LLY - Veru Inc.: Q1 Revenues Fall Short And Uncertainty Looms Making It Risky

Summary

• Veru Inc. is eyeing emergency use authorization for its COVID-19 drug Sabizabulin, which is currently under FDA review.
• Veru Inc. shares fell around 20% to a 52-week low after reporting Q1 FY23 results that fell short of analysts' revenue forecasts.
• Veru's future lies in obtaining regulatory approvals for its drugs in the pipeline, making it a risky stock to hold, though the company has taken measures to conserve cash.

Investment Thesis

Veru Inc. (VERU) reported poor fiscal first-quarter results, with declining revenues and margins after reporting a net revenue reduction. Further, higher R&D and marketing expenses affected its operating margin. Though the company is confident about its drug, Sabizabulin , it has yet to get regulatory approval.

The company's growth hinges on the outcome of the regulatory review. Thus, I recommend that the new investors refrain from buying this stock until they receive a positive announcement from the global regulatory agencies. For risk-averse investors, who hold this stock, my recommendation is to sell. However, investors can hold the stock if they understand the biopharma industry and are confident about the company's products in the pipeline, receiving FDA approval and its ability to monetize them.

Company Overview

Veru Inc., headquartered in Miami, Florida and incorporated in 1971, is a biopharmaceutical company specializing in innovative medicines for COVID-19 and other viral ARDS (Acute respiratory distress syndrome)-related illnesses and oncology. Its infectious disease development program involves Sabizabulin, an oral microtubule disruptor. The drug has shown a clinically significant 51.6% relative reduction in deaths in the Phase 3 trial for treating moderate to severe COVID-19 patients at high risk for ARDS. Sabizabulin is now under regulatory review for potential emergency or conditional approval by several regulatory agencies globally.

The company's breast cancer development portfolio includes Enobosarm , a selective androgen receptor-targeting agonist. Veru's oncology program also features VERU-100 , a long-acting GnRH antagonist, and zuclomiphene citrate, an oral nonsteroidal estrogen receptor agonist for treating prostate cancer. The company also has a commercial sexual health program, Urev , which includes two FDA-approved products: FC2 Female Condom® and ENTADFI™ (finasteride and tadalafil) capsules for oral use, a new treatment for benign prostatic hyperplasia, both of which are sold in the United States and globally.

Sabizabulin Shows Promise in Treating Severe COVID-19 Cases

According to management , Veru Inc has received positive results from Phase III clinical trials of Sabizabulin, an investigational drug candidate for treating COVID-19, which is expected to help hospitalized COVID-19 patients and those at high risk for ARDS. The double-blind, multicenter, multinational, randomized, controlled study was conducted to evaluate the daily oral 9-milligram dose of Sabizabulin for up to 21 days versus a placebo in 204 hospitalized severe COVID-19 patients. The Independent Data Monitoring Committee conducted a planned interim efficacy analysis in the first 150 patients for a randomized trial COVID-19 study, resulting in a statistically significant 24.9 percentage point absolute reduction and a 55.2% relative reduction in all-cause mortality by day 60, the primary efficacy endpoint of the study, with a P value equal to 0.0042. Subgroup analysis showed that the mortality benefit of Sabizabulin was consistent regardless of the standard of care treatment received, baseline WHO, ordinal score, sex, age, baseline comorbidities, BMI, or geographic location.

The critical secondary efficacy endpoints also demonstrated that Sabizabulin treatment significantly reduced days in the ICU, days on mechanical ventilation, and days in the hospital compared to the placebo. In addition, the safety profile of Sabizabulin treatment was found acceptable, and fewer adverse and severe adverse events were reported for Sabizabulin compared to the placebo.

On May 10, 2022, the company had a pre-emergency use authorization meeting with the FDA, and on June 6, 2022, they submitted a request for a EUA application to FDA. On November 9, 2022, the U.S. FDA's Pulmonary-Allergy Drugs Advisory Committee met with the company to review its request for the EUA of Sabizabulin. Although the advisory committee voted eight to five that the known or potential benefits of Sabizabulin, when used for the treatment of adult patients hospitalized with Covid-19 and high-risk RDS, do not outweigh known or potential risks to Sabizabulin, there was additional discussion around possible clinical trial design aspects for a potential confirmatory Phase 3 clinical trial as a post-EUA authorization requirement. However, the FDA decides on emergency use authorization approval.

