Overview
Veru Inc., The Prostate Cancer Company, is an oncology and urology
biopharmaceutical company developing novel medicines for the management of
prostate cancer.
The Company's prostate cancer pipeline includes VERU-111, zuclomiphene citrate,
and VERU-100.
VERU-111 is an oral, next-generation, first-in-class small molecule that targets
alpha and beta tubulin subunits to disrupt microtubules in cells to treat
metastatic prostate cancer patients whose disease is resistant to both
castration and novel androgen-blocking agents (e.g., abiraterone or
enzalutamide). VERU-111 is being evaluated in men with metastatic castration and
androgen-blocking agent resistant prostate cancer in two portions of an ongoing
open label clinical trial: the Phase 1b portion and the Phase 2 portion.
Recently we announced positive results from the fully enrolled but ongoing Phase
1b portion of the Phase 1b/2 VERU-111 trial for prostate cancer. The Phase 1b
portion of the Phase 1b/2 clinical study enrolled 39 men with metastatic
castration-resistant prostate cancer who have also become resistant to at least
one novel androgen blocking agent from 7 clinical sites in the United States. A
standard 3x3 design was used to establish the maximum tolerated dose (MTD), to
select a recommended clinical dose for Phase 2 study, and to assess preliminary
evidence of antitumor activity of VERU-111. Oral dosing escalated from 4.5mg to
81mg (7 days of dosing followed by 14 days of no drug each 21-day cycle and
expanded to 21 days of continuous dosing per cycle). As for safety, the MTD of
VERU-111 was determined to be 72mg (3 of 11 men had reversible Grade 3
diarrhea). No Grade 3 diarrhea was observed at doses less than 72 mg per day. At
doses of VERU-111 of 63 mg and lower per day, mild to moderate nausea, vomiting,
diarrhea and fatigue were the most common adverse events. There were no reports
of neurotoxicity and no neutropenia at doses 63 mg and lower oral daily dosing
continuous for 21 days per cycle. Preliminary antitumor activity was assessed by
serum PSA and standard local imaging with bone and CT scans. In the eight men
that received at least four 21-day cycles of oral VERU-111 at any dose, based
upon their 21-day cycle baseline PSA levels, 6/8 (75%) had decreases in their
PSA levels, 4 patients (50%) demonstrated a greater than or equal to 30%
decline, and 2 patients (25%) had a greater than or equal to 50% decline in
serum PSA. Based upon PCWG3 and Response Evaluation Criteria in Solid Tumors
(RECIST) 1.1 criteria, objective tumor responses were seen in 2 patients (25%)
(soft tissue and bone) and 5/8 patients (63%) had stable disease. Objective
tumor responses and PSA declines lasted longer than 12 weeks. The primary
endpoint used in pivotal efficacy studies for the treatment of metastatic
castration-resistant prostate cancer is median time to cancer progression by
imaging (bone and CT scans). In the current study, median duration of response,
or time to cancer progression, has not been reached since 7 out of 8 of the men
are still being treated on the study with an average duration of response of 10
months (range is 6-14 months). There are an additional 3 subjects on study that
have not yet completed four 21-day cycles; therefore, a total of 10 men are
still on study. The Phase 2 portion of the trial is currently enrolling men who
have metastatic castration resistant prostate cancer and who have also become
resistant to novel androgen blocking agents, such as abiraterone or
enzalutamide, but prior to proceeding to IV chemotherapy, also referred to as
the prechemotherapy stage. In addition, based on the Phase 1b safety and
efficacy clinical data, the Company plans to meet with the FDA next quarter to
reach agreement on the registration Phase 3 design for the treatment of men with
metastatic castration resistant prostate cancer who also have failed one
androgen blocking agent (enzalutamide or abiraterone). We also plan to present
an update of the Phase 1b/2 clinical data at a future major scientific meeting.
Zuclomiphene citrate is an oral nonsteroidal estrogen receptor agonist that has
successfully completed a Phase 2 trial (Stage 1 testing placebo, Zuclomiphene
10mg, and Zuclomiphene 50 mg) to treat hot flashes, a common side effect caused
by androgen deprivation therapy (ADT) in men with advanced prostate cancer.
Following an End of Phase 2 meeting with the FDA, the Company plans to advance
zuclomiphene citrate to a Phase 3 clinical trial in men with advanced prostate
cancer who experience moderate to severe hot flashes with a potential start date
in late calendar year 2020.
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VERU-100 is a novel, proprietary peptide formulation for ADT with multiple
potential beneficial clinical attributes addressing the shortfalls of current
FDA-approved ADT formulations for the treatment of advanced prostate cancer.
VERU-100 is a long-acting gonadotropin-releasing hormone (GnRH) antagonist
designed to be administered as a small volume subcutaneous 3-month depot
injection without a loading dose. VERU-100 will immediately suppress
testosterone with no testosterone surge upon initial or repeated
administration-a problem which occurs with currently approved luteinizing
hormone-releasing hormone (LHRH) agonists used for ADT. There are no GnRH
antagonists commercially approved beyond a one-month injection. VERU-100 is
anticipated to enter a Phase 2 dose-finding study with a potential start date in
the third quarter of calendar year 2020.
