Veru Inc. Still Has Serious Growth To Realize

Summary

• Veru Inc. is a Florida-based drug developer, which focuses primarily on developing cancer-treatment drugs as well as its sexual health division.
• This year, the company hit a stroke of luck upon discovering its cancer treatment candidate, Sabizabulin is a highly efficacious and safe treatment against ARDS in later-stage Covid-19 patients.
• Veru’s financials show an increase in its periodic losses, given its increasing R&D costs, which it funds from the profits of its marketed FC2 (female condom) products.
• VERU stands impressively against a number of its peers, which suggests an undervaluation, as well as a low degree of credit risk.

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Veru Inc. (NASDAQ:VERU) is a stock that looks set to see growth in the coming months and potentially explosive growth in the coming years. For this reason, I believe the stock is a clear buy. It has managed to adopt a relatively sustainable business strategy which, through a brilliant stroke of luck, has positioned the company to cash in on opportunities it did not originally aim for. Following the recommendation by the FDA to pursue an Emergency Use Authorization, it is very likely that Veru will be at the forefront of a global medical need being met.

Company Overview­­­­

Veru Inc. is a small American biopharmaceutical company that has been making the rounds across the news lately and has generated somewhat of a hype owing to some recent developments. The company holds a drug development segment that develops treatments for breast and prostate cancers, as well as Covid-19 treatments for patients at high risk for ARDS. Additionally, the company operates a sexual health division that successfully launched the FC2 female condom, which delivered an operating income of $44 million in FY21.

Through the separate stages and natures of its divisions, Veru follows a strategy of leveraging its growth and returns from its sexual health segment to fund the development of its breast and prostate cancer portfolios. Both these forms of cancer, which are presently among the most prevalent, reflect a substantial market gap that Veru Inc. could fill through the development of these treatments. To deliver high value for its shareholders, the company is seeking to develop effective treatments within these domains, whilst looking to grow its sexual health division, which has its own development portfolio underway. In total, the company has ten products in various phases of development, with the FC2 condom being the only one that has successfully been launched in the market.

Recent Developments

In a period of just barely a month, VERU had surged in price by over 258%, climbing from $4.35 on 11 April 2022, to around $15.6 as of 17 May 2022.

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The surge had come about as a result of a recent study on Veru’s cancer treatment candidate (included both in the prostate and breast cancer development portfolios), Sabizabulin, which found that the drug has both broad antiviral and anti-inflammatory properties. This had been discovered following the results of phase 3 trials that consisted of hospitalized patients. The market understandably reacted swiftly to the news; especially given the newfound potential the candidate had found as an effective treatment for Covid-19 patients with a high risk of developing acute respiratory distress syndrome.

Share prices saw another growth surge after the FDA recommended the company request Emergency Use Authorization (EUA) for the Sabizabulin candidate. A statement of this nature coming directly from the highest regulator in the industry indicates that the optimism surrounding VERU is substantial. Senior Wall Street analysts from Oppenheimer expect this EUA to be granted by as early as Q3’2022. This confidence in the candidate comes after the FDA admitted that the study was stopped by the Independent Data Monitoring Committee after observing an “overwhelming efficacy” associated with the candidate. In addition to the high efficacy, the committee further pointed out that the candidate sufficiently met safety requirements to qualify for an EUA.

The sheer potential of this news is massive, given the global scale at which this critical medical need remains unmet. The launching of the drug could potentially mark a significant global milestone in relation to Covid-19, thus further lowering the mortality rate associated with the virus. There is strong optimism amongst market bulls that rightfully anticipate a far greater surge than has already been experienced. If the treatment is launched on an emergency basis, the small Florida-based company would garner global attention and would be in a far better financial position to fund the development of its various drug portfolios.

Furthermore, to emphasize the significance the company is attaching to this new growth venture, the company hired Joel Batten, former head of the Respiratory Syncytial Virus (RSV) franchise at Sobi North America as Executive Vice President, effective from 23 May 2022. Batten will also head the company’s U.S. Infectious Disease Franchise from the same date. This addition at the company’s top executive level is an indication that Veru is positioning itself for big changes to come, relating to developments with Sabizabulin and its Covid-19 potential.

Financial Assessment

The recent quarter of Q2’2022 has been somewhat of a disappointment for Veru, especially in terms of the loss it had delivered. Loss per share during this reporting period rose by a staggering 300% to 18 cents per share from the prior year’s comparable figure of 4 cents per share. This loss per share was higher than analysts’ expectations, with the consensus at 12 cents per share. This is the first time in the prior four quarters that Veru failed to beat analyst analysts’ estimates, who expect a turnaround to take place after Q4’2022:

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This worsening loss figure came despite a 2% rise in gross profit, on a year-on-year basis, with the figure climbing to $11.2 million. Similarly, sales of the FC2 lines rose by an impressive 12%, to $11.6 million. The loss was primarily driven by substantially higher operational costs. Research and development under the operational expenses head had more than doubled across the comparable quarters, climbing from $7.5 million to $15.5 million.