The White House Office of Management and Budget announced that the Biden administration plans to terminate COVID-19 national and public health emergencies on May 11, 2023. Still, HHS has declared a national emergency is expected to remain in effect beyond May 11, so existing EUAs would remain in effect. It may continue to issue new EUAs when the criteria for issuance are met. The European Medicines Agency announced that they had validated the company's application for conditional marketing authorization in Europe in September 2022. The company submitted a Marketing Authorization Application for Sabizabulin to the Ministry of Health, Labor, and Welfare in Japan in December 2022.

Veru Inc's Promising Clinical Trials: Advancing Treatment for Breast and Prostate Cancer

Veru has been actively enrolling in two registered clinical trials regarding advanced breast cancer. The first trial, the ARTEST Phase 3 clinical trial , is conducted on approximately 210 patients to evaluate Enobosarm monotherapy for third-line treatment of AR-positive ER-positive HER2-negative metastatic breast cancer. The second trial, called the ENABLAR Phase 3 clinical study, is being conducted in approximately 186 patients to evaluate the efficacy and safety of Enobosarm and Abemaciclib combination therapy versus an alternative estrogen-blocking agent in subjects with AR-positive ER positive HER2-negative metastatic breast cancer who have failed first-line therapy with palbociclib, which is a CDK4/6 inhibitor, plus an estrogen-blocking agent.

Veru has a clinical trial collaboration and supply agreement with Eli Lilly (LLY) for the ENABLAR-2 Phase 3 clinical study. Under the terms of the agreement, Veru is responsible for conducting the clinical trial, while Lilly is supplying Abemaciclib for this study. In addition, Veru retains full exclusive global rights to Enobosarm. The Phase 3 ENABLAR-2 study has two stages. Stage 1 is a pharmacokinetics and safety assessment of the combination of enobosarm and Abemaciclib to ensure that there are no drug-to-drug interactions resulting in changes in blood levels of either drug and that there are no added safety concerns for going to Stage 2. Stage 2 is the actual Phase 3 study. Veru has completed Phase 1, which consisted of three patients. There were no changes in expected blood levels for enobosarm or Abemaciclib given in combination, and the combination was well-tolerated. Interestingly, objective antitumor activity was observed in target lesions at the eight-week C.T. scan in all three patients.

Moving on to advanced prostate cancer, Veru has been actively enrolling in Phase 3 and Phase 2 clinical trials. The company is enrolling an open-label randomized Phase 3 VERACITY clinical trial to evaluate Sabizabulin on 32 milligrams versus an alternative androgen receptor targeted agent for chemotherapy-naive men with metastatic castration-resistant prostate cancer who had tumour progression after previously receiving at least one androgen receptor targeted agent. The trial's primary endpoint is radiographic progression-free survival, and enrollment is ongoing. Veru also evaluates VERU-100 GnRH antagonist three-month depot formulation in Phase 2 dose-finding clinical study to treat hormone-sensitive advanced prostate cancer.

Veru Inc's Urev Program Offers FDA-Approved Products

The company has a health program called Urev. This program includes two products approved by the U.S. Food and Drug Administration ((FDA)): FC2 and ENTADFI. FC2 is now available through multiple sales channels, meaning it can be bought from different places. In addition, Veru has partnered with companies that provide sexual health services through telemedicine platforms, which makes it easier and more convenient for patients to get FC2 products at a lower cost.

The telemedicine and global public sector orders have not done well in the past year. However, Veru is starting to see revenues increase in the second quarter of the fiscal year 2023, which is a positive sign. In addition to FC2, Veru also has ENTADFI, a new treatment for a medical condition called benign prostatic hyperplasia ((BPH)). Current BPH medicines may cause sexual side effects, but ENTADFI is a faster and more effective treatment that doesn't have these side effects.

