AYTU: Gearing Up To Launch Natesto; Bolsters Leadership Team; Pursues NASDAQ Listing

By Anita Dushyanth, PhD

OTC:AYTU

Aytu (AYTU) held a conference call on July 6, 2016 to provide details to investors on Natesto’s launch, which is expected by end of this month.

Acerus Pharmaceuticals Corporation (ASP.TO) terminated the agreement relating to the commercialization of Natesto in the U.S. and Mexico with Endo Ventures Bermuda Limited (an affiliate of Endo International plc) (ENDP) on June 30, 2016. In April 2016 Aytu acquired the exclusive rights from Acerus Pharmaceuticals to market Natesto in the U.S. Aytu paid $2 million at signing, and will pay the remaining $6 million in September 2016 and January 2017. Additionally, Aytu is expected to pay up to $37.5 million based on the achievement of certain sales milestones. Further, Aytu is expected to make royalty payments of 25% on net sales. Acerus will be continuing to supervise manufacturing of Natesto. In the initial months after launch, Acerus will be working closely with Aytu to ensure a smooth transition of Natesto from Endo.

The reasons we think management found potential in Natesto, after assessing all opportunities and challenges in the evolving TRT market, are listed below.

The U.S. testosterone replacement therapy (TRT) market generated ~$2 billion in annual sales in 2013 and sales are expected to double by 2018.

There is a lot of capacity in Aytu’s urology-centric sales force and therefore Natesto is a nice addition to the portfolio.

Natesto was not Endo’s prioritized product and consequently Natesto under performed generating only $1.2 million in revenue in the past year as per Acerus’ 2015 annual report.

Natesto’s promotional labeling requirements are largely expected to remain the same as when marketed by Endo. We think Natesto has the following advantages over other TRT drugs:

- It is the first FDA approved, patented, nasally-administered TRT product for men with Low-T.
- It requires 2-3x dosing per day which mimics the natural testosterone cycle in men.
- It is easy and convenient to use. It offers a non-messy, no-touch application.
- Unlike Axiron (Eli Lilly) and AndroGel (AbbVie), its two leading TRT competitors, Natesto’s label does not contain a black-box warning against transference risk.
- Natesto has demonstrated significant improvements in erectile function, intercourse satisfaction, orgasmic function, sexual desire, overall satisfaction and positive mood when compared to baseline.

Aytu has beefed up its marketing and sales team to launch Natesto.in the U.S. in late July 2016. Management noted on the call that they have not appointed sales personnel to focus their marketing efforts solely on Natesto. We believe that they have an adequate sales force who are familiar with marketing TRT products. Additionally, they have existing relationships with prescribing physicians that should help optimize Natesto’s potential sales in this market. Currently, majority of reimbursement plans cover Natesto.

Aytu’s urology sales force is planning to promote Natesto to the highest TRT prescribing physicians, endocrinologists and few primary care physicians totaling about 5500 specialists in metropolitan areas. We believe this focused messaging will help in driving adoption of Natesto. Management is planning to prioritize the sales of Natesto to the untapped urologist audience (where other TRT drugs have not been targeting). The initial sales strategy is to approach dissatisfied patients (using other TRT therapies), followed by those using injectable drugs and then new patients. We think Aytu is making strong headway in the commercialization efforts of Natesto.

Based on the guidance management has given, we are not expecting an immediate revenue increase in Q1 2017 as the firm will not have sufficient time within the launch of Natesto to make a serious impact. However, we do expect sequential but modest growth in commercial sales in the coming year. We think Natesto sales will gain traction and follow an upward growth trend in the subsequent quarters following Q2 2017. Management expects to gain 5% market penetration sometime in the out years. Also tilling the soil for Aytu’s growth could be the overall uptick in the TRT market segment.

In 2000, the first topical gel was introduced and according to IMS, it accounted for ~73% of the total prescriptions in the TRT market. As per IMS, the total number of prescriptions written within the TRT market increased three times (to about three million prescriptions) between 2000 and 2008. However, the gel market growth slowed down in 2013 due in large part to formulary changes, patients switching from gels to injectables and non-availability of newer therapies.

