New York Chronicle

Since March, shares of Aytu BioScience (NasdaqCM: AYTU) are higher by more than 54%, and if investors track back to the beginning of the year shares are higher by more than 114%. The surge in share price comes as AYTU continues to successfully demonstrate its ability to acquire and market potentially best-in-class drugs that target a combined $7 billion market opportunity.

AYTU’s three FDA-approved drugs, Natesto, ZolpiMist, and Tuzistra XR, each target multi-billion dollar markets and each bring to the patient distinct product and efficacy characteristics that may ultimately lead each to earn a best-in-class designation when compared to competing products. Now, with four consecutive record-breaking quarters in the books for AYTU, the editorial team at Soulstring Report reached out to Aytu BioScience CEO, Josh Disbrow, to provide him with an opportunity to talk directly to investors, and to explain how he and his team plan to keep the momentum in place.

We jumped right into the specifics:

SR: Aytu BioScience has had a great couple of months. In fact, the stock is higher by roughly 110% since the beginning of the year. Along with that, there has been recent analyst upgrades and investor chatter highlighting the three FDA-approved drugs already in your pipeline. Some also speculate that this is only the beginning of what is a long-term growth strategy. Are they right?

JD: I truly do believe this is just the start of what we expect to become a successful pharmaceutical company after having built a solid foundation these first two to three years.  In a few short years Aytu has gone from being a true start-up with no products, no revenues, and little public recognition – to a company that is now well-financed, has three important prescription products on the market, a diagnostic device in development and marketed overseas, and a built-out commercial infrastructure.  And we’re now showing strong growth over the last four quarters as our products have launched. 

SR: To that last point, AYTU’s growth is obviously impressive. What’s the driver?

JD: Multiple things are contributing. We’re excited to see Aytu growing into a fully-integrated, specialty pharmaceutical company whose reach is increasingly positively impacting more and more patients.  I’m very proud of the work we’ve done to acquire and license the three novel therapeutics we have now in our portfolio, and I’m very excited about what they can become. Natesto, we believe, is a best-in-class medication, and can serve men with Low T in a truly different, and we believe, a better way than other testosterone replacement therapies.  Through an excellent safety profile and a mode of action and pK profile unlike any other therapy, Natesto stands to continue on its rapid growth path as the only nasally-administered Low T therapy. 

Our other two therapeutics, ZolpiMist and Tuzistra XR, also stand alone with their unique formulations and can help potentially millions of patients with difficulty sleeping in the case of ZolpiMist and a troubling all-day and all-night cough in the case of Tuzistra XR.  I truly feel like Aytu is just scratching the surface as, we really just finalized the build-out of our product portfolio late last year.  So, in that sense, we’re only six or so months into this race, and we’re off to an outstanding start.

SR: Since you said AYTU is off to an “outstanding start”, it’s notable that investors are starting to compare the success that you and your brother, Jarrett, had at Arbor Pharmaceuticals with what’s happening at AYTU. Arbor started as a garage start-up drug company that was built and eventually sold for roughly one-billion dollars. If an investor asked you whether AYTU was on a similar pace to becoming an Arbor in the next five years, how would you respond and what would you point to as proof?

JD: I think it’s a fair analogy, but, when I think about where Arbor was just three or so years into its formation and compare it to how Aytu is positioned after less than four years in existence, it’s like night and day. At Aytu, we’re substantially better capitalized, having just raised $15M and secured Armistice Capital as a major investor. Also, from a product portfolio perspective, there’s just no comparison between the two companies’ portfolio.  Aytu is much farther along than Arbor was three years in. 

At Arbor at this stage, we had two modestly differentiated products competing in therapeutic categories approximating $500-$600M in total U.S. sales.  Today at Aytu, we have three unique therapeutics plus an extremely innovating diagnostic device in categories generating approximately $7 BN in annual sales.  I believe the potential of all of our products far outweighs the potential of those early Arbor products, yet those served as a springboard to what Arbor became. 

SR: Obviously, Arbor was successful enough to attract the attention of institutional investors that were willing to value the company at a billion dollars. You just said that AYTU may be better positioned, how so?