These increased costs, and hence the higher loss figures stand justified, given the development breakthroughs that were delivered during this reporting period. During this period, the company was overseeing four Phase 3 clinical trials, along with two Phase 2 clinical trials, due to which more personnel have been hired for these programs. For this reason, these increasing loss figures do not concern me too much. Instead of going with the label, ‘loss-making company’ for Veru, I prefer the term ‘pre-profit company’. In these cases, increased R&D costs are tolerable, as long as breakthroughs are being made, which certainly seems to be the case with Veru. Its strategy of using earnings from one stream to fund growth in another does give the company a significant edge over competing firms that are zero-revenue players. I believe this does make VERU a safer player to bet on than its competitors, as indicated by its improving quick ratio over time, which points to a greater ability to pay off current obligations:

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Valuation

The figures below demonstrate how VERU fairs against similarly sized biopharmaceutical players, in terms of its valuation metrics:

Company	Market Cap	P/B	Institutional Ownership	Float Short	ROI	Quick Ratio	LT Debt/ Equity	Price
Veru Inc.	867M	9.18	29.30%	24.06%	9.80%	6.3	0.08	15.6
Harrow Health, Inc.	154M	15.62	58.90%	3.72%	3.40%	6.3	7.12	5.78
Evolus, Inc.	713M	11.52	41.40%	6.70%	-29.70%	3.4	1.06	13.94
RedHill Biopharma Ltd.	55M	6.39	14.40%	4.53%	-83.90%	0.9	9.69	1.15

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In terms of the PB ratios denoted above, VERU stands at a relatively attractive position with its price to book ratio of 9.18, which is significantly lower than most of its peers. The only stock behind which VERU falls behind is that of RedHill Biopharma (RDHL), which is a micro-sized company valued only at $55 million. This indicates that VERU shareholders are entitled to a higher net asset portion given their capital investments in the company, thus hinting at an undervaluation. This further sheds light on the strong debt management of Veru Inc., which does not result in a company burdened by debt.

The long-term debt to equity ratio further points to this, with VERU reporting the lowest figure at 0.08, which is heavily below the comparative ratio of each of its peers. This, coupled with its high quick ratio, enhances my stance on VERU being a relatively safe stock, due to its robust business strategy which does not leave its growth reliant solely on debt. Institutional ownership, whilst far from being the highest, is still moderate at almost 30%, however, I do believe this will see a surge as more progress is made on its various drug candidates.

What is most concerning at present is the substantially high short float at over 24%, which is far above what would be considered to be normal levels. There are clear indications that several market participants are increasingly betting on the stock’s fall, but given its price trajectory in recent weeks, it is evident that VERU’s rise is not about to stop any time soon.

However, the optimism of analysts toward VERU is not a factor to be taken lightly within this discussion. The stock is ranked at 4.80 by the Wall St. Ratings, which translates to a ‘strong buy’ categorization. Moreover, the stock is still trading at less than half of its target price of $34.0, which could potentially lead to a growth of over 100%, as more updates about the company’s EUA process come to light.

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Risks

With the go-ahead by the FDA for the Veru to pursue an EUA for its antiviral and anti-inflammatory treatment, many expect things to be smooth sailing for the company. Despite the preliminary approval on efficacy and safety, the EUA application process could take longer than expected, and could even see the FDA request additional data to determine if the drug is fit to be marketed in the context of a public health emergency.

There also exists the risk of the application being rejected altogether, as had been the case with Humanigen, Inc. (HGEN) in September 2021. As a result, the stock that was trading at $25 levels is presently trading close to the $1 mark. This doomsday scenario, although unlikely in the case of VERU, continues to be an underlying risk to consider. Just as is presently the case with VERU, analysts remained highly optimistic that HGEN had a high chance of gaining the FDA approval for its EUA. For this reason, as is the case with any biotech stock developing a potentially breakthrough treatment, market participants must exercise caution, and be aware of the heavy downward reversals that are typical within this industry. This may explain why VERU is presently so heavily shorted, with several traders betting on the EUA to be rejected, and the stock to eventually plummet.

Conclusion

Veru Inc. is a company that, just like its peers in the biopharmaceutical industry, has set its sights high, aiming for a breakthrough in its development portfolio to turn its financial fate around. However, Veru has a substantial competitive advantage in having a revenue-generating division that it leverages to fund its various drug development portfolios.

This year, the company hit a stroke of luck, upon discovering that its cancer-treating candidate is a highly efficacious and safe treatment for late-stage Covid-19 ARDS, given its strong antiviral and anti-inflammatory properties. FDA had given the company a go-ahead to pursue an EUA, after the IDMC stopped the study short, given its “overwhelming efficacy” and high safety findings. I recommend a buy on this stock, because of the high potential of staggering growth, and its relatively sustainable business strategy.

Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.