VERU - Stay Away From Veru Until 2024

2023-07-20 16:40:52 ET

Summary

• Increasing operational losses and decreased net revenues necessitate immediate financing in my view.
• Its largest customer defaulted on payments and filed for bankruptcy.
• I believe the company's future is uncertain with no catalysts for stock rallies in 2023.

Veru Inc. ( VERU ) is a microcap (<$120 million) late clinical-stage biopharmaceutical company developing medicines for the treatment of breast cancer, SARS-CoV-2 and other viral acute respiratory distress syndrome ('ARDS')-related diseases (Figure 1). Veru's fiscal year ends September 30, and for the Fiscal Second Quarter ended March 31, cash and equivalents were $23.5 million , with operational losses from research and development ($22.9 million) and selling, general and administrative expenses ($12.8 million). It was a different mix in FQ1 for R&D ($18.7 million) and SG&A ($17.5 million), but the total costs were about the same ($35.7 million vs. $36.3 million). Therefore, I believe they may need immediate financing and are at risk of more dilution.

Figure 1. Veru Pipeline

In FQ2, net revenues decreased to $6.6 million (-49%) year-over-year. Veru also operates a sexual health program that includes two FDA-approved products, ENTADFI for the treatment of benign prostatic hyperplasia, and the FC2, the only FDA-approved internal condom, and the only non-hormonal, latex-free contraceptive option available to women that can be used with most other forms of contraception, which can provide "layering" benefits. Veru's largest customer historically was The Pill Club ( 44% of net revenues in fiscal 2022). On February 7, 2023, The Pill Club entered into a $15 million settlement with the California Department of Justice and paid $3.2 million to the CA Department of Insurance for alleged fraudulent practices, including overbilling for FC2. Subsequently, The Pill Club defaulted on $3.9 million in past due payments and filed for Chapter 11 bankruptcy . Veru has since entered into another FC2 supply agreement with Afaxys Group Services ('AGS') in April, but AGS' purchasing activity remains to be seen.

On April 19, the Company sold its ENTADFI business to Blue Water Biotech ( BWV ) for $20 million. Veru received $6 million upfront, with $4 million due in FY 2023 , and the remaining $10 million in FY 2024. There were terms for up to an additional $80 million from sales milestones. However, since ENTADFI is a me-too capsule combination of tadalafil 5mg and finasteride 5mg, which are generically available at those common strengths, the minimum annual net sales targets of $100 million are most likely unachievable. The previous week, Veru privately sold 5 million shares to Frost Gamma Investments and netted $5 million. These activities propped up cash to $34.5 million, along with $4.2 million in net accounts receivable as of March 31.

Potential dilution of up to 20% may come from at the market offerings. Another source of possible dilution of up to 20% stems from a purchase agreement entered on May 2 with Lincoln Park Capital Fund. On any day the closing sale price per-share of VERU Stock is above $0.25, Veru has the right to require Lincoln Park to purchase up to 225,000 shares of Common Stock. An intriguing clause raises the limit to 250k shares if the closing price is not below $6 and to 275k shares if the closing price is not below $8. Unfortunately, there are no longer any catalysts that could cause such rallies in 2023 in my opinion.

To conclude, I think there are few signs that Veru can staunch its cash bleed except by selling more stock. Doubling FC2 sales likely doesn't even buy them another quarter. The company was waylaid by its failure to secure an Emergency Use Authorization (EUA) for sabizabulin, thereby using up precious millions in preparatory job hires and contracts. Even with a path forward to submit a new EUA application and/or New Drug Application (NDA) by obtaining positive results from the Phase 3 confirmatory COVID-19 clinical trial initiating later this year, the first planned interim efficacy analysis won't be conducted until 2024.

The only event that I believe could've salvaged the year was the Phase 3 ARTEST trial evaluating enobosarm for the treatment of AR+ER+HER2- metastatic breast cancer. Its potential was probably what made Veru include the high Floor Price provisions in the Lincoln Park deal. The study was set to complete this month , but was quietly removed from Company documents after the FQ1 earnings report . The Eli Lilly ( LLY )-partnered enobosarm trial hasn't completed enrollment yet. Investors would be wise not to get involved with this stock at least until next year.

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