Sometimes investors just need to say, "c'mon, man!" I mean, really, will the market ever offer a plausible explanation for how it values stocks? For the most part, at least in my experience, the retail investor might as well resign themselves to the fact that the companies that get the biggest pump in price are the ones that are just about to hit the capital markets for new funding. The worst part, though, is that while the share price gets pumped by eager institutional bankers, the probable outcome for the unsuspecting retail investor is that they become a sacrificial pawn in the process...and a holder of the forthcoming institutional dump.
Perhaps I'm cynical, or just plain glass-half-empty on this point. But, one thing is for sure...I see too many good stocks go lower in price despite having solid fundamentals, a genuine growth story intact, and a balance sheet that can bring a company to profitability without needing to go to the vulture financiers every four quarters. And, I have examples. (see VIDEO here)
Aytu BioScience Crushes Recent Quarter, Shares Slide
Take Aytu BioScience (NasdaqCM: AYTU), for instance. I am long this stock and have covered the company extensively during the past two years, highlighting this growth story with an accompanying thesis as to why the company should be valued at least 10X higher than it is currently priced. After all, it's peer companies, like Aileron (ALRN), for instance, have market caps that are 3X that of AYTU but are so far from making any meaningful revenue that they hardly even allude to such a goal during their company presentations. Aileron may very well become a good company in the future, but for now their valuation is based on a whole lot of "what if." But, as investors, shouldn't the bulk of our portfolios be in stocks that play "show and tell", where we can analyze risk based on real revenue, real guidance, and consistent company performance?
For me, that answer is yes. And, perhaps that's what is troubling me for the past week. Aytu BioScience traded lower after a record quarter. Not only was the quarter the company's best ever, but its management also provided guidance about two additional drugs that have been made available for sale into multi-billion dollar markets. Plus, unlike the "what if" companies, AYTU is already "doing" the things it set out to do and is not shifting strategy midstream to salvage what they have left in a failing drug, as many of the development stage companies appear to do.
The AYTU Advantage
For those new to Aytu BioScience, Inc., they are 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. And, AYTU is what I consider to be a classic "show and tell" company. Let me bring my thesis into focus...AYTU is already generating revenue. AYTU is actually growing its commercial-stage pipeline. And, AYTU is targeting significant markets where their potential best in class drugs can make a meaningful difference to patients.
Thus, for retail investors looking to invest in revenue-generating, record-breaking companies, AYTU may foot the bill. Why? Because AYTU has a substantial cash balance of roughly $18 million, has three drugs already on the market, and they have a trained and deployed sales force that has shown the ability to generate sales to record levels for Natesto, its lead testosterone replacement therapy drug. And, after posting three sequential quarters of record growth in both revenue and prescriptions written, I believe that AYTU is following a formula that can be repeated.
Natesto is leading the charge and it targets a more than $1.8 billion market. Moreover, AYTU recently published data from its ongoing spermatogenesis study taking place at the University Of Miami School of Medicine which may result in a paradigm shift in how Natesto is marketed. It's a significant opportunity for the drug, and investors need only wait until mid-summer for final data. However, the fact that Natesto is already posting consecutive record increases in new prescriptions and is bringing in more net revenue to AYTU is encouraging. And, as the company phases out its initial aggressive couponing strategy and replacing it with the Natesto Direct program, investors can expect higher gross margins for each sale. Thus, AYTU is showing investors their hand, and they are telling us even more. The market simply needs to listen.
By the way, Natesto isn't even the whole story. AYTU has two other potential blockbuster drugs. Now, I'm not expecting AYTU to generate real "blockbuster" status which typically refers to a drug that sells more than $1 billion. However, for AYTU, who is formulating a strategy to earn just 1%-5% of each given market would translate to blockbuster status for the company, potentially leading to hundreds of millions in gross sales once the pipeline matures. After all, they are targeting a combined $7 billion opportunity.
Sure, some may think my optimism is too manic. But, please, take a few minutes to read on and understand why my enthusiasm for AYTU continues to grow.
