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Edited Transcript of FHCO earnings conference call or presentation 8-Aug-19 12:00pm GMT

Q3 2019 Veru Inc Earnings Call

CHICAGO Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Veru Inc earnings conference call or presentation Thursday, August 8, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Michele Greco

Veru Inc. - CFO, Executive VP of Finance & Chief Administrative Officer

* Mitchell S. Steiner

Veru Inc. - Chairman, President & CEO

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Conference Call Participants

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* Brandon Richard Folkes

Cantor Fitzgerald & Co., Research Division - Analyst

* David Sable

* Kumaraguru Raja

Brookline Capital Markets, LLC, Research Division - Director & Senior Biotechnology Analyst

* Paul D. Sonz

Paul D. Sonz Partners - President

* Peter McMullin

Independent Portfolio Consultants, Inc. - Investment Strategist

* Shawn Boyd

Next Mark Capital, LLC - Founder & Portfolio Manager

* Yi Chen

H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst

* Stephen Dearholt

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to Veru Inc.'s Investor Conference Call. (Operator Instructions) Please note that this event is being recorded.

The statements made on this conference call that are not historical in nature, are forward-looking statements. Such forward-looking statements reflect the company's current assessment of the risks and uncertainties related to our businesses. Our actual results and future developments could differ materially from the results or developments in such forward-looking statements. Factors that may cause actual results or developments to differ materially include such things as the risks related to the development of the company's product portfolio, risks related to the ability of the company to obtain sufficient financing on acceptable terms when needed to fund development and company operations, risks related to competition, government contracting risks and other risks detailed in the company's press releases, shareholder communications and Securities and Exchange Commission filings. For additional information regarding such risks, the company urges you to review its 10-Q and 10-K SEC filings.

I would now like to turn the conference over to Dr. Mitchell Steiner, Veru Inc.'s Chairman, CEO and President. Please go ahead, sir.

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [2]

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Thank you, operator, and good morning. This is Dr. Mitchell Steiner. I'm the Chairman, President and CEO of Veru Inc. And joining me are Michele Greco, CFO and CAO; and Phil Greenberg, Executive Vice President, Legal. Thank you for joining our call.

Veru is a urology and oncology biopharmaceutical company, focusing on prostate cancer and prostate cancer supportive care medicines. Today, we will update you on the clinical development of our drug pipeline and the commercializations of our products, as well as provide financial highlights for the third fiscal quarter 2019.

We are delivering on our strategy to be the prostate cancer company. We are dedicated to the development and commercialization of products to address unmet medical needs to prostate cancer treatment and supportive care. The markets of prostate cancer treatment and prostate cancer supportive care are well established as multibillion-dollar markets. And given our core expertise and the number and type of drugs in our pipeline, we are uniquely positioned to understand, develop and commercialize medicines for these unmet medical needs of prostate cancer patients.

Here's a brief update on the advancement of the prostate cancer drug pipeline. We have made significant progress with the enrollment of our open-label Phase Ib/II clinical trial with VERU-111, a novel proprietary first-in-class oral selective antitubulin agent for metastatic castration-resistant prostate cancer patients, who have also become resistant to novel antigen blocking agents, enzalutamide or abiraterone, but prior to IV chemotherapy, also refer to sort of the pre-chemotherapy or the chemotherapy naive state.

In other words, the open-label Phase II clinical trial will target those patients, whose prostate cancer has progressed, but before they're offered IV taxane chemotherapy. The pre-chemotherapy space in men who have failed novel androgen blocking agents is currently the fastest-growing unmet medical need segment in advanced prostate cancer.