JD: I think we are. Where we are different at this stage is that AYTU is better positioned in that our commercial infrastructure is fully built out for selling our therapeutics; Arbor was much smaller in terms of sales footprint.  Moreover, with MiOXSYS – our male infertility medical diagnostic – and our recently announced ex-US partnership to sell ZolpiMist globally through SUDA Pharmaceuticals, we have a rest-of-world presence that could represent meaningful, long-term presence for Aytu as we expand.  Arbor never had a global presence like we already have with distribution around the world. I’m excited about where Aytu is today and am excited about what the future will look like.  We hope, at Aytu, we’ll see a similar level of success as at Arbor.

SR: With that said, one of the key pieces you have been able to put into the mix that can drive that level of success may come from the expertise and experience of Steve Boyd from Armistice Capital. What most investors may not know is that Mr. Boyd was an instrumental figure in bringing up the value of Cerecor, Inc. (Nasdaq: CERC) from about a dollar per share to roughly $6.00 today. With Mr. Boyd expected to officially join the BOD in April, can investors expect that he will be a hands-on Director that will be closely involved in executing the growth strategy at AYTU?

JD: Certainly, that’s the plan. I was very pleased to be able to attract a healthcare investor like Armistice and an individual with the reputation of their founder Steve Boyd. Steve and his team at Armistice have proven, in a short period of time, that Armistice is an excellent investor and can serve as a real partner to growing companies like Aytu. I’d expect that we’ll continue to benefit from Steve’s knowledge of the pharmaceutical industry, his deep connections in specialty pharma, as well as from his capital markets expertise.  Steve has clearly shown, through the performance of other Armistice portfolio pharma companies, his presence and participation with company management helps to accelerate growth and value creation for shareholders.  I’m optimistic about, and already have seen, the positive impact Steve will have as he formally joins the team here shortly. We’re pleased to have Steve as a part of the team.

SR: Investors are trying to connect the dots.  Do you think to have a deep-pocketed investor, like Armistice Capital, that close to AYTU will expedite the growth strategy?

JD: It can and it’s important to note that we got AYTU to the point that investors like Armistice are interested in us. Having the company well-financed, as we now have, was an important aspect of aligning with a strategic investor like Armistice Capital.  As we recently announced, when we acquired the Tuzistra XR license, Armistice came alongside with an incremental $5M investment to help enable and accelerate that product’s launch.  It clearly helped the company in many ways.  We launched Tuzistra XR very quickly and got our reps into the field in about 60 days following the signing of the Tuzistra deal.  Having the additional funding, and being solidified from a balance sheet perspective, provided a level of strength we haven’t had before.  This strength and support from Armistice, I believe, can help us accelerate our growth as we ramp our products and continue to consider additional bolt-on assets that fit.

SR: Since you brought up the goal to “ramp up” the growth, can you be specific as to what types of products you are looking at today that can add both near and long term value?

JD: We’re at an exciting point in the company’s short history in that we’ve developed a reputation as a deal-making, growing enterprise.  Third parties, whether those are companies or investment banks or brokers, have learned of our early commercial success and the effectiveness of our field team such that, as they develop or come across product opportunities for which they need a commercial partner, Aytu is increasingly on the list of companies they’ll call.  That tells me we’ve done something right.  We have a focused, high-performing sales team; we have a commercially-oriented management team with past success; and we have a mix of novel products that can be efficiently sold to overlapping physician customers.  That makes us a potentially valuable partner to companies with a prospective near-commercial or revenue-generating product that fits into primary care.

SR: There’s some speculation that AYTU is again in the mood to acquire an additional drug. Can you comment? 

JD: I can’t share specifics on what, if anything, we’re looking at.  But I can say, if and when we bring in additional assets in the near-term or longer-term, it will fit well within our commercial structure.  Also, it will be differentiated and will be a solid improvement over existing therapies in the space, and we will ‘buy right’ at a price that doesn’t require any significant drain on near-term cash.  A part of our early success has been in not overpaying for our assets in order to preserve cash and deploy that cash to ramp sales. 

So, any product we’d bring in will be complementary, offer substantial revenue upside, and come in a deal that doesn’t divert any meaningful cash in the near term.  That cash is best spent on execution, which is what is happening now with our on-market products.