Recently the Company announced that it has received FDA permission to initiate a
Phase 2 clinical trial to assess the efficacy of VERU-111, a microtubule
depolymerization agent, in combating COVID-19, the global pandemic disease
caused by the novel coronavirus SARS-CoV-2. VERU-111 is an oral, first-in-class
microtubule depolymerization agent that targets the colchicine binding site of
alpha and beta tubulin subunits to inhibit microtubules and is currently under
clinical development in prostate cancer. Drugs that target microtubules have
broad antiviral activity by disrupting the intracellular transport of viruses
such as SARS CoV-2, along microtubules. Microtubule trafficking is critical for
viruses to cause infection. Furthermore, microtubule depolymerization agents
that target alpha and beta tubulin subunits of microtubules also have strong
anti-inflammatory effects including the potential to treat the cytokine release
syndrome (cytokine storm) induced by the SARS-CoV-2 viral infection that seems
to be associated with high COVID-19 mortality rates. The Company met with the
FDA and received agreement on the clinical development program for VERU-111 as a
potential dual antiviral and anti-inflammatory agent to combat COVID-19 under
the new FDA program, Coronavirus Treatment Acceleration Program (CTAP). The
Phase 2 clinical trial is a double-blind randomized (1:1) placebo-controlled
trial evaluating daily oral doses of VERU-111 versus placebo for 21 days in 40
hospitalized patients (VERU-111 20 subjects and placebo 20 subjects) who tested
positive for the SARS-CoV-2 virus and are at high risk for Acute Respiratory
Distress Syndrome (ARDS). The primary efficacy endpoint will be the proportion
of patients that are alive and without respiratory failure at Day 29. Secondary
endpoints include the measured improvements on the WHO Disease Severity Scale
(8-point ordinal scale) which captures COVID-19 disease symptoms and signs
including hospitalization to progression of pulmonary symptoms to mechanical
ventilation as well as death. The Phase 2 COVID-19 study will evaluate an 18mg
oral daily dosing single treatment for 21 days. Because of the urgent need for
effective and timely therapeutics to combat COVID-19, the Company has applied
for significant grant funding through both The Biomedical Advanced Research and
Development Authority of the US Department of Health and Human Services (BARDA)
and The Defense Advanced Research Projects Agency of the US Department of
Defense (DARPA) to expedite the clinical development program of VERU-111 for
COVID-19. There can be no assurances that any such grant funding will be
provided.
The Company is also advancing new drug formulations in its specialty
pharmaceutical pipeline addressing unmet medical needs in urology such as
TADFIN® for the administration of tadalafil 5mg and finasteride 5mg combination
formulation dosed daily to treat urinary tract symptoms caused by BPH. Tadalafil
(CIALIS®) is currently approved for treatment of benign prostatic hyperplasia
(BPH) and erectile dysfunction and finasteride is currently approved for
treatment of BPH (finasteride 5mg PROSCAR®) and male pattern hair loss
(finasteride 1mg PROPECIA®). The co-administration of tadalafil and finasteride
has been shown to be more effective for the treatment of BPH than by finasteride
alone. The Company had a successful pre-NDA meeting with the FDA and the
expected submission of the NDA for TADFIN® is the fourth quarter of calendar
year 2020 or early 2021. The Company is also developing a Tamsulosin XR
formulation which is a formulation of tamsulosin, the active ingredient in
FLOMAX®, which the Company has designed to avoid the "food effect" inherent in
currently marketed versions of the drug, allowing for potentially safer
administration and improved patient compliance.
The Company's commercial products include FC2, an FDA-approved product for the
dual protection against unintended pregnancy and sexually transmitted
infections, and the PREBOOST® 4% benzocaine medicated individual wipe for the
treatment of premature ejaculation. The Company's Female Health Company Division
markets and sells FC2 commercially and in the public health sector both in the
U.S. and globally. In the U.S., FC2 is available by prescription through the
Company's multiple telemedicine and internet pharmacy partners and retail
pharmacies, as well as OTC through the Company's website at www.fc2.us.com. In
the global public health sector, the Company markets FC2 to entities, including
ministries of health, government health agencies, U.N. agencies, nonprofit
organizations and commercial partners, that work to support and improve the
lives, health and well-being of women around the world. PREBOOST® is marketed
online in the U.S. through an exclusive marketing arrangement under the Roman®
Swipes brand name by Roman Health Ventures Inc. Roman is a leading telemedicine
company that sells men's health products via the internet website
www.getroman.com.
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In October 2016, we completed the APP Acquisition. Prior to the completion of
the APP Acquisition, the Company had been a single product company, focused on
manufacturing, marketing and selling FC2 in the public sector. Most of the
Company's net revenues are currently derived from sales of FC2 in the public and
commercial sectors.