In the Phase Ib study, we are determining the maximally tolerated dose by finding the dose-limiting toxicity. Based on information from the Phase Ib clinical trial, we will be able to select the treatment dose that will be evaluated in the Phase II clinical trial. We will find the maximally tolerated dose by treating 3 patients at a time with an oral daily dose of VERU-111 for 7 days followed by 2 weeks off drug, which represents one cycle. We will treat for at least 3 cycles. And for the patients that are responding to treatment, we will continue this treatment and increase the schedule to 2 weeks on drug and 1 week off for 3 additional cycles. And then 3 weeks continuously on drug, unless there is evidence of prostate cancer progression. This will allow us to assess the durability of the anticancer response.

The escalating doses are 4.5, 9, 18, 27, 36 and 45 milligram doses of VERU-111. We have now dosed all 6 cohorts and are waiting on safety information for the last group which is the 45 -- the most recent dose group, which is the 45-milligram group. At this time, we can provide an update on some promising early clinical observations in 18 men. As for safety, VERU-111 is well tolerated. We have not seen dose limiting toxicity in men taking the drug for 1-week on and 2 weeks off and so far, also men taking the drug 2 weeks on and 1 week off. There have been no reported complaints of neurotoxicity, no evidence in neutropenia or liver enzyme changes, which commonly occur with IV taxanes.

As for the antitumor activity, we continue to be encouraged that the men whose PSAs was rising -- were rising prior to enrollment into the Phase Ib, treatment of VERU-111 in some men have resulted in PSA stabilization and reduction, which are promising early indications of efficacy. As we have not yet reached dose limiting toxicity, we will continue to test higher doses of VERU-111 until we see dose limiting toxicity. We will continue to report safety and efficacy clinical data from the Phase Ib study, which is progressing quite nicely. After we have selected a dose in the Phase Ib study, we will then start the Phase II study.

According to Accuvia, oral drugs abiraterone and enzalutamide for advanced prostate cancer had over $6 billion in 2018 global annual revenue. Interestingly, in men with castration-resistant prostate cancer to take these drugs, 12% to 25% will just kind of march right through there, continue and/or have cancer progression. 75% to 85% of men will have initial tumor response and then cancer progression within 9 to 15 months. Men who have failed these novel antigen blocking agents are the patients that VERU-111 is targeting, which we estimate represents a $4.5 billion annual global market. There are currently no FDA-approved drugs for men, who have failed both androgen deprivation therapy and one of the novel androgen blocking agents.

Our next product candidate in a clinical trial is zuclomiphene, a novel, proprietary, oral, nonsteroidal, estrogen receptor agonist being evaluated to treat hot flashes, the most common side effect in men on androgen deprivation therapy for advanced prostate cancer, and a major reason why men want to stop androgen deprivation therapy. We are enrolling approximately 100 men in a multicenter double-blind placebo dose finding Phase II clinical trial evaluating 2 doses, 10 milligrams and 50 milligrams of zuclomiphene versus placebo. We anticipate top line results in late summer, early fall 2019.

Based on the current blinded aggregate preliminary data from our placebo-controlled trial, I'd like to share with you the following general promising clinical observation. Many men are experiencing substantial reductions in hot flashes. As for safety, zuclomiphene is well tolerated in the aggregate safety database, which is made up of both zuclomiphene and placebo-treated men. We had not received any reports of gynecomastia, painful breasts or venous thromboembolic events, which you commonly see with higher doses of estrogen.

Based on an independent market analysis sponsored by the company, which included interviews with payers covering 259 million U.S. lives, urologists and medical oncologists, the market research estimates that the U.S. potential sales with zuclomiphene citrate will be over $600 million annually, with a 25% market penetration. This independently confirms that zuclomiphene for the indication of treatment of hot flashes in men on androgen deprivation therapy for advanced prostate cancer is a major market opportunity. Currently, there are no FDA-approved drugs for this indication.

We have also added a new prostate cancer therapy to our robust drug pipeline. Veru announced in June that we added a breakthrough novel androgen deprivation therapy formulation called VERU-100, following a successful meeting with FDA. VERU-100 is a proprietary peptide drug candidate for the treatment of hormone-sensitive advanced prostate cancer, which is an established multibillion-dollar global market. VERU-100 was internally developed in collaboration with drug delivery experts at San Diego, California. The target product profile for VERU-100 is commercially and scientifically most compelling as having a number of anticipated advantages over currently available androgen deprivation therapies.