Three Drugs, Each In A Multi-Billion Market
While Natesto already generated more than a million dollars in revenue last quarter, AYTU holds two additional drugs that just recently went on the market, 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. They also have a device, MiOXSYS, an in-vitro diagnostic semen analysis test that is used in the measurement of static oxidation-reduction potential (oxidative stress) in human semen. It's a fairly robust pipeline for a company with a market cap of less than $20 million.
At the same time, jumping back to ALRN for a moment, despite ALRN being a company that is only filled with “what if”, it has seen its market cap shoot to over $30 million in the past two weeks from its former $24 million. But, for AYTU, who is executing a near flawless growth strategy, and published a near blowout quarter, saw its market cap decline to roughly $10.92 million. It makes little sense, especially with AYTU sitting well financially and its products experiencing record growth.
Moreover, while an explanation as to why AYTU lost value after a best-ever quarter is difficult, it is not hard to punctuate the point that the market has a major disconnect from a more realistic AYTU valuation. And, remember when I said that an investor can get all the information they need by reading the SEC filings and listening to CEO conference calls? Well, it's true.
Just last week, AYTU announced record quarterly revenues of $1.8 million. Beyond just a strong quarter at face value, however, investors need to take that number and compare it to historical data. In this case, that revenue gain represented a 71% growth over the same quarter in 2018, and a 25% increase over the Q1 of fiscal 2019. For consistency purposes, that record-quarter follows the past three-quarters of record revenue and prescription rate growth. Thus, investors were treated to record after record after record. Yes, I intentionally wrote it three times, just to point out that AYTU is both showing and telling investors just how well they are performing.
But, revenue without net-revenue is not very appealing either. On that point, the company's flagship product, Natesto®, increased its revenue contribution by 37% sequentially over the first quarter of FY19. Not only are the products ringing the revenue bell, but Natesto may soon find its place as the only TRT product capable of providing testosterone replacement therapy without interfering with a patient’s fertility. To date, not a single TRT product on the market can say that their formulation does not limit future fertility potential.
For AYTU's Natesto, however, investors are only a few months away from a final readout that may place Natesto in a class of its own in the TRT market. And, while Natesto is already showing strength and consistent quarterly growth, if the final data from the spermatogenesis study confirm interim results, Natesto will likely be the only TRT option to treat the 20% of men that need testosterone replacement therapy but want to maintain their fertility. That market would be substantial, perhaps driving the sales and revenue higher on an exponential basis. More on that point...
University Of Miami Spermatogenesis Study
In prior articles covering Natesto, data from AYTU's ongoing spermatogenesis study taking place at the University of Miami's School of Medicine is showing Natesto® to be the only TRT drug either on the market or in a clinical trial that can maintain normal semen parameters in males. If the final data read-out this summer confirms the interim findings announced last fall, that critical distinction will place Natesto® in a class to become the only TRT drug that can treat hypogonadal men with all the benefits of testosterone while at the same time preserving male fertility. It's also noteworthy to mention that the data already published from this Natesto® study is a first of its kind result.
Here's the punchline to the study at U of M. The results thus far in 38 treatable men showed absolutely no effect in reducing fertility levels in men taking the product. In a game of winner take all, Natesto appears pretty close to owning the market that addresses roughly 20% of the low-T market and treating the men that want to retain their ability to build a family. At the end of the day, Natesto would be their only option.
Wall Street Analysts Say AYTU Should Increase By 400%-1000% Higher
Notably, I'm in good company with others that favor AYTU, including two Wall Street analysts that cover the company. Ladenburg Thalmann has a BUY rating and a $4.00 price target. And, Northland Capital updated its analysis with an OUTPERFORM rating (BUY) and a price target of $10.00 per share. Investors could bank on either and earn potential returns of between 400% -1000%.
But, these estimates also include a broad safety net for investors. Unlike development stage companies, AYTU has no debt, no regulatory uncertainty, no development costs, and no need to raise cash anytime soon. Despite these positives, the stock trades as if the market sees the polar opposite of what AYTU actually is delivering quarter after quarterly – record revenues and record prescription rate growth. But, as is often the case, they will find this emerging gem. The market always does.
And, when big money finds the company, the retail investor won't have a chance to get shares at these levels. Why? Because like ALRN, a relatively small float creates sharp price movements, and once the buying starts the stock will most likely rally similar to ALRN, but for a better reason. AYTU is producing tangible results with real, revenue-generating products.
