What do you like about Acrux (ACR)?
ACR is one of only a few Australian companies in the emerging healthcare sector that has successfully developed and partnered a product and is generating earnings. Most companies in this space tend to list too early and stay in the cash burning, research stage for too long.
ACR’s product Axiron, a testosterone replacement therapy, is approved by the US Food and Drug Administration (FDA) and is currently marketed by Eli Lilly in the US market. Lilly has years of experience in sales and marketing of men’s health therapies, in particular when it comes to displacing a well-established dominant player and securing a leading market position. Viagra was a clear leader in the erectile dysfunction market until Lilly launched its drug Cialis and claimed that position. In addition, Lilly has sufficient resources to continue to invest into Axiron.
Lilly has already grown Axiron’s market share to 13% in the six months following its launch.
In addition, ACR is participating in a very attractive segment of the pharmaceutical market. Men’s health, and in particular the testosterone replacement therapy market in the US, has been growing at a 20% plus annual growth rate and is expected to continue to grow in the high teens for a number of years, as disease awareness continues to improve.

How long have you held ACR?
We initiated our position in February 2013. ACR has been on a watch list for a while but we were waiting for two milestones: (1) the US patent extension to be granted; and (2) for market share growth to return.
How is it better than its competitors?
Axiron is a topical testosterone therapy much like other products on the market; however, unlike Androgel and other topical therapies it is a spray and not a thick gel, and is therefore, easier and quicker to absorb by patients.
In addition, Axiron is applied only to patients’ armpits and not to a patient’s torso area, thus reducing the risk of accidentally transferring the product onto women or children.
More importantly, Eli Lilly is the most dominant player in men’s health with an experienced selling and marketing team (as a result of Cialis’ success) and strong track recording in building a leading market position in this segment.
What do you like about its management?
ACR is a rare example of an Australian biotech that has successfully developed a product and is generating earnings.
The success of big Australian healthcare stocks, such as Cochlear (COH) and ResMed (RMD), hasn’t been repeated for a while. Most Australian biotech companies tend to list too early and require ongoing shareholder support in funding numerous research and development projects. The research and development phase is very capital intensive and most companies in this sector tend to burn through shareholder capital without ever producing a marketable product.
On the other hand, ACR’s management has demonstrated clear focus on maximising shareholder returns. ACR terminated research and development projects that had a more difficult regulatory path ahead of them, and focused the company’s resources and attention on developing Axiron. This enabled them to successfully commercialise Axiron, and secure an industry leader as a commercial partner.
ACR management also signed a licensing agreement that secured a very attractive royalty stream. Once Axiron was commercialized, ACR eliminated all unnecessary business costs, including downsizing the executive team, to ensure that virtually all generated operating earnings can be passed onto shareholders in the form of dividends.
What is your target price on ACR?
Our price target on ACR is above $6.
At what point would you sell it?
We will monetise our position when the price exceeds our upper valuation target.
Where do you see the value?
We believe that intellectual property in Axiron, such as the underarm patent, as well as its superior marketing partner, will continue to deliver benefits to ACR shareholders through further market share gains.
Is there anything else you would like to say about company ACR?
Because of its unique structure (ACR is a Pooled Development Fund), unfranked dividends and capital gains are exempt from tax.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
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