VERU-100 is a long-acting gonadotropin-releasing hormone, which is GnRH antagonist, designed to be administered as a small volumes of subcutaneous 3-month depot injection without a loading dose. As a GnRH antagonist, it will immediately suppress testosterone with no testosterone surge upon initial or repeated administration and no testosterone micro increases, which may adversely affect patient outcomes, a problem which is -- which potentially occurs with the already approved LHRH agonist drugs like Lupron, Zoladex and Eligard.

Currently, there are no GnRH antagonists commercially approved for treatment beyond 1 month, making VERU-100, if approved, the only commercially available GnRH antagonist 3-month depot an attractive choice for androgen deprivation therapy. When the company recently met with FDA, we received agreement that VERU-100 qualifies for an expedited regulatory pathway. Based on this FDA input, the company plans to commence a single open-label multicenter dose-finding Phase II clinical trial in approximately 60 men, filed by only a single open-label multicenter Phase III clinical trial in approximately 100 men.

Veru is in the process of scaling up GMP manufacturing of drug product to prepare for the clinical trials of VERU-100. The company plans to submit an investigational new drug application by early 2020 so we could commence the Phase II clinical study. We will continue to execute on our strategy to become the prostate cancer company by expanding and advancing our deep pipeline of late-stage proprietary oncology products for men with advanced prostate cancer.

As VERU-100 qualifies for an expedited FDA regulatory pathway, it represents a lower cost investment opportunity, a major product that can address the shortfalls of the current $2.6 billion global androgen deprivation therapy market. Veru's ability to advance the clinical development of our proprietary prostate cancer drugs that address unmet medical needs in large markets is being substantially supported by investments on 2 commercial sources of revenue. The FC2 Female internal condom as well as PREBOOST/Roman Swipes 4% benzocaine wipes for premature ejaculation.

As you can see from the earnings release, in Q3 fiscal year 2019, we continue to have significant growth in revenues and gross profit from these commercial products. Although Ms. Greco will cover the detailed financial results highlights in a few moments, I would like to make a few comments.

We continue to grow and expect further increases of FC2 sales in the public sector with increases in units sold in the global public sector of 18.4 million units in fiscal year-to-date 2018 to 26.8 million units in fiscal year-to-date 2019. We started shipping South African orders in Q3 fiscal year 2019, and we expect to ship significant orders to South Africa under the tender award in Q4 fiscal year 2019.

As for the FC2 by prescription in the U.S., we increased sales from $834,000 in fiscal year-to-date 2018 to $9.4 million in fiscal year-to-date 2019, which is an increase greater than 10x year-over-year. We expect to have significant growth in sales as we have signed new agreements to supply FC2 by prescription to telemedicine companies and to pharmacy distributors.

We've also dramatically shifted the ratio of FC2 sales in global public sector to U.S. prescription sales. In the fiscal year-to-date 2018, U.S. prescription net revenues were 88% compared to global public sector net revenues of 92%. Versus now and fiscal year-to-date 2019, the U.S. prescription net revenues of 42% compared to global public sector net revenues of 58%. The robust growth of the U.S. FC2 prescription business remains noteworthy as it allows us to be less reliant on intermittent ordering patterns typically seen in our traditional FC2 public sector business.

For our premature ejaculation product marketed as Roman Swipes, the company entered into a multiyear U.S. distributor agreement with Roman Health Ventures, a premier and fast-growing men's health and telemedicine company that discretely sells men's health products via the Internet through the website, www.getroman.com. We have begun to see these revenues grow, and we plan to comment on details of these revenues next quarter.