Recent Developments
In December 2019, a novel strain of coronavirus was reported to have emerged in
Wuhan, China. COVID-19, the disease caused by the coronavirus, has since spread
to over 100 countries, including every state in the United States. On March 11,
2020, the World Health Organization declared COVID-19 a pandemic, and on March
13, 2020, the United States declared a national emergency with respect to the
COVID-19 outbreak.
In an effort to contain and mitigate the spread of COVID-19, many countries,
including the United States, the United Kingdom and Malaysia, have imposed
unprecedented restrictions on travel, and there have been business closures and
a substantial reduction in economic activity in countries that have had
significant outbreaks of COVID-19. In addition and in an attempt to slow the
rapid growth of the COVID-19 infection rate, many governments around the world,
including in the United States at the federal, state and local levels as well as
in the United Kingdom and Malaysia, have imposed mandatory sheltering in place
and social distancing restrictions that severely limit the ability of its
citizens to travel freely and to conduct activities.
The COVID-19 pandemic has substantially impacted the global healthcare system,
including the conduct of clinical trials. Many healthcare systems have
restructured operations to prioritize caring for those suffering from COVID-19
and to limit or cease other activities. The severe burden on healthcare systems
caused by this pandemic has also impaired the ability of many research sites to
start new clinical trials or to enroll new patients in clinical trials. The
imposed mandatory sheltering in place and social distancing restrictions may
delay the recruitment of patients and impede their ability to effectively
participate in such trials. Significant fees may also be owed to contract
research organizations associated with starting and stopping clinical trials,
typically more so than delaying the start of a clinical trial. For these and
other reasons, Veru has decided to postpone initiation of the first Phase 3
trial for zuclomiphene citrate until at least the end of calendar year 2020 or
until such time as there is additional clarity and certainty surrounding the
impact of the COVID-19 pandemic on the healthcare system.
The Phase 1b portion of our ongoing VERU-111 clinical trial is fully enrolled.
As for the Phase 2 portion of the VERU-111 clinical trial, discontinuation would
disrupt treatment of patients' advanced prostate cancer. Therefore, the VERU-111
Phase 2 study for metastatic castration resistant prostate cancer is currently
enrolling as planned. However, there is a risk that changing circumstances
relating to the COVID-19 pandemic may not allow our healthcare clinical trial
investigators, their healthcare facilities or other necessary parties to
continue to participate in these trials through completion.
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In addition to its impact on our clinical trials, COVID-19 has had, and will
likely continue to have, a significant impact on our operations. On March 16,
2020, the Malaysian government issued an order closing non-essential businesses
in that country due to the COVID-19 pandemic. As a result, the sole facility
where the Company manufactures FC2 was unable to manufacture or ship product
starting March 16, 2020. Because FC2 is a health product, the Company received
an exemption to reopen the facility with limited staff to ship existing
inventory on March 27, 2020, to reopen for manufacturing with 50% of the regular
number of workers and social distancing requirements on April 20, 2020 and to
return to 100% of the regular number of workers but continued social distancing
requirements on May 4, 2020. The Company has had a sufficient quantity of FC2
outside of Malaysia to continue to satisfy customer demand, and with the
facility reopening the Company does not expect to have issues with supply of
FC2. However, if the Company's Malaysian manufacturing facility encounters labor
or raw material shortages, transportation delays or other issues, our ability to
supply product to our customers could be disrupted. The sole supplier of the
nitrile polymer sheath for FC2 has recently been prioritizing production of
surgical gloves during the COVID-19 pandemic and may continue to do so, which
could disrupt the Company's supply of a critical raw material. Malaysian ports
are currently open for shipment but at limited capacity, and the Company may
also encounter issues shipping product into key markets. The COVID-19 pandemic
and related economic disruption may also adversely affect customer demand for
FC2 and PREBOOST. For example, sales of FC2 could be impacted in the U.S.
prescription market if insurance coverage is affected by job losses and in the
Global Public Sector if governments delay future tenders or reduce spending on
female condoms due to financial strains or changed spending priorities caused by
the COVID-19 pandemic. To protect the health and safety of our workforce, we
have closed our offices in the United States and the United Kingdom and our
personnel have been working remotely. Travel between our facilities in the
United States, the United Kingdom and Malaysia has also been restricted.
Significant uncertainty remains as to the potential impact of the COVID-19
pandemic on our operations, and on the global economy. It is currently not
possible to predict how long the pandemic will last or the time that it will
take for economic activity to return to prior levels. We do not yet know the
full extent of any impact on our business or our operations; however, we will
continue to monitor the COVID-19 situation and its impact on our business
closely and expect to reevaluate the timing of our anticipated clinical trials
as the impact of COVID-19 on our industry becomes more clear.
Sales of FC2 in the public and commercial sectors
FC2 Public Sector. FC2's primary use is for the prevention of HIV/AIDS and
other sexually transmitted diseases and family planning, and the global public
health sector has been the Company's main market for FC2. Within the global
public health sector, various organizations supply critical products such as
FC2, at no cost or low cost, to those who need but cannot afford to buy such
products for themselves.