Veru launched ENTADFI during the fourth quarter of 2022. The company currently focuses on getting agreements with insurance companies and distributing the product to wholesalers and Medicare. In addition to traditional distribution methods, Veru is also looking to work with companies like GoodRx and telemedicine partners to ensure more people can access ENTADFI.

Q1 2023 Review - Decreased Sales in U.S. Prescription Business Lead to Net Revenue Reduction

The first quarter results for the fiscal year 2023 show that overall net revenues were $2.5 million, compared to $14.1 million in the prior year's quarter. The U.S. prescription business net revenues decreased to $163,000 from $11.6 million in the prior year. The reduction is due to some business challenges experienced by telemedicine customers in recent quarters, which resulted in a slowdown in orders.

Net revenue for the global public health sector business was $2.3 million, compared to $2.6 million in the prior year. The gross profit for the quarter was $700,000, or 28% of net revenues, compared to $11.8 million, or 84% of net revenues in the prior year period. The gross profit and margin decrease is driven primarily by decreased U.S. FC2 prescription business sales.

Operating expenses for the quarter increased to $36.3 million, compared to the prior quarter of $16.8 million. The increase of $19.5 million is primarily due to research and development costs, which increased $8.7 million to $18.7 million from $10.1 million in the prior year period, and the increase in selling, general, and administrative expenses of $10.8 million from $6.7 million in the prior year period to $17.5 million in the current period.

The increase in research and development costs is due to the increased costs associated with the multiple in-process research and development projects, mainly for the Phase 3 Sabizabulin COVID-19 registration trial and manufacturing costs of $8 million for pre-launch inventory, and increased personnel costs resulting from increased headcount and an increase in the fair value share-based compensation.

The operating loss for the quarter was $35.6 million, compared to $5 million in the last quarter. The change of $30.6 million is due to the increase in research and development costs and selling, general, and administrative expenses during the current period and the reduction in the net revenues and gross profit.

Non-operating expenses were $1.3 million for the current quarter and the prior-year quarter, primarily consisting of interest expense and change in the fair value for derivative liabilities related to synthetic royalty financing. In addition, for the quarter, the company recorded a tax benefit of $68,000 compared to a tax expense of $115,000 in the prior year's quarter.

The bottom line results for the quarter was a net loss of $36.8 million or $0.46 per diluted common share, compared to $6.4 million or $0.08 per diluted common share in the prior year. The company has net operating loss carry-forwards for U.S. federal tax purposes of $112.5 million, with $29.7 million expiring in years through 2042 and $82.8 million, which can be carried forward indefinitely. In addition, the company's net operating loss carry-forwards of $63.1 million in the U.K. do not expire.

As of December 31, 2022, the company's cash balance was $46.9 million, and its accounts receivable balance was $3.9 million. In addition, the net working capital was $32.9 million on December 31, 2022, compared to $63.3 million on September 30, 2022.

Veru Inc's Historical Financials

2022 was a dismal year for Veru as the company reported a decline of 54% in sales from $60.8 million in December 2021 to $27.2 million in December 2022 due to the reduction in overall net revenues.

Veru's gross margin has declined from 81% in December 2021 to 70% in December 2022 due to net revenue reduction. In contrast, the steep decline in EBIT margin from -18% in December 2021 to -352% in December 2022 is due to increased R&D and SG&A expenses. The company has treated R&D investments as operating expenses. However, R&D expenses generate future economic benefits; we must capitalize on the R&D expenses.

The company's asset turnover has declined consistently in the last two years from 0.5x in December 2021 to 0.2x in December 2022, while the asset efficiency has declined from 2% in December 2020 to -53% in December 2022. Thus, Veru's ability to utilize its assets efficiently to generate revenues and profits declined in the last two years as the company is yet to get regulatory approval for its oncology and COVID drugs.

The company's R&D margin as % of revenues has jumped from 61% in December 2021 to 286% in December 2022, while the SG&A expenses as % of revenues jumped from 37.9% in December 2021 to 164.4% in December 2022 while the Capital expenditures as % of revenues have increased from 1.1% in December 2021 to 2.6% in December 2022. If the company's products in the pipeline get approval, it will push future revenues.

