Pharmaceutical companies can grab the attention of investors through positive clinical studies and expectations of a potential U.S. Food and Drug Administration (FDA) approval. On the other hand, investors don't typically care for a quarterly earnings miss.
So what happens to a company's stock when all three of these pieces of news hit at the same time? Let's see in the case of Veru (VERU -1.21%). It's taken a solid turn in one direction. But is it a healthy stock for long-term investors?
The trigger point
On April 8, Veru's stock price was at $4.55 and on a 14-month downward trend. Then, in a flash, the stock popped 190% on the heels of positive clinical trial results for its potential COVID-19 treatment, sabizabulin, which showed an impressive 55% reduction in the risk of death for hospitalized patients with moderate-to-severe disease.
The trial's success led Veru's independent safety monitoring committee to stop the study and immediately submit an application to the FDA for emergency use authorization (EUA). The company is currently awaiting a response. Knowing that an EUA response could take up to one month, Veru is wasting no time getting its manufacturing of the 9 mg tablets ramped up.
The company's focus is to make the pills available to government agencies and hospitals in anticipation of a positive response from the FDA.
The risk factors
One risk, of course, is that the application could be denied. What's more, EUAs are only good as long as public health is in emergency status and the EUA declarations are in place. And these are unknown at this time. However, COVID-19 is still not showing signs of going away. Although vaccinations are available, further variations could form and so it could be around for a long time.
This could lead the FDA to approve the EUA in order to provide help to those in need. It could also lead the European Medicines Association to complete its review promptly, which would open more roads of revenue to Veru.
Another concern is that the company is facing a year-over-year decline in revenue, along with rising research and development (R&D) expenses. Total sales sank 46% during the fiscal third quarter, driven by a 50% drop in prescription revenue. The company also experienced higher R&D expenses, resulting in a net loss of $0.28 per share compared to a $0.03 for Q3 2021.
Veru is sitting on $100 million in cash, which gives it a slight cushion to sustain its growth, but the company spent nearly $44 million on research and development in the first three quarters of the year, including $18 million in the third quarter. That and its latest net loss could foretell blowing through that cash quickly. The company's swift action to boost manufacturing of its COVID-19 treatment could make perfect timing as the medical community braces for what is expected to be a rise in COVID-19 cases during the fall and winter. But if no approvals come through, the stock could lose its gains even faster than it made them.
Though the risks for investors are there, the stock price has been able to hold its own, up over 200% year to date. This could mean that much of the anticipated revenue growth from an EUA approval is already built in, but it could also mean the stock is simply reaching its next level of growth.
The company is not laying all its bets on just one treatment case either. Sabizabulin is in development for use against several tumor types found in multiple cancers, including phase 2 clinical studies as a treatment for breast cancer and phase 3 studies for prostate cancer.
In addition, the company has three other drugs in its pipeline for potential use by cancer patients, one of which is a collaboration for clinical and supply agreement with Eli Lilly to fight breast cancer. Thirteen percent of U.S. women will develop invasive breast cancer during their lifetime. In 2022, an estimated 300,000 new cases of breast cancer will be diagnosed.
There are a lot of ifs associated with Veru's potential success, but that is often the case for smaller pharmaceutical stocks. And sometimes, it only takes that one success to be a game-changer for patients and investors alike, resulting in revenue growth and huge shareholder gains. Along with those ifs comes risk. Investors willing to take on the risk could certainly reap the rewards. But for those more risk averse, the right move might be to stay on the sidelines until a response from the FDA is official. Investors would be wise to keep a close eye.
Editor's note: This article has been corrected. Veru spent $43.8 million on research and development during the first three quarters of the year. A previous version of this article incorrectly stated that amount was spent in one quarter.