FC2 has been distributed in the U.S. and 149 other countries. A significant
number of countries with the highest demand potential are in the developing
world. The incidence of HIV/AIDS, other sexually transmitted infections and
unwanted pregnancy in these countries represents a remarkable potential for
significant sales of a product that benefits some of the world's most
underprivileged people. However, conditions in these countries can be volatile
and result in unpredictable delays in program development, tender applications
and processing orders.
The Company currently has a limited number of customers for FC2 in the global
public health sector who generally purchase in large quantities. Over the past
few years, significant customers have included large global agencies, such as
UNFPA, USAID, the Brazil Ministry of Health either through UNFPA or Semina
Indústria e Comércio Ltda (Semina), the Company's distributor in Brazil, and the
Republic of South Africa health authorities that purchase through the Company's
various local distributors. Other customers include ministries of health or
other governmental agencies, which either purchase directly or via in-country
distributors, and NGOs.
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Purchasing patterns for FC2 in the public sector vary significantly from one
customer to another and may reflect factors other than simple demand. For
example, some governmental agencies purchase FC2 through a formal procurement
process in which a tender (request for bid) is issued for either a specific or a
maximum unit quantity. Tenders also define the other elements required for a
qualified bid submission (such as product specifications, regulatory approvals,
clearance by WHO, unit pricing and delivery timetable). Bidders have a limited
period of time in which to submit bids. Bids are subjected to an evaluation
process which is intended to conclude with a tender award to the successful
bidder. The entire tender process, from publication to award, may take many
months to complete, including administrative actions or appeals. A tender award
indicates acceptance of the bidder's price rather than an order or guarantee of
the purchase of any minimum number of units. Many governmental tenders are
stated to be "up to" the maximum number of units, which gives the applicable
government agency discretion to purchase less than the full maximum tender
amount. Orders are placed after the tender is awarded; there are often no set
dates for orders in the tender and there are no guarantees as to the timing or
amount of actual orders or shipments. Orders received may vary from the amount
of the tender award based on a number of factors including vendor supply
capacity, quality inspections and changes in demand. Administrative issues,
politics, bureaucracy, process errors, changes in leadership, funding priorities
and/or other pressures may delay or derail the process and affect the purchasing
patterns of public sector customers. As a result, the Company may experience
significant quarter-to-quarter sales variances in the global public sector due
to the timing and shipment of large orders of FC2.
On August 27, 2018, the Company announced that through six of its distributors
in the Republic of South Africa, the Company had received a tender award to
supply 75% of a tender covering up to 120 million female condoms over three
years. The Company began shipping units under this tender award in the third
quarter of fiscal 2019.
The Company classified approximately $1.1 million and $300,000 of trade
receivables with its distributor in Brazil as long-term as of March 31, 2020 and
September 30, 2019, respectively, because payment was expected in greater than
one year.
FC2 Commercial Sector. In April 2017, the Company launched a small-scale
marketing and sales program to support the promotion of FC2 in the U.S. market.
The commercial team developed a plan to confirm the "proof of concept" that FC2
represented a significant business opportunity. This required changes in the
distribution process for FC2 in the U.S. As part of this strategy the Company
announced new distribution agreements with three of the country's largest
distributors that support the pharmaceutical industry. This newly developed
network now allows up to 92% of major retail pharmacies the ability to make FC2
available to their customers. In addition to the distribution system, the
Company expanded sales and market access efforts that resulted in FC2 now being
available through the following access points: community-based organizations, by
prescription, through leading telemedicine providers, through 340B covered
entities, colleges and universities and our patient assistance program. We
continue to increase healthcare provider awareness, education and acceptance,
which has resulted in more women utilizing FC2 in the U.S. In 2018, we dissolved
our small-scale marketing and sales program to focus our efforts in partnering
with fast-growing, highly reputable telemedicine firms (telemedicine being the
remote diagnosis and treatment of patients by means of telecommunications
technology) to bring our much-needed FC2 product to patients in a cost-effective
and highly convenient manner.
FC2 Unit Sales. Details of the quarterly unit sales of FC2 for the last five
fiscal years are as follows:
Period 2020 2019 2018 2017 2016
October 1 - December 31 10,070,700 7,382,524 4,399,932 6,389,320 15,380,240
January 1 - March 31 6,884,472 9,792,584 4,125,032 4,549,020 9,163,855
April 1 - June 30 - 10,876,704 10,021,188 8,466,004 10,749,860
July 1 - September 30 - 9,842,020 6,755,124 6,854,868 6,690,080
Total 16,955,172 37,893,832 25,301,276 26,259,212 41,984,035
Revenues. The Company's revenues are primarily derived from sales of FC2 in the
global public sector and the U.S. prescription channel. Other revenues are from
sales of PREBOOST® (Roman® Swipes). These sales are recognized upon shipment or
delivery of the product to the customers depending on contract terms.
The Company's most significant customers have been global public health sector
agencies who purchase and/or distribute FC2 for use in preventing the
transmission of HIV/AIDS and/or family planning and, in the U.S., telemedicine
providers who sell into the prescription channel.