SR: Okay, then, let’s shift to the topic of execution. Investors got excited in March about two significant and positive events at AYTU. First, Natesto is proving itself as possibly the best-in-class testosterone replacement drug for a variety of reasons. And, second, you made what may become a huge deal with SUDA Pharmaceuticals and announced a license to expand ZolpiMist to a global stage. Can you comment on each of those developments and what they could mean to AYTU in the next 12-months?

JD: I think that the progress we’ve demonstrated just in March is an indicator of our commitment to building value from our assets. Gaining this global license with Suda for worldwide distribution of ZolpiMist, for instance, has been an important development for Aytu.  While I can’t specifically comment on any revenue expectations this may bring, I can say that the insomnia market is truly global and remains largely unsatisfied.  The global sleep aid market is estimated to be around $50 billion, making it one of the globe’s largest therapeutic areas.  This makes the U.S.’s large $2 billion market for prescription sleep aids seem small, so the upside outside the U.S. with the Suda deal could be substantial. 

To be sure, the sleep market is large.  In the U.S., large players like Merck (NYSE: MRK) compete in the sleep aid market and have driven sales of their sleep aid Belsomra to over 600,000 prescriptions annually – in just the U.S.  Yet even with new entrants, the insomnia market remains largely unsatisfied.  There remains a place for a fast-acting, alternate formulation of a trusted molecule in zolpidem tartrate.  Ambien, the brand name for zolpidem tartrate tablets in the US that is marketed by Sanofi (NadaqGS: SNY) – along with its generics, remains the most widely prescribed sleep aid with 30 million zolpidem prescriptions written annually in the U.S. alone.  It works, but it doesn’t always work fast and may not be appropriate for everyone, especially those who need to get to sleep fast or may have trouble swallowing pills.  So ZolpiMist – in the U.S. and elsewhere – can potentially position itself as a faster and more convenient way to get patients to sleep – with the familiarity they already have with Ambien or zolpidem tablets.

With respect to Natesto, we’re very pleased with the clinical data that is being developed.  An important and promising clinical study is underway at the University of Miami specifically in urologist Dr. Ramasamy’s group that, if positive, would be the first such study to show that hypogonadal men being treated with testosterone replacement therapy can actually maintain their fertility while being treated with Natesto.  This has not been achievable with other testosterone because of their steady-state pK profiles that essentially enable constant exposure of exogenous testosterone. 

SR: There is chatter that the results from the Spermatogenesis Study can be a game changer for the industry. How so?

JD: Yes, we are certainly encouraged by the data we’ve seen so far. The early interim results suggest Natesto can, in fact, maintain male fertility parameters unlike other testosterones, so we’re anxious to see the final data later this year.  This could truly separate Natesto from the other Low T therapies that are administered either via topical gels or injections.  Androgel, which is marketed by AbbVie (NYSE: ABBV), Testim, marketed by Endo (NasdaqGS: ENDP), and Axiron, which was previously marketed by Lilly (NYSE: LLY), are all applied daily through topical application of a rub-on gel or solution.  But, it appears that, due to the steady-state exposure of products like these, the male hormonal levels affecting sperm production get altered and, therefore, often impact the process of spermatogenesis.

Doctors know this and are increasingly concerned about it.  They know testosterone treatments can cause infertility, and it is an issue for many.  As many of 20% of men with Low T are in their family formation – or childbearing – years, so this large swath of patients is currently locked out of receiving testosterone replacement.  Perhaps more problematic than the topical gels – at least from a sperm-producing standpoint – are the injectable testosterone treatments.  Whether it is generic testosterone cypionate or newer injectable agents like Xyosted by Antares Pharma (NasdaqCM: ATRS), this form of testosterone causes men’s T levels to get quite high and stay elevated.  With that often comes pronounced disruption of the hormonal mechanisms driving sperm production.  This creates an issue for this large group of men seeking to maintain fertility.  Again, Natesto appears to not be in that camp based on the early data.  Time will tell, and the clinical data will be revealed relatively soon as to Natesto’s ‘sperm preserving’ capability.  This could truly shift the thinking in Low T treatment for good, and we’re excited for the readout.

