Too Risky for Me?

Melbourne-based Acrux Limited is a small company with a market capitalisation of around AUD 27.5 million. Acrux is a drug development company. The Company is engaged in developing and commercializing branded and generic transdermal and topical pharmaceuticals for global markets with a particular focus on Axiron for the treatment of testosterone deficiency.


 Acrux Limited

Market Cap: AUD 27.5 M

Price: AUD 0.17 (Net Cash 0.18, Net-Net Working Capital 0.21, Net Current Asset 0.22)

Price/NCAV: 77%

P/B: 0.6

F-Score: 6

Z-Score: 4.86

Debt to Equity: 0.0

EV/EBIT: 9.2


Statistically Acrux is a great net-net stock. The company’s rich asset value implies management could return all the funds to shareholders and have some money left over. But sometimes it is worth the trouble to look under the surface. As a biotechnology company, Acrux is highly dependent on product development and its pipeline. Which is the worst, the future of many small biotechnology businesses may depend on just one product. This is more or less the situation also with Acrux.

Testosterone product Axiron has been the company’s most important product for years. Because of Axiron the company has been profitable throughout the 2010s. Axiron’s woes began in 2014 when the Food and Drug Administration voiced its concerns about suspected linkages between testosterone treatment and heart attacks and strokes. As a result, the regulator requires a post-marketing clinical trial to address these risks.

In 2013 Acrux launched and lost a court action against four generic companies planning generic alternatives. The US District Court for the Southern District of Indiana declared the core protective patents for Axiron, delivery of testosterone through the armpit, to be invalid. Acrux and distributor of Axiron Eli Lilly announced that they will appeal the decision. However as a result, several other companies launched a generic version of Axiron.

And bad news did not end there. September 6, 2017 Acrux and Eli Lilly and Company have mutually agreed to terminate their licensing agreement for Axiron. Termination of license in US is effective immediately and termination of license outside US will be effective 90 days thereafter. For what they’re worth now, global rights to product will revert to Acrux.

While generic products have been a curse for Acrux, they are also integral to the company’s future. Two years ago, the company realized, it couldn’t rely on Axiron and resolved to enter the generics game itself. The company cites seven generic products under development its pipeline at end of 2017 and 12 more by the end of 2018.

Whether these generic products will replace losses caused by Axiron case, only the future will show it. However, everything is not so bad. Legal costs of appealing the court decision are minimal for Acrux because of Eli Lilly’s contribution. Given the valuation of Acrux shares ascribes no worth at all to the legal dispute and a possible successful appeal is all upside. Acrux will also continue to receive Axiron royalties while the Eli Lilly tie-up winds down.

All in the end Acrux boasts a hidden asset. It is a pooled development fund (PDF). There are not so many similar. PDFs offer advantages including not being subject to capital gains tax and non-taxed dividends. The downside is that losses can’t be claimed against capital gains.

Acrux is high risk, high reward net-net. I will not say that you cannot earn money by buying it. Actually, in the best case you can earn a lot of money, but I think the risks are bigger and the odds are not necessary in your favor.


Biotechnology and pharmaceutical net-nets

if you screen net-nets you will find a lot biotechnology and pharmaceutical companies. All deep value screeners are littered with these companies.

Biotech and pharma companies often come from spin-offs or IPOs. Larger biotech or pharmacutical company can spin-off potential but different division which doesn’t make sense for them to invest. Some of these companies come about when an enthusiastic industry specialist/doctor with an idea does an IPO to raise funds to develop their idea.

What attracts deep value hunter to small biotech and pharma companies is that often these companies sell for net cash or even below net cash. They are small and many times they have an incomprehensible annual report to all non-specialist. But they really can tell convincing story which goes more or less as follows: all that stands between them and untold billions of dollars is FDA approval of their top product.

The key difference between a biotech net-net and a normal net-net is the purpose of the company. A net-net is focused on delivering a product or service to customers and turn a profit while doing so. Although there are often some problems, there are also many possible ways to solve them. Instead biotech and pharma companies burn they cash to research and develop in the hope of hitting a jackpot with a new product.

Unfortunately, only few will success. FDA receives a large number of applications and few are approved. FDA approval process is long (there are three stages to FDA trials), expensive (It takes on average 12 years and over $350 million to get a new drug from the laboratory onto the pharmacy shelf) and uncertain. After all, only about 0.02% goes through.

If you are biotech or pharma expert and really understand the industry, you might be richly rewarded if you can pick up those few companies which products are approved. For the rest of us deep value hunters, it is better to keep hands off if you don’t want to lose your money slowly as the company burns down their cash pile.

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