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The Company is working to further develop a global market and distribution
network for FC2 by maintaining relationships with global public health sector
groups and completing strategic arrangements with companies with the necessary
marketing and financial resources and local market expertise.
In 2017, the Company began expanding access to FC2 in the U.S. by making it
available by prescription. With a prescription, FC2 is covered by most insurance
companies with no copay under the Patient Protection and Affordable Care Act
(the "ACA") and the laws of 20+ states prior to enactment of the ACA. The
Company supplies FC2 to a leading telemedicine provider, which has become one of
our largest customers. The Company has developed and is working to develop
additional supply and distributor relationships with telemedicine and other
providers.
The Company manufactures FC2 in a leased facility located in Selangor D.E.,
Malaysia, resulting in a portion of the Company's operating costs being
denominated in foreign currencies. While a material portion of the Company's
future sales are likely to be in foreign markets, all sales are denominated in
the U.S. dollar. Effective October 1, 2009, the Company's U.K. and Malaysia
subsidiaries adopted the U.S. dollar as their functional currency, further
reducing the Company's foreign currency risk.
Operating Expenses. The Company manufactures FC2 at its Malaysian facility. The
Company's cost of sales consists primarily of direct material costs, direct
labor costs and indirect production and distribution costs. Direct material
costs include raw materials used to make FC2, principally a nitrile polymer.
Indirect production costs include logistics, quality control and maintenance
expenses, as well as costs for electricity and other utilities. All the key
components for the manufacture of FC2 are essentially available from either
multiple sources or multiple locations within a source.
Conducting research and development is central to our business model. Since the
completion of the APP Acquisition we have invested and expect to continue to
invest significant time and capital in our research and development operations.
Our research and development expenses were $3.9 million and $2.9 million for the
three months ended March 31, 2020 and 2019, respectively. Our research and
development expenses were $9.2 million and $5.3 million for the six months ended
March 31, 2020 and 2019, respectively. We expect to continue this trend of
increased expenses relating to research and development due to advancement of
multiple drug candidates.
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Results of Operations
THREE MONTHS ENDED MARCH 31, 2020 COMPARED TO THREE MONTHS ENDED MARCH 31, 2019
The Company generated net revenues of $9.9 million and net loss of $0.8 million,
or $(0.01) per basic and diluted common share, for the three months ended March
31, 2020, compared to net revenues of $7.0 million and net loss of $4.0 million,
or $(0.07) per basic and diluted common share, for the three months ended March
31, 2019. Net revenues increased 43% year over year.
FC2 net revenues represented 96% of total net revenues for the three months
ended March 31, 2020. FC2 net revenues increased 39% year over year. There was a
30% decrease in total FC2 unit sales and an increase in FC2 average sales price
per unit of 98%. The principal factor for the increase in the FC2 average sales
price per unit compared to prior year was the increase in net revenues in the
U.S. prescription channel. The Company experienced an increase of 168% in FC2
net revenues in the U.S. prescription channel and a decrease of 40% in FC2 net
revenues in the global public sector.
Cost of sales increased to $2.5 million in the three months ended March 31, 2020
from $2.4 million in the three months ended March 31, 2019 primarily due to an
increase in labor, transportation, and equipment maintenance costs.
Gross profit increased to $7.4 million in the three months ended March 31, 2020
from $4.6 million in the three months ended March 31, 2019. Gross profit margin
for the 2020 period was 75% of net revenues, compared to 66% of net revenues for
the 2019 period. The increase in the gross profit margin is primarily due to the
increase in sales in the U.S. prescription channel, which is at a higher average
sales price.
Significant quarter-to-quarter variances in the Company's results have
historically resulted from the timing and shipment of large orders rather than
from any fundamental changes in the business or the underlying demand for FC2.
The Company is also currently seeing pressure on pricing for FC2 by large global
agencies and donor governments in the developed world. As a result, the Company
may continue to experience challenges for revenue from sales of FC2 in the
global public sector. The Company is experiencing a significant increase in
revenue from sales in the U.S. prescription channel, which is helping grow net
revenues quarter to quarter and year to year. The Company anticipates that its
largest U.S. telemedicine customer may reduce its orders in the third quarter of
fiscal 2020, which could adversely affect net revenues and gross profit margin.
Research and development expenses increased to $3.9 million in the three months
ended March 31, 2020 from $2.9 million in the same period in fiscal 2019. The
increase is primarily due to increased costs associated with the in-process
research and development projects and increased personnel costs.
Selling, general and administrative expenses remained consistent at $3.8 million
in the three months ended March 31, 2020 compared to the three months ended
March 31, 2019.
Interest expense, which consists of items related to the Credit Agreement and
Residual Royalty Agreement, was $1.2 million in the three months ended March 31,
2020, which is comparable with $1.3 million in the three months ended March 31,
2019.
