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Aytu BioScience's (AYTU) Market Cap Is An Insult To Rational Investing

|Includes: Aileron Therapeutics (ALRN), AYTU, BPMX, VTVT

Aytu BioScience (NasdaqCM: AYTU) trading with a lower market cap against Aileron, BiopharmX, and vTv Therapeutics makes little sense.

AYTU is set to report another round of record revenues, has ample cash balances, and three approved drugs on the market.

Once investors trade on fundamentals, AYTU should overtake all three of the comparative companies.

Investors have thousands of choices when it comes to finding emerging opportunities. And, these choices range from stock trading at pennies per share to those that trade at well over a hundred dollars per share. But, what if investors took the time to make decisions based on valuation rather than headlines, and relied less on news network soundbites to drive their investment decisions?

We, at Soulstring Report, believe that for most investors, opportunities would emerge that can lead to profitable investing by identifying and acting on the disconnects in markets that expose these under-the-radar stocks that are posting record growth and seizing opportunities from established drugs that are already penetrating multi-billion dollar markets. As an example, Aytu BioScience (NasdaqCM: AYTU) checks all of the boxes as to how investors can miss the obvious. However, the good news for AYTU is that the markets don't ignore the obvious for long, and AYTU's day of reward may be close at hand, for both the company and its investors.

Side By Side Comparisons Show Aytu BioScience As Significantly Undervalued

Aytu BioScience, Inc., is an emerging specialty pharmaceutical company focused on developing and commercializing novel products in the field of hypogonadism (low testosterone), insomnia, cough and cold, and male infertility in the United States and internationally. Currently, AYTU markets three FDA-approved drugs, Natesto, a nasal gel for the treatment of hypogonadism (low testosterone) in men; ZolpiMist, an oral spray for the treatment of insomnia, and Tuzistra XR, a 12-hour codeine-based antitussive that serves the cough and cold market. On the medical device side, AYTU offers MiOXSYS, an in-vitro diagnostic semen analysis test that is used in the measurement of static oxidation-reduction potential (oxidative stress) in human semen. The market cap of AYTU at the time of this writing stands at roughly $11.34 million. More importantly to this exercise of valuation, AYTU is expected to report on February 7th, its third straight quarter of record revenues and the highest levels of prescription rate growth for its lead product, Natesto. Also, in that report, AYTU will likely announce contributions in revenue from ZolpiMist and Tuzistra XR, two of its most recent acquisitions that are already penetrating lucrative, large markets.

A Mission To Close The MC Disconnect

Thus, what began as a mission to uncover reasons as to why AYTU shares trade at what many believe to be deeply discounted levels, instead became a study in the disconnect in market cap valuation between AYTU and several of its peer competitors. To that point, I penned a side by side comparison of Aytu BioScience against similar styled emerging companies. And, during this assessment, I was surprised to find that despite AYTU being in a superior position when it comes to generating revenue, having three FDA-approved drugs already on the market, and having cash on hand to support ongoing operations, its valuation was anywhere from 2X to 10X lower than several market peers. And, it's difficult to justify the difference.

Hence, after considering the sum of the parts, opportunities expose themselves that should lead investors to reevaluate their investment positions to determine the risk/reward benefit of Aytu BioScience over comparable companies. As examples, companies trading at higher market cap levels than AYTU, which may exemplify the disconnect mentioned, include Aileron Therapeutics (NasdaqGM: ALRN), vTv Therapeutics (NasdaqCM: VTVT), and BioPharmX (NYSE American: BPMX). And, as my title states, for AYTU to trade at lower market cap levels than these three popular stocks is an insult.

Here's why.

Aytu Should Far Exceed Aileron Therapeutics’ $20.94M Market Cap

The first on our list of peer comparisons is Aileron Therapeutics (NasdaqGM: ALRN). The company has a current market cap of roughly $25.51M, approximately double the market cap of Aytu BioScience. But, what information have investors relied upon to justify a market cap for a non-revenue producing company that essentially dwarfs that of AYTU?

From the ALRN website, the company describes itself as the clinical-stage leader in the field of stabilized, cell-permeating peptides to treat cancer and other diseases. The lead product candidate at ALRN is ALRN-6924, described as a first-in-class, stabilized cell-permeating alpha-helical peptide that mimics the p53 tumor suppressor protein to disrupt its interactions with both its endogenous inhibitors, MDMX and MDM2. According to data published by ALRN, for p53 wild-type tumors, ALRN-6924 is said to have the ability to restore p53-dependent tumor suppression. Currently, ALRN-6924 is presently being evaluated in multiple clinical trials for the treatment of solid and hematological cancers, including acute myeloid leukemia (AML), myelodysplastic syndrome (MDS), and peripheral T-cell lymphoma (PTCL). Sounds impressive, right? But, don't pull the investment trigger too fast.

If ALRN Has No Revenue, Is All The Valuation Blue-Sky?