AYTU Should be A Standout
For experienced investors that listen to conference calls, they know that small companies always have a reason on hand for missed earnings, lack of capital, slow trials, and a bloating capital structure. Granted, most every development and emerging biotech company experiences growing pains, but, as an investor, isn't it more prudent to take a position in a company that is already on target to increase existing revenues and reduce costs? For me, it's a strategy that makes total sense.
Not to bash Aileron, but let's compare them to AYTU as a peer comparison. ALRN promotes itself as a clinical-stage leader in the field of stabilized, cell-permeating peptides to treat cancer and other diseases. The stock closed January at $1.10 per share. Now, on February 19th, the stock is trading at $1.77, a gain of almost 60%. The company has posted no news, no updates, and no specific reason to account for the newfound enthusiasm. At best, investors in ALRN have a shot at making long-term money by staying long with ALRN. Most recently, investors are hanging their hat on news that the company's first patient has been enrolled in a Phase 2a expansion cohort intended to assess preliminary activity and safety of ALRN-6924 in combination with Pfizer's palbociclib, also known as IBRANCE®, in cancer patients with MDM2-amplified solid tumors. In other words, ALRN is expanding its primary trial. And, despite the known variables that their endeavor will be a lengthy and expensive process, the share price rallied. Now, at best, ALRN told investors that they “hope” to report results by the end of 2019.
Think about it, should ALRN become the investment vehicle for retail investors to hang their hopes? I don't think so. Especially when the company's latest 10Q, where ALRN prints for all to see, "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."
In other words, they are expanding trials, spending money, and they don't yet know the outcome. Too risky for me for other than a lottery ticket investment.
I'm Not Bagging ALRN Too Hard
Don't get me wrong, I think it's fantastic that ALRN is trying to find a meaningful drug to treat a horrible disease. However, the thesis here is to figure the reason as to why the stock has run up during the past fifteen days. At best, a massive cloud of uncertainty about ALRN exists, starting from whether they actually are going to develop an FDA-approved drug, and second, how will they pay for the trials. Investors already know that the company does not generate any revenue, nor do they expect to make any revenue in the coming months. Their words, not mine. But, they are touting the development efforts for ALRN-6924, and investors have been drawn to the stock like a magnet. Keep in mind, as do I, the stock is beaten down from much higher levels, but, that is not altogether uncommon for low-float, thinly traded stocks. It happens.
But, thinly traded or not, if retail investors are getting ready to pull the investment trigger on ALRN, might I suggest a pause? Realistically, is there any fundamental change in the business since it fell from its 52-week high of $9.50 per share? Nope, not a thing. Well, perhaps having some big name institutional investors in the stock can help, and ALRN does have JP Morgan, Bridgeway Capital, and the Vanguard Group as a few of its largest institutional owners. And, that never hurts. In fact, when I analyze a company for my own portfolio, I always look at the major holder list. For one, I like to be in good company. But, on the other side of that equation sits a hungry bear, waiting for its retail investor prey as these big brokers pump the shares to dump them on the little guys ahead of a capital raise. If you think it doesn't happen, think again. It happens all of the time.
Don't Let The Institutions Play You
Institutional investors don't stay in business by holding losers. They make money by finding winners and making the best of their bad decisions. Thus, these guys will purchase shares, drive the stocks higher, suck the retail investor into play and then dump the “commission” shares into their unsuspecting portfolios. But, as they say, don't hate the player, hate the game.For those that purchase ALRN over AYTU, good luck. Only one company is producing record revenues. Only one company already has three FDA-approved drugs on the market serving a combined $7 billion opportunity. And, only one of the two above has a cash balance of roughly $18 million.
I'll save you the guessing, it's Aytu BioScience. And, by any stretch of the investment imagination, AYTU is clearly in the position to become a retail investor's best friend, with record-earnings expected, no debt, an additional new drug in the wings, and a cash balance that will keep AYTU away from the predatory lenders and the death spiral committee. I can't say the same for Aileron.
Disclaimer: Author is LONG Aytu BioScience
This article appeared onSoulstring Report