Focusing now on Veru's Commercial segment, which is FC2, PREBOOST/Roman Swipes and drug commercialization costs, we had net revenues in Q3 fiscal year 2019 of $9.7 million compared to $5.5 million in Q3 fiscal year 2018, which is up 77%. Net revenues for the fiscal year-to-date 2019 were $23.1 million compared to $10.7 million in fiscal year-to-date 2018, which is up 116%. In fact, gross profit for fiscal year-to-date 2019 was $15.8 million compared to all of fiscal year 2018 of $8.7 million, which is up 80% when comparing only the first 9 months of fiscal year 2019 to the full fiscal year of 2018.

With continued revenue growth, we have been able to substantially fund the development of our prostate cancer clinical programs and our urology specialty pharmaceuticals for the past 9 months. We intend to continue this revenue growth trajectory with the revenues that we will generate in the commercialization of the company's proprietary Tadalafil/finasteride combination tablet for the treatment of BPH, called TADFIN. We expect this to be the company's first pharmaceutical urology asset moving to commercialization. We recently had a pre-NDA meeting with FDA for TADFIN for the treatment of BPH. The purpose of the meeting was to discuss the proposed NDA and to confirm the clinical, nonclinical and the chemistry manufacturing controls requirements for the company's NDA submission utilizing the FDA expedited 505(b)(2) regulatory pathway.

Veru submitted a pre-NDA briefing document to the FDA that outline the company's preliminary data package we prepared for the NDA submission, including bioequivalence and bioavailability clinical study results, CMC and other regulatory elements of the 505(b)(2) submission. Based upon the Veru's in-person meetings and written communications with FDA regarding our pre-NDA briefing package, we believe that all of the requested components of our upcoming TADFIN NDA will be available to fulfill the FDA's requirements for submission, after we have reached 12 months of stability data for the TADFIN manufacturing batches.

Veru is excited to advance our 505(b)(2) development program to an NDA submission by December of 2020. We look forward to working with FDA to bring this novel and differentiated treatment option that combines both Tadalafil and finasteride into one formulation for the men suffering from BPH. Tadalafil, trade name CIALIS, is currently approved for treatment of BPH and erectile dysfunction, and finasteride is currently approved for the treatment of BPH as finasteride 5 milligrams PROSCAR and male pattern hair loss which is finasteride 1 milligram PROPECIA.

The coadministration of Tadalafil and finasteride has been shown to be more effective with treatment of BPH than finasteride alone. In the U.S., we're exploring commercially launching TADFIN only through telemedicine channels. As you have seen, we've had great success with our other products using this sales channel. We are also in discussions with potential commercial partners outside the U.S., having TADFIN revenues from U.S. sales and potential partnerships with upfront payments and royalties from outside the U.S. should add substantial near-term revenues with high gross margins to the existing and growing revenues from FC2 and PREBOOST/Roman Swipes products.

I will now turn the call over to Michele Greco, CFO and CAO, to discuss the financial results. Michele?

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Michele Greco, Veru Inc. - CFO, Executive VP of Finance & Chief Administrative Officer [3]

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Thank you, Dr. Steiner. Let's start with our third quarter results for the 3 months ended June 30, 2019. FC2 sales totaled $10.9 million, up 9% over the prior year third quarter of $10 million. Net revenues were up 77% to $9.7 million from $5.5 million in the prior year third quarter. The company reported FC2 sales growth in its prescription business with net revenues up more than tenfold to $4.4 million from $400,000 in the prior year third quarter.

Net revenue for the public sector business was $4.9 million compared to $5.1 million in the prior year third quarter. Gross profit was up 114% to $6.6 million from $3.1 million in the prior year third quarter. Gross margin increased to 68% from 56% in the prior year third quarter. The increase in gross margin is driven primarily by the increase in the U.S. prescription business. These financial results reflect modest shipments under the new tender orders from South Africa.

We previously announced that we won 75% of the South African tender, representing up to 120 million units over 3 years for the total tender. This translates to approximately 30 million units per year for our company and potentially $10.4 million in revenue per year for a total of approximately $30 million over 3 years. We started shipping these new orders from South Africa during the third quarter. We will be shipping more South Africa orders during the fourth quarter of this fiscal year.