Importantly, and beneath all of the colorful description, ALRN has no revenue and is in early clinical stage studies. In fact, noted within ALRN's most recent quarterly report, they state that they have not generated any revenue from product sales and do not expect to produce any income from the sale of products in the coming months. They don't necessarily believe that they will never become a revenue-generating company. But, they can't say when they might be, either. To that end, ALRN says that if the development efforts for ALRN-6924 or other product candidates that they either have or will develop in the future are successful and result in marketing approval, they can seek multiple opportunities to generate revenue inclusive of licensing, collaboration, or product sales. However, with the company in the relatively early stages of clinical study development, it is likely that they will need cash to continue to fund the operations. They even allude to that possible event.

Again from the most recent quarterly filing, ALRN is very clear when they state that, "over the next six months, and subject to obtaining the necessary funding, we plan to initiate additional clinical trials or support investigator-initiated trials, primarily evaluating ALRN-6924 in combination with approved therapies. We expect these trials to include combinations of ALRN-6924 with cyclin-dependent-kinase 4/6 inhibitors and with paclitaxel in an investigator-initiated trial, among other combinations."Thus, with a cloud of uncertainty about future funding and a strategy that is geared toward expanding its clinical initiatives by focusing on additional applications, the likelihood for extensive dilutive financing may become a drag on the stock price.

Hence, with ALRN sporting a market cap of $25.51M, the justification of having a higher market cap than AYTU, who is not only a revenue-producing company but has three FDA-approved drugs already on the market, is a comparison that's hard to swallow from an investor’s perspective. While ALRN is not to blame for its high market cap, it can act as a template for others to follow. And, with ALRN not having a single product on the market, and their likely need for additional cash to support an array of planned and expanded clinical trials, it would certainly be more appropriate for ALRN to play catch-up to AYTU rather than be a leader. Indeed, the template should get changed.

Take Notice, Does vTv Therapeutics Deserve a Market Cap Of 10X Over AYTU?

Keep in mind, when looking for comparisons, the parameters were set to find small-cap and emerging companies that are looking to fill unmet medical needs with novel drugs, similar to the strategy at AYTU. Although the target markets may differ, the focus on targeting niche opportunities in multi-billion-dollar drug markets is basically the same. Thus, vTv Therapeutics (NasdaqCM: VTVT) is an ideal comparison. But, unlike Aileron Therapeutics, the market cap at VTVT dwarfs AYTU's by more than 10X and is currently valued at $122.6 million. But why?

vTv Therapeutics Inc. describes itself as a clinical-stage bio-pharmaceutical company engaged in the discovery and development of orally administered small molecule drug candidates to fill significant unmet medical needs. According to the company's website, vTv has a pipeline of clinical drug candidates led by programs for the treatment of Alzheimer's disease and diabetes as well as the treatment of inflammatory disorders. The company also is advancing a pipeline of small molecule clinical and pre-clinical drug candidates for the treatment of a wide range of human diseases including central nervous system disorders, diabetes, and metabolic disorders, inflammation and cancer. Shares closed at $2.72 per share as of this writing.

Huge Market Cap For vTv Therapeutics With No Tangible Contributions

For its efforts and its $122M market cap, VTVT recently released results from its Alzheimer drug that were disappointing at best. Although the stock took a hit from the news, the company believes that by spending additional dollars to exploit what they call "hope in additional development," investors may want to remain cautious as to where the company is valued today against the hopes of future success. It's never too early to take a gain and never too late to a loss. At VTVT, it's a coin toss as to the next set of results. And, when looking at the company's recent financials, it may be best to lay hope elsewhere.

Again, when comparing against AYTU, the question begs as to why the disconnect in market cap. After all, if investors are going to value blue-sky potential, then they should at least factor in some reality. In this instance, VTVT states in its most recent quarterly report that not only have they not generated revenue in any quarter, from any product, but that they are also in the continuing development stage of its drug candidates and will require additional financing to fund those endeavors. As most know, a share price seldom rises in tandem with stock offerings. To put that in perspective, VTVT says that from its inception through September30, 2018, the company has funded its operations primarily through a combination of private placements of common and preferred equity, research collaboration agreements, upfront and milestone payments for license agreements, debt and equity financing's. The company also used funds from the completion of its IPO in August 2015. And, for VTVT, history is likely to repeat itself.

Little Cash Will Lead To More Dilution At VTVT

What should be most concerning to investors, though, is that VTVT says that as of September 30, 2018, the company had an accumulated deficit of $189.0 million and had generated net losses in each year of its existence. But, while substantial accumulated losses may be the case for most emerging biotech companies, AYTU included, the most poignant part of VTVT's disclosure is what they said about their cash position. Red flags should fly high after VTVT told investors that as of September 30, 2018, the company's liquidity sources totaled cash and cash equivalents of $3.8 million and $5.0 million of remaining funds available under the Letter Agreements. To that end, VTVT management estimates that these sources of funding will only allow VTVT to continue its operations and activities for a period of fewer than twelve months from the date of the latest consolidated financial statements, which were published on September 30th.