The company's DSO days have increased from 37 days in December 2021 to 79 days in December 2022, implying that Veru is taking more time to collect cash from its customers. However, the cash conversion cycle has declined from 101 days in December 2021 to 56 days in December 2022 because the DPO days have increased from 113 days in December 2021 to 323 days in December 2022. Therefore, though the company has reduced the cash conversion cycle, it is not long-term sustainable.

Veru's net working capital has declined from 139.6% in December 2021 to -399.8% in 2022 due to an increase in DPO days. Though the company's current ratio has declined from 10.5x in December 2021 to 1.8x in December 2022, the company does not face any liquidity issues.

The company's debt-to-capital ratio has increased from 2.8% in December 2021 to 4.9% in December 2022 as the company has taken an additional debt of $2.5 million. In addition, as the company's earnings are negative, it has a negative interest coverage ratio. Still, as the percentage of debt to the overall capital is less than 5%, the company is not distressed.

The company's cash from operations is negative in all the years except December 2020. As the company treats R&D expenses as operating expenses, the cash outflow from investing is marginal.

The company's performance in 2022 was dismal, reflected in its share prices as it gave -a 28.2% return in the last twelve months against -7.43% returns from the S&P 500 index.

Valuation

Before computing the intrinsic value of Veru by Discounted Cash Flow approach, I determined the Economic Value Added by Veru in the last 12 months, i.e., the excess returns the company generated over the cost of capital.

I arrived at a negative EVA of -$105 million, implying that Veru generated negative excess returns.

Before valuing the company by DCF, we must amortize the R&D expenses as R&D investments generate future economic benefits. As Veru's R&D investments focus on clinical trials and FDA approvals, I have taken an amortization period of seven years, much higher than a technology company whose average amortization period is three years.

By amortizing R&D expenses, there is an adjustment to the operating income with an increase of $58.5 million.

Veru has a negative operating income, so we can use the NOLs to reduce future tax liabilities. So I have taken that into account in the valuation model.

For the cost of capital, i take the 10-year U.S. treasury bond of 3.8% as the risk-free rate.

I take the U.S. ERP of 5.5% as the company's equity risk premium.

At 94.6% equity and 5.4% debt, the weighted average cost of capital for Veru is 11.1%.

I assume the company's revenues will grow at 15% CAGR in the next ten years, and its EBIT will approach the industry average of 14.5% in the terminal year.

Further, I assume the Sales/Invested Capital for the next ten years is four, i.e., for every $1 invested capital; the company will generate $4 in revenues.

I arrive at an Enterprise Value of $99.1 million or $1.23 per share. Adding cash and subtracting debt, the equity value is $127 million or $1.58 per share. The company is trading at a premium at the current market price of $4.1.

Risks

Veru Inc.'s potential future lies in the FDA's approval of Sabizabulin and other products in the pipeline. The company has invested significant capital in trials and R&D development for the drug. Therefore, any delay in the approval will hurt the valuation as the company must reduce its spending on future trials to conserve cash, which can impact revenue growth. Further, any decline in the company's revenues from the sexual health business will impact the funding of the clinical development of its oncology program.

Conclusion

Veru Inc. is optimistic that its revenues are returning to the same level they were in the first and second quarters of the year; however, it had some problems with two of its customers, who were going through changes and had issues that needed fixing. One of the customers had leadership changes and had to rebrand their company, which took some time to fix. The other customer also had some internal problems they needed to sort out. Veru Inc. management believes things are looking good for the third and fourth quarters of the year, but they still need to wait and see how quickly their customers can fix their issues before they can be sure.

Veru Inc. had a dismal quarter and the last twelve months. The revenues from its existing products have declined. In addition, Veru Inc.'s significant investments in R&D for its new drug development have not yielded positive outcomes. However, it can change if Veru Inc. gets regulatory approval for Sabizabulin and its other drugs in the pipeline.

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