Income associated with the change in fair value of the embedded derivatives
related to the Credit Agreement and Residual Royalty Agreement was $0.5 million
in the three months ended March 31, 2020 compared to expense of $0.6 million in
the three months ended March 31, 2019. The liabilities associated with embedded
derivatives represent the fair value of the change of control provisions in the
Credit Agreement and Residual Royalty Agreement. See Note 3 and Note 8 to the
financial statements included in this report for additional information.
The income tax benefit in the second quarter of fiscal 2020 was $133,000,
compared to income tax expense of $25,000 in the second quarter of fiscal 2019.
The increase in the income tax benefit of $158,000 is primarily due to a
decrease in the change in the valuation allowance of $0.9 million, partially
offset by a decrease in the income tax benefit of $0.8 million related to the
decrease in the loss before income taxes during the current period.
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SIX MONTHS ENDED MARCH 31, 2020 COMPARED TO SIX MONTHS ENDED MARCH 31, 2019
The Company generated net revenues of $20.5 million and net loss of
$4.1 million, or $(0.06) per basic and diluted common share, for the six months
ended March 31, 2020, compared to net revenues of $13.3 million and net loss of
$6.2 million, or $(0.10) per basic and diluted common share, for the six months
ended March 31, 2019. Net revenues increased 54% year over year.
FC2 net revenues represented 97% of total net revenues for the six months ended
March 31, 2020. FC2 net revenues increased 51% year over year. There was a 1%
decrease in total FC2 unit sales and an increase in FC2 average sales price per
unit of 53%. The principal factor for the increase in the FC2 average sales
price per unit compared to prior year was the increase in net revenues in the
U.S. prescription channel. The Company experienced an increase in FC2 net
revenues of 158% in the U.S. prescription channel and a decrease of 15% in FC2
net revenues in the global public sector.
Cost of sales increased to $5.8 million in the six months ended March 31, 2020
from $4.1 million in the six months ended March 31, 2019 primarily due to an
increase in labor, transportation, and equipment maintenance costs.
Gross profit increased to $14.7 million in the six months ended March 31, 2020
from $9.3 million in the six months ended March 31, 2019. Gross profit margin
for the fiscal 2020 period was 72% of net revenues, compared to 69% of net
revenues for the fiscal 2019 period. The increase in the gross profit margin is
primarily due to the increase in sales in the U.S. prescription channel, which
is at a higher average sales price.
Significant quarter-to-quarter variances in the Company's results have
historically resulted from the timing and shipment of large orders rather than
from any fundamental changes in the business or the underlying demand for FC2.
The Company is also currently seeing pressure on pricing for FC2 by large global
agencies and donor governments in the developed world. As a result, the Company
may continue to experience challenges for revenue from sales of FC2 in the
global public sector. The Company is experiencing a significant increase in
revenue from sales in the U.S. prescription channel, which is helping grow net
revenues quarter to quarter and year to year. The Company anticipates that its
largest U.S. telemedicine customer may reduce its orders in the third quarter of
fiscal 2020, which could adversely affect net revenues and gross profit margin.
Research and development expenses increased to $9.2 million in the six months
ended March 31, 2020 from $5.3 million in the same period in fiscal 2019. The
increase is primarily due to increased costs associated with the in-process
research and development projects and increased personnel costs.
Selling, general and administrative expenses increased to $7.6 million in
the six months ended March 31, 2020 from $7.1 million in the six months ended
March 31, 2019. The increase is primarily due to increased personnel, personnel
costs, and related benefits.
Interest expense, which consists of items related to the Credit Agreement and
Residual Royalty Agreement, was $2.3 million in the six months ended March 31,
2020, which is comparable with $2.5 million in the six months ended March 31,
2019.
Income associated with the change in fair value of the embedded derivatives
related to the Credit Agreement and Residual Royalty Agreement was $75,000 in
the six months ended March 31, 2020 compared to expense of $0.4 million in the
six months ended March 31, 2019. The liabilities associated with embedded
derivatives represent the fair value of the change of control provisions in the
Credit Agreement and Residual Royalty Agreement. See Note 3 and Note 8 to the
financial statements included in this report for additional information.
The income tax benefit in the first six months of fiscal 2020 was $0.2 million,
compared to income tax expense of $0.1 million in the first six months of fiscal
2019. The increase in the income tax benefit of $0.3 million is primarily due to
a decrease in the change in the valuation allowance of $1.0 million, partially
offset by a decrease in the income tax benefit of $0.6 million related to the
decrease in the loss before income taxes during the current period and a
decrease of $70,000 for the effect of lower foreign income tax rates.
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Liquidity and Sources of Capital
Liquidity
Our cash on hand at March 31, 2020 was $2.6 million, compared to $6.3 million at
September 30, 2019. At March 31, 2020, the Company had working capital of
$0.6 million and stockholders' equity of $31.1 million compared to working
capital of $2.8 million and stockholders' equity of $32.3 million as of
September 30, 2019. The decrease in working capital is primarily due to an
increase in the current portion of the Credit Agreement liability and the
recognition of a current liability for operating leases as a result of the
Company's adoption of the new lease accounting standard, as described in Note 1
to the financial statements included in this report.
