Acerus Pharma Takes Off!

Date Added: November 27, 2017 | Comments (0) | Filed under: Blog

In June I blogged about Acerus Pharmaceuticals, and talked about why we found it an “compelling option on a developing pharmaceuticals business”. You can read that blog here!

At the time I was intrigued by the immense size of the U.S. market for the condition that Acerus’s lead product Natesto treats (hypogonadism in men). That is, men who require testosterone replacement therapy to maintain an age appropriate level of testosterone. The testosterone replacement market in the US is estimated to be a $2b USD market. Natesto has a unique delivery system (a convenient nasal applicator) which delivers testosterone without the significant transference problems that exist for the various gels with which it completes, gels that must be rubbed on the shoulders and can often be transferred to other family members with undesirable side effects. In fact Natesto is the only product available without the “black box” warning about transference. Working through the numbers, assuming a conservative level of market penetration, discounting for the US payee/payer system, the split with their distribution partner, and their net margin on sales, one could see that at a 10% market penetration the stock was trading for 1X prospective earnings for one drug (they have others) in one market (the US market).

The original US distribution partner Endo Pharmaceuticals did nothing with the product, seemingly just putting it on the shelf. That partnership ended when Endo decided to reposition their sales force to focus on a new cardiovascular drug. Enter Aytu Bio, a tiny firm run by two brothers who had successfully built another pharma firm, and who have staked the success of Aytu Bio on their ability to grow the market share of Natesto. Fast forward to today and script volume growth is accelerating (albeit from a small base), and just recently a competitor decided to withdrawal their own product from the market meaning that 15% of the market is up for grabs immediately. Other distribution deals have been announced for important markets around the world, and once the drug is approved in those markets (already approved in Canada) further script volume can be expected.

Acerus is a typical Takota holding. A busted story that had enough positive elements to make us believe that it would survive and eventually thrive.

  • An approved drug with competitive advantages addressing a huge market. New distribution agreements in important markets around the world.
  • A Chairman who ended up owning 48% of the Company at a cost base of $40m+ (at the time of my June blog the market cap had fallen to some $15m) and who wasn’t going to let his investment falter if the Company had needed a few million $$$ to tide it over.
  • An absolutely oversold stock after the exit of Eugene Melnyk and his cronies (see my blogs on Melnyk hereherehereherehere and here), and two Toronto based hedge funds. A Company with absolutely no following from analysts or anyone else for that matter.

So what happened? The shares which were trading for .10 cents only a few months ago are, as of this writing, now trading for .50 cents or some 400% higher. There is significant insider buying, continued script growth, and another global distribution deal has been announced (Brazil this time).

This is a great example of what we try to do and the reason why I am blogging about it today. That is to sort through what investors have discarded and find those rare jewels that given a bit of time and polishing, can shine bright.

One of the failings of most investors is to extrapolate past circumstances into the indefinite future. Instead, we would all be better off to focus on the concept of reversion to the mean. That is, things that are really good today are likely to be a little less good in the future and things that are really bad today, are likely to be a little less bad in the future.

Scott

***Takota Asset Management owns shares of Acerus Pharmaecuticals on behalf of its Managed Accounts and Premium Value Partnership. In the future Takota may buy more shares, or sell some or all of its shares for its Managed Accounts and/or Partnership. Investors should seek the advice of their financial advisor before considering an investment in Acerus, or do their own in depth due diligence of the Company, its prospects, and the risks inherent in investing in a Company that has yet to achieve positive net cash flow. This is not a recommendation to buy or sell Acerus or any other security.


No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment

Print This Post