is vulnerable as a largely one-trick pony.
It's a good trick though with strong underlying demand and good retention of market share for the easy-to-use testosterone therapy in the North American market. Acrux is also growing global sales of the product, with potential for that to develop over the medium term.
Indeed, much of the FDA's concern may be centred around the perception that sales of testosterone therapy are too strong, although how effective any attempt to apply stricter guidelines over prescriptions is remains to be seen.
Short sellers relying on a regulatory knock-out risk a large amount of egg on their face if any new regulatory requirements have little direct impact on prescription requirements, and sales continue to gather momentum.
Acrux is also a beneficiary of the falling Australian dollar, the potential for special dividends and a best-in-class product which appears to provide a slight competitive advantage in the testosterone therapy market. At $1.45, it remains a high-risk buy in my opinion.