Operating expenses for the quarter increased by $374,000 to $8.4 million compared to the prior year third quarter of $8 million. Included in the prior year third quarter operating expenses is $227,000 related to the settlement agreement we entered into with our Brazilian distributor during December 2017. Excluding the settlement, the operating expenses increased $601,000, which is primarily driven by the increase in research and development costs of $1.1 million and primarily offset by a reduction of $800,000 in salary and marketing expenses due to the company's change in its U.S. sales strategy.

During the quarter, we incurred $934,000 of interest expense and change in the fair value of the derivative liabilities related to the synthetic royalty financing compared to $1.8 million incurred in the prior year third quarter. For the quarter, we recorded a de minimis tax benefit compared to a tax expense of $1.2 million in the prior year third quarter. The effective tax rate for this quarter is basically 0 due to recording of valuation allowance against the net operating loss generated for the quarter in the U.S., which is the majority of the pretax loss for the period. The bottom line results for the third quarter of fiscal 2019 was a net loss of $2.8 million or $0.04 per diluted common share compared to a net loss of $7.9 million or $0.15 per diluted common share in the prior year third quarter.

Turning to the results for the 9 months ended June 30, 2019. For the first 9 months of fiscal 2019, FC2 unit sales totaled 28.1 million compared to 18.5 million units in the prior year period, an increase of 51%. Net revenues were up 116% to $23.1 million from $10.7 million in the prior year period. The company reported growth in FC2 sales in both its U.S. prescription and public sector businesses and in PREBOOST.

Net revenues from the U.S. prescription business was up more than tenfold to $9.4 million from $831,000 in the prior year period. And just to note, all of fiscal year 2018, U.S. prescription revenues were $2.4 million. Net revenue for the public sector business was up 33% to $13 million from $9.8 million in the prior year period.

Net revenue for PREBOOST/Roman Swipes increased $616,000 to $623,000 from $7,000 in the prior year period. Gross profit was up 183% to $15.8 million from $5.6 million in the prior year period. Gross margin increased to 69% from 52% in the prior year period. The increase in gross margin is driven primarily by the increase in the U.S. prescription business.

Operating expenses decreased by $1.9 million to $20.8 million compared to the prior year period of $22.7 million. Included in the prior year operating expenses is the $4 million related to the settlement agreement we entered with our Brazilian distributor, Semina, during December 2017. Excluding the settlement agreement, the operating expenses increased $2.1 million, which is primarily driven by the increase in research and development costs of $2.3 million. During the period, we incurred $3.9 million of interest expense and change in the fair value of derivative liabilities related to the synthetic royalty financing compared to $2.1 million in the prior year period. We entered into the synthetic royalty financing during March of 2018. For the 9 months, we recorded a tax expense of $117,000 compared to a tax benefit of $3.3 million in the prior year period. The effective tax rate for the 9 months of 1% is due to recording a valuation allowance against the net operating loss for the 9 months in the U.S., which represents the majority of the pretax loss for the period.

The company has net operating loss carryforwards for U.S. federal tax purposes of $33.2 million with $14.4 million expiring in years to 2037 and $18.8 million, which can be carryforward indefinitely. And our U.K. subsidiary has net operating loss carryforwards of $62.3 million, which do not expire.

The bottom line results for the first 9 months of fiscal 2019 was a net loss of $9 million or $0.14 per diluted common share compared to a net loss of $16 million or $0.30 per diluted common share in the prior period. The reduction in the net loss of $7.1 million is due primarily to the increase in our gross profit, offset by the interest expense.

Now looking at the balance sheet. As of June 30, 2019, our cash balance was $8 million and our accounts receivable balance was $4.8 million. Our net working capital was $5.5 million at June 30, 2019, compared to a negative $2.4 million at December 30, 2018.