We have incurred quarterly operating losses since the fourth quarter of fiscal
2016 and anticipate that we will continue to consume cash and incur substantial
net losses as we develop our drug candidates. Because of the numerous risks and
uncertainties associated with the development of pharmaceutical products, we are
unable to estimate the exact amounts of capital outlays and operating
expenditures necessary to fund development of our drug candidates and obtain
regulatory approvals. Our future capital requirements will depend on many
factors. See Part II, Item 1A of this Form 10-Q and Part I, Item 1A, "Risk
Factors - Risks Related to Our Financial Position and Need for Capital" in the
Company's Annual Report on Form 10-K for the fiscal year ended September 30,
2019, for a description of certain risks that will affect our future capital
requirements.
The Company believes its current cash position, cash expected to be generated
from sales of the Company's commercial products, and its ability to secure
equity financing or other financing alternatives are adequate to fund planned
operations of the Company for the next 12 months. Such financing alternatives
may include debt financing, common stock offerings, or financing involving
convertible debt or other equity-linked securities and may include financings
under the Company's effective shelf registration statement on Form S-3 (File No.
333-221120) (the "Shelf Registration Statement"). The Company intends to be
opportunistic when pursuing equity or debt financing which could include selling
common stock under the Purchase Agreement with Aspire Capital. See Part II, Item
1A of this Form 10-Q and Part I, Item 1A, "Risk Factors - Risks Related to Our
Financial Position and Need for Capital" in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 2019, for a description of certain
risks related to our ability to raise capital on acceptable terms.
Operating activities
Our operating activities used cash of $4.9 million in the six months ended
March 31, 2020. Cash used in operating activities included a net loss of
$4.1 million, adjustments for noncash items totaling $4.0 million and changes in
operating assets and liabilities of $4.8 million. Adjustments for noncash items
primarily consisted of $2.3 million of noncash interest expense, $1.3 million of
share-based compensation, and $0.2 million for the write-down of obsolete
inventory. The decrease in cash from changes in operating assets and liabilities
included an increase in accounts receivable of $1.8 million, an increase in
inventories of $2.6 million, an increase in prepaid expenses and other current
assets of $1.0 million, and a decrease in accrued expenses and other current
liabilities of $0.3 million. These were offset by an increase in accounts
payable of $1.1 million.
Our operating activities used cash of $4.0 million in the six months ended
March 31, 2019. Cash used in operating activities included a net loss of
$6.2 million, adjustments for noncash items totaling $4.3 million and changes in
operating assets and liabilities of $2.1 million. Adjustments for noncash items
primarily consisted of $2.5 million of noncash interest expense related to the
Credit Agreement and Residual Royalty Agreement, $0.9 million of share-based
compensation, and $0.4 million of expense due to the increase in fair value of
the derivative liabilities. The decrease in cash from changes in operating
assets and liabilities included decreases in accounts payable and accrued
expenses of $1.0 million and an increase in inventories of $0.7 million.
Investing activities
Net cash used in investing activities in the six months ended March 31, 2020 was
$55,000 and was primarily associated with capital expenditures at our U.K. and
Malaysia locations.
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Financing activities
Net cash provided by financing activities in the six months ended March 31, 2020
was $1.2 million and consisted of $1.2 million from the sale of shares under the
Purchase Agreement with Aspire Capital (see discussion below), proceeds from the
Premium Finance Agreement of $0.8 million, which were used to finance the
Company's directors and officers liability insurance premium, and proceeds from
stock option exercises of $0.4 million, less payments on the Credit Agreement
(see discussion below) of $0.9 million and payments on the Premium Finance
Agreement of $0.3 million.
Net cash provided by financing activities in the six months ended March 31, 2019
was $6.1 million and consisted of net proceeds from the underwritten public
offering of the Company's common stock of $9.1 million (see discussion below)
and proceeds from stock option exercises of $0.2 million, less payments on the
Credit Agreement totaling $3.2 million.
Sources of Capital
Common Stock Offering
On October 1, 2018, we completed an underwritten public offering of 7,142,857
shares of our common stock, at a public offering price of $1.40 per share. Net
proceeds to the Company from this offering were $9.1 million after deducting
underwriting discounts and commissions and costs paid by the Company. All the
shares sold in the offering were by the Company. The offering was made pursuant
to the Shelf Registration Statement.
SWK Credit Agreement
On March 5, 2018, the Company entered into a Credit Agreement (as amended, the
"Credit Agreement") with the financial institutions party thereto from time to
time (the "Lenders") and SWK Funding LLC, as agent for the Lenders (the
"Agent"), for a synthetic royalty financing transaction. On and subject to the
terms of the Credit Agreement, the Lenders provided the Company with a term loan
of $10.0 million, which was advanced to the Company on the date of the Credit
Agreement. Under the Credit Agreement, the Company is required to make quarterly
payments on the term loan based on the Company's product revenue from net sales
of FC2 until the earlier of receipt by the Lenders of a return premium specified
in the Credit Agreement or a required payment upon termination of the Credit
Agreement on March 5, 2025 or an earlier change of control of the Company or
sale of the FC2 business. The recourse of the Lenders and the Agent for
obligations under the Credit Agreement is limited to assets relating to FC2. On
May 13, 2019, the Company entered into an amendment to the Credit Agreement (the
"Second Amendment") which included a reduction to the percentages to be used to
calculate the quarterly revenue-based payments due on product revenue from net
sales of FC2 during calendar 2019, a return to the original percentages to
calculate the quarterly revenue-based payments due on product revenue from net
sales of FC2 during calendar year 2020 and an increase to the percentages to be
used to calculate the quarterly revenue-based payments due on product revenue
from net sales of FC2 during calendar year 2021 and thereafter until the loan
has been repaid.
