Per the interim results of a phase 3 clinical trial published on April 11 Veruit is (NASDAQ: VERU) sabizabulin, an oral drug, reduced deaths by 55% when given to hospitalized patients with severe COVID-19. With such promising data, it’s no surprise that its shares rose 190% on Monday and remain up more than 200% in the past five days.
Yet it takes more than a favorable snapshot of a clinical trial to make a good investment in biotechnology. And with such a surge in its share price, investors are right to wonder if there is still an upside. Let’s analyze Veru’s latest achievement as well as some of his other wins to see if this could be a worthy addition to your holdings.
It’s not just a pandemic play
The first thing to appreciate about Veru is that it is not an infectious disease biotech and is not interested in becoming one despite its work on sabizabulin.
Veru’s drug development pipeline is focused on therapies for breast cancer and prostate cancer, though it also has a reproductive health division with a pair of products that have grossed $61.3 million. dollars in sales in 2021.
Currently, the business is not profitable, but has recently made progress towards profitability, as shown below:
The catch is that its sales have slowed this year, with its quarterly net sales falling 3% year over year in the first fiscal quarter of 2022, which ended on the 31st. December 2021. If he can get regulatory approval for sabizabulin, that shouldn’t be a problem anymore.
Management plans to apply for an emergency use authorization (EUA) for the drug this year, which is the only therapy in Veru’s pipeline that has a chance of going to market within the next two years.
At the end of 2021, he got the regulatory green light for his benign prostatic hyperplasia treatment called Entadfi. Although the drug’s total global market is only around $200 million, it will still help stabilize Veru’s revenue.
On paper, Veru has the potential to become a profitable business growth stock through its revenue base from its reproductive health products coupled with an anticipated windfall from sabizabulin sales.
The problem is that if you buy the stock today, you will pay a huge hype tax thanks to the buzz positive sabizabulin results. As the early-comers cash in their positions as the hype remains high, they will let the late-comers hold the bag. Of course, savvy investors will be quick to point out that the existence of the “hype tax” is in the eye of the beholder, as Veru’s sky-high stock price may in fact be justified if it can make significant profits from the commercialization of sabizabulin.
And therein lies the second problem. If the market has already priced in the expected benefits from the sale of sabizabulin, investors will be heavily penalized if Veru is pushed back by regulators.
At its current valuation, it’s a recipe for disaster.
In short, Veru price/sales ratio (PS) is currently significantly higher than little-known biotechs of similar size and pipeline maturity like Pharmaceutical catalyst and Vanda Pharmaceuticalsnot to mention familiar names like Modern.
That doesn’t mean it’s a bad stock, just that its inflated valuation puts it at downside risk in the event of bad news – or even no news. Keep in mind that there could be many reasons why a drug like sabizabulin might not sell as well, starting with the prospect that the pandemic is easing and fewer people will be hospitalized with COVID. -19. Competitors could also develop other preventative interventions or drugs that render the drug obsolete.
And so, if you are a conservative investor, this is definitely not the stock you should buy.
On the other hand, if you’re comfortable rolling the dice, Veru could well be a winner over the next few years, and it’s entirely possible that sabizabulin is just the start of the ascent of the company. Don’t put all your eggs in this one basket because it’s risky, even with favorable clinical trial results.
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