SR: Let’s get personal. AYTU has three approved drugs that target a combined $7 billion market opportunity. You have a healthy cash balance that at last report was $18 billion. Then, you have Natesto delivering really good results from its Spermatogenesis Study and a huge deal in place to drive sales of ZolpiMist. With all of the positive things happening at AYTU, what, if anything, keeps you up at night?

JD: For me and for our team, the only thing we think about is how can we help more patients get our therapies into their hands to get them back to feeling like themselves again.  As a company, we’re in the best position we’ve been since our formation – from both a financial and a fundamental perspective.  Now, it’s just execution.  Its up to us and our team.  So, I’m excited when I think about the huge opportunity we have to help patients – patients affected by every day, problematic conditions that need better treatments.  Nothing keeps me up other than constantly thinking through new ways to get our products into the hands of the patients who need them.  That leads to growth, and that’s our focus every day.  

SR: So, if it’s the implementation of successful growth and execution strategy that is keeping you preoccupied, would you like to add some more pressure on yourself and speculate as to how many products you expect to have in your pipeline in the next 12-months?

JD: That’s always a good question given all of our activity.  I can’t be specific with this answer, but I can say that there are products out there that could fit, but we’ll only consider other assets that make sense and align with the principles I spoke to earlier. But, frankly, we can build a very nice, very healthy company with the products we already have in the bag today.  It’s just about execution with these three assets.  If we can grow these products – as we’ve shown we can and are doing – there may be no need for additional products. 

That said, we won’t shy away from opportunity and we know we’ll have at least one more product to complement our therapeutics soon – although having it within the next twelve months is no guarantee.  As we announced with the licensing deal, Tuzistra XR will have a complementary antitussive soon.  However, it is with the FDA, so we’ll need to wait for approval to get that onto the market.  Thus, potentially four therapeutics and our infertility diagnostic device are what I’d expect to be selling in the near-term while always being open to additive, adjacent assets to bring in.

SR: Finally, most investors argue that the markets will always correct and that AYTU will soon get rewarded with a fair market cap. Comparing yourself to some of your peers, and knowing this industry well, what multiple would you give to AYTU shares based on what you have now and where you are expected to go?

JD: Well, that’s always a challenge to answer as we can only control what is controllable.  As a company we can only continue to execute on our plan as I’ve discussed, and, at some point, expect to have external stakeholders take notice.  If and when they do, I think Aytu – and our relative valuation – will come more in line with our fundamentals and performance.  But, again we can’t really control that.  Sometimes getting a company’s true fundamentals and prospects to align with observers’ perspectives just takes time. 

That said, to try to answer the question solely from my perspective, when I look across the spectrum of large, mid-sized, and emerging specialty pharmaceutical companies, valuations range from 3 or 4 to over 6 or even 7 times projected revenues.  A lot of factors are clearly at play when discussing public valuations, so nothing here is ironclad.  However, with our growth trajectory, a reasonable multiple would be 4 or maybe 5 times projected revenues, say 12 months in the future.  Now, this is absolutely not guidance, but if, as an example, we grew revenues at 20% per quarter for the next 4-6 quarters, annual revenues would be in excess of $20 million. So, I guess that math suggests a valuation in the $80-$100 million range if this growth were achieved.  Again, not guidance here but a growth trajectory that resembles a growth-oriented company in the early stages.  Will we get to these levels?  Our execution is what will play the biggest role in determining that.  We believe we have a great team and a great portfolio of products to continue to drive revenue growth for the long term, so we’re excited to show our stakeholders what this can become.    

SR: Obviously, the takeaway may be that these are exciting times for AYTU. We will certainly keep an eye on the developments as they unfold. Thank you for being so candid with your responses.

JD: Thank you, and we look forward to keeping investors apprised of developments. And, I will agree- these are exciting times at Aytu BioScience.   

For investors interested in learning more about Aytu BioScience, please visit their website at www.aytubio.com. For the latest video about the promising pipeline at Aytu BioScience, please click HERE. And, please continue to visit Soulstring Report for breaking news and additional editorial commentary about Aytu BioScience and other promising companies.

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