In the beginning of June 2016 the firm began patient enrollment and dosing at Princess Margaret Cancer Centre in Canada for their three-arm, open label prostate cancer study. The study is being led by Dr. Antonio Finelli in collaboration with Hybridyne Imaging Technologies to investigate the efficacy of Hybridyne’s ProxiScan compact gamma cameras to detect local prostate cancer using ProstaScint. Currently the study has enrolled twenty of the sixty total patients. Patient enrollment is expected to be completed by end of calendar 2016 (1H 2017).

In January 2016 the MiOXSYS system received CE Mark and by June 2016 the company entered into agreements with five leading European specialty medical distributors to commercialize the system. The European commercial network includes Tani Medikal in Turkey, TECOmedical in Switzerland and Germany, Parallabs in the U.K. and France, THP Medical Products in Austria, and Durviz S.L. in Spain. Aytu anticipates expanding its ex-U.S. distribution channel to ramp up commercial sales in CE Mark territories. Although management has not disclosed specific sales numbers of the MioXSYS system, there seems to be considerable interest as five distributors have quickly signed contracts.

Additionally, in order to meet the requirements for uplisting shares to NASDAQ, Aytu underwent a 1 for 12 reverse stock split that became effective on July 1, 2016. The reverse stock split was approved by the company’s stockholders and board of directors during the annual meeting held in May 2016. Following the reverse split, the number of outstanding shares is approximately 3.7 million. We have updated our financial model to reflect the share count following the reverse stock split. After adjusting the numbers based on the reverse stock split our target price comes out to $10.36/share.

More recently, the firm added pharmaceutical industry veterans, John Donofrio, Jr. and Gary Cantrell (bio detailed below) to its board of directors. All board members have impressive credentials and we believe the recent addition has strengthened the management team immensely. They have the necessary financial and commercial experience in the pharmaceutical industry to carry Aytu through its business operations.

Bio

Mr. Donofrio is the Chief Financial Officer and Head of North American Business Development for Merz North America, or Merz, since August 2013. Over his 24-year career in pharmaceuticals he has a broad range of experience in consolidated financial reporting, international accounting and internal controls, budget and forecast planning, mergers and acquisitions, business development and other strategic and financial areas. Mr. Donofrio has been instrumental in Merz North America’s growth; sales and profits have more than doubled since he joined the company. Previously, he served as interim CFO and vice president of Stiefel Global Finance, U.S. specialty business and Puerto Rico, for Stiefel, a GlaxoSmithKline plc. company (GSK). He was also the senior finance partner for the U.S. specialty business units of GSK. Mr. Donofrio holds a degree in accounting from North Carolina State University.

Mr. Cantrell’s thirty years’ experience in the life sciences industry ranges from clinical experience as a respiratory therapist to his current executive-level consulting role with Mayne Pharma (MYX.AX), as business development executive focused on acquiring branded prescription assets for Mayne Pharma’s U.S. specialty brands division. Prior to forming his professional consultancy, Mr. Cantrell served as CEO of Yasoo Health Inc., a global specialty nutritional company from 2007 to 2015, highlighted by the sale of its majority asset, AquADEKs, to Actavis in March 2015. He was also president of the Catevo Group, a North Carolina-based healthcare consulting firm, and executive vice president, sales and marketing at TEAMM Pharmaceuticals, an Accentia Biopharmaceuticals company. Mr. Cantrell started his pharmaceutical career at GSK, where he held multiple senior management positions in sales, marketing and business development over a period of 22 years. He has served as an advisor or board member of several emerging life science companies including his role as a board member at Flexible Stenting Solutions, Inc., which was sold to Cordis, while a division of Johnson & Johnson in March 2013. Mr. Cantrell is a graduate of Wichita State University.

We are keeping a close watch on Aytu’s events in the second half of 2016 as the company executes its goals of up listing to a U.S. premier stock exchange and ramping up sales of their urology products.

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