Hence, it may be hard to justify the market cap difference. But, understanding the market and how institutions may play a role in propping up companies that they underwrite, the high valuation for VTVT is not all that surprising. However, understanding the assessment is one thing, justifying it against peer companies is quite another. In that respect, with AYTU having products already in the market, generating sequential record revenue, and with roughly $18 million in cash, the difference in the market cap may show an opportunity in AYTU that may be lost in the near-term for VTVT.

At 2X Market Cap Of AYTU, Is BioPharmX Worthy Of The Difference?

The last company pitted against AYTU is BioPharmX (NYSE American: BPMX). As of this writing, BPMX holds a market cap of roughly $24.67M. The company's most recent earnings report was filed in December of 2018 for the period ending October 31st. For that period, BMPX posted revenue of only $0.01 million for the three months. That revenue was considerably less than analysts forecast that expected the company to post of $0.02 million. Keep in mind that $.01 million equates to $10,000.

BMPX is currently followed by two analysts, with both rating the stock as an OUTPERFORM candidate. BioPharmX Corporation describes itself as a specialty pharmaceutical company developing products for the dermatology market. Despite a market cap that is roughly 2X that of AYTU, BPMX is undergoing some regulatory listing issues, but did announce that on November 1, 2018, the NYSE Regulation committee accepted the Company's plan to regain compliance with the NYSE American LLC continued listing standards set forth in Sections 1003(A)(III) of the NYSE American Company Guide. The company was given a plan period through September 24, 2019, to regain compliance standards.

Assumptions Should Not Contribute To Market Cap Riches

Assuming that BPMX is successful in regaining listing compliance, do they have much to offer to justify its market cap advantage? In its most recent quarterly filing, BPMX said that they expect to bring new products to market by identifying optimal delivery mechanisms and/or alternative applications for US Food and Drug Administration (FDA) approved active pharmaceutical ingredients and biological materials. In doing so, the company hopes to work proactively to reduce the time, cost and risk typically associated with new product development by re-purposing drugs with demonstrated safety profiles. Thus, the strategy is somewhat similar to AYTU in that BPMX may try to bring drugs back to the market, and like AYTU, may in some circumstances take advantage of the regulatory approval pathway under Section 505(B)(2) of the Federal Food, Drug and Cosmetic Act. However, having plans to develop and bring to market is entirely different than actually having products on the market that are already generating revenue.

Thus, with a market cap roughly 2X that of AYTU, the disconnect between tangible, revenue-generating assets and blue-sky potential emerges again, with AYTU again becoming a more appropriate risk/reward investment compared to BPMX on the basis of producing real revenue, having cleared most all regulatory hurdles, and by having a considerable cash balance to fund operations.

BPMX doesn't wish to remain static by any means. And, in their filings, they say that they believe that their strategic approach to reducing the time needed for drug development and reduced risk plays into their growth objective. However, while the motive may be for the company to expedite both the development efforts and the trials required to achieve FDA approvals, investors should note that since BPMX's inception, substantially all of the company's efforts have been devoted to developing its product candidates, including conducting pre-clinical and clinical trials. Therefore, trying to understand why the market cap of a company that has no drugs on the market, but hopes to one day get one approved and marketed, is higher than that of AYTU is a difficult pill to swallow, and even harder to comprehend.

How Do They Compare?

There is no intent to discredit the work of ALRN, VTVT, or BPMX. In the long-term, each may present investors with a considerable opportunity. However, in the here and now, AYTU is clearly a superior company that is providing real revenues, real growth, and has already cleared the most important regulatory hurdles. Thus, while each of those mentioned above has considerable hurdles to clear before generating any revenue, AYTU is already posting substantial growth demonstrated by its most recent record-breaking quarter.

So, why is the market cap of AYTU considerably lower than most of its clinical-staged peers? My experience attributes it to institutional involvement. But, at AYTU, they, too, recently benefited from that advantage, with an analyst at Ladenburg-Thalmann recently serving up a report on AYTU's market position and placing a price target of $3.75 per share for the stock. That target represents a more than 300% gain from current levels and would be a start to AYTU growing into a more deserved market cap multiple.

Although Aytu BioScience currently trades at a market cap of roughly 10X less than that of vTv Therapeutics, that gap may soon close as AYTU continues on its path of sustainable revenue growth. Besides, AYTU should quickly benefit from its ability to successfully market potentially best-in-class drugs, and build upon its pipeline with complimentary medications that can quickly deliver revenue and bypass the costly and lengthy time required to clear new drugs for market.

Thus, while AYTU may be valued at only $10 million today, the likelihood for the stock to trade multiples higher may soon be validated by the company's ability to continue its path to penetrate lucrative markets with FDA-approved drugs that target substantial medical needs.

Disclosure: The author is LONG Aytu BioScience stock and may add to positions within the next 72 hours

Disclosure: I am/we are long AYTU.