In connection with the Credit Agreement, Veru and the Agent also entered into a
Residual Royalty Agreement, dated as of March 5, 2018 (as amended, the "Residual
Royalty Agreement"), which provides for an ongoing royalty payment of 5% of
product revenue from net sales of FC2 commencing after the Lenders would have
received their return premium based on the return premium and calculation of
revenue-based payments under the Credit Agreement without taking into account
the amendments effected by the Second Amendment. The Residual Royalty Agreement
will terminate upon (i) a change of control or sale of the FC2 business and the
payment by the Company of the amount due in connection therewith pursuant to the
Credit Agreement, or (ii) mutual agreement of the parties.
The Company made total payments under the Credit Agreement of $0.9 million and
$3.2 million during the six months ended March 31, 2020 and 2019, respectively.
As a result of the Second Amendment, the Company currently estimates the
aggregate amount of quarterly revenue-based payments payable during the 12-month
period subsequent to March 31, 2020 will be approximately $6.7 million.
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Aspire Capital Purchase Agreement
On December 29, 2017, the Company entered into the Purchase Agreement with
Aspire Capital which provides that, upon the terms and subject to the conditions
and limitations set forth therein, the Company has the right, from time to time
and in its sole discretion during the 36-month term of the Purchase Agreement,
to direct Aspire Capital purchase up to $15.0 million of the Company's common
stock in the aggregate. Other than the 304,457 shares of common stock issued to
Aspire Capital in consideration for entering into the Purchase Agreement, the
Company has no obligation to sell any shares of common stock pursuant to the
Purchase Agreement and the timing and amount of any such sales are in the
Company's sole discretion subject to the conditions and terms set forth in the
Purchase Agreement.
During the six months ended March 31, 2020, we sold 300,000 shares of common
stock to Aspire Capital under the Purchase Agreement resulting in proceeds to
the Company of $1.2 million. Since inception of the Purchase Agreement through
March 31, 2020, we sold 4,017,010 shares of common stock to Aspire Capital
resulting in proceeds to the Company of $7.8 million. Subsequent to March 31,
2020, we sold 400,000 shares of common stock to Aspire Capital under the
Purchase Agreement resulting in proceeds to the Company of $1.3 million. As of
May 11, 2020, the amount remaining under the Purchase Agreement was
$5.9 million.
U.S. Small Business Administration's Paycheck Protection Program
In April 2020, the Company was approved for a loan under the U.S. Small Business
Administration's (the "SBA") Paycheck Protection Program established by the
CARES Act in the amount of $0.5 million (the "PPP Loan"). The PPP Loan proceeds
were received on April 20, 2020. The PPP Loan has a maturity of two years and an
interest rate of 1%. Payments on the PPP Loan are deferred for six months.
Pursuant to the CARES Act, the PPP Loan will be fully forgiven if the funds are
used for payroll costs, rent and utilities, subject to certain conditions,
including maintaining employees and maintaining salary levels. As of the date of
this report, the Company has not terminated any employees in the U.S. due to the
COVID-19 pandemic. The Company intends to use the proceeds of the PPP Loan to
pay salaries for its U.S.-based employees and to pay rent and utilities. The
amount of the PPP Loan that might be forgiven is not known at this time.
Fair Value Measurements
As of March 31, 2020 and September 30, 2019, the Company's financial liabilities
measured at fair value on a recurring basis, which consisted of embedded
derivatives, represent the fair value of the change of control provisions in the
Credit Agreement and Residual Royalty Agreement. See Note 8 to the financial
statements included in this report for additional information.
The fair values of these liabilities were estimated based on unobservable inputs
(Level 3 measurement), which requires highly subjective judgment and
assumptions. The Company determined the fair value of the embedded derivatives
at inception and on subsequent valuation dates using a Monte Carlo simulation
model. This valuation model incorporates transaction details such as the
contractual terms, expected cash outflows, expected repayment dates, probability
of a change of control, expected volatility, and risk-free interest rates. The
assumptions used in calculating the fair value of financial instruments
represent the Company's best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, the use
of different estimates or assumptions would result in a higher or lower fair
value and different amounts being recorded in the Company's financial
statements. Material changes in any of these inputs could result in a
significantly higher or lower fair value measurement at future reporting dates,
which could have a material effect on our results of operations. See Note 3 to
the financial statements included in this report for additional information.
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