During the 9 months ended June 30, 2019, we used cash of $8.7 million in operations, and we received net proceeds from financing activities of $8.9 million, of which $9.1 million relate to the public offering of the company's common stock last October, $3.6 million related to the sale of shares under the purchase agreement with Supplier Capital, $200,000 related to stock option exercises, all offset by installment payments on the synthetic royalty agreement of $4 million.

We continue to make significant progress on our clinical programs and are optimistic about the continuing increase in the U.S. prescription business for FC2, the increasing global public sector volumes as well as the increasing sales of Roman Swipes to government health centers.

Now I'd like to turn the call back to Dr. Steiner.

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [4]

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Thank you, Michele. We have enjoyed another strong financial quarter, which has allowed us to significantly advance our clinical programs. In fact, we have -- we now have had 4 strong quarters shown revenue growth in the commercialization of our products.

Furthermore, as we have completed at least 1 month in Q4 fiscal year 2019, our revenues continue to be strong. With the improving performance of the commercial products and the strengthening balance sheet, we believe that we have been able to substantially invest in the continuous clinical development of our prostate cancer drug product candidates as well as to submit NDAs, and if approved, commercially launched TADFIN, which would provide even more revenue adding to the already growing revenues from our female health division and from PREBOOST/Roman Swipes.

We anticipate a steady flow of important positive news for Veru over the next few months to 1 year. We expect to report open-label efficacy and safety clinical results of the Phase Ib and Phase II clinical trials of VERU-111, our oral tubulin inhibitor for metastatic castration and novel androgen blocking agent resistant prostate cancer as well as start a Phase III study.

Important clinical results for the Phase II clinical trial in evaluating zuclomiphene for the treatment of hot flashes caused by androgen deprivation and to have started a Phase III study. Submit the NDA for TADFIN and expect approval and commercially launch the product following FDA review. Complete GMP manufacturing of clinical supply of Veru-100, submit the IND and commence the Phase II clinical trial. We secured partnerships with some of our drug products and finally continue to demonstrate robust growing revenues for our commercial products, FC 2 and PreBoost/Roman Swipes.

We are committed to driving shareholder value by becoming the prostate cancer company and providing a continuum of care for prostate cancer patients.

With that, I now open the call to questions. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Brandon Folkes of Cantor Fitzgerald.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [2]

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Congratulations on the progress during the quarter. One on VERU-111. Having dosed the 6 cohorts to date, you mentioned you're going to continue to dose until you see toxicity. So I just want to clarify that, could there be additional doses beyond the 45 dose?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [3]

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Yes. So the protocol allows us to continue to go up. And as you know, there's really, as I mentioned in the call, there's really -- there's 3 parts to the study. First one is dose escalating at 1 week on and 2 weeks off. So in that -- let me lay out the 3, and then I'll tell what we're doing. So track one is these cohorts come in 3 at a time. They go from 9.5 to 4.5. And second cohort -- second part of the study or the patients that do not progress, they get the stay on the drug, and they switch over to 2 weeks on and 1 week off. And if 3 cycles later, they're still not progressing, they're holding on, then we can go to 3 weeks on continuously, okay? So that's the third.

So looking at the first track, which is just dose escalating 1 week on and 2 weeks off, yes, we are allowed to continue to go up. So at 45, if it shows no dose-limiting toxicity, you go to 54. And that shows no dose-limiting toxicity, you go to 63. But in the background, the patients that have not progressed are allowed to keep going.

So you could see -- we're like hitting this thing with -- I mean with this dose limiting toxicity, we are able to give a lot more drug. And if we can give a lot more drug, then as you know in this class of agents, with antitubulins, more drug is better. And that's been shown over and over. The reason they can't give more drug is the is toxicity so high. So this is -- this bodes incredibly well for an oral agent. And so this Phase Ib is going to be able to provide information not only on dose but also on schedule, meaning how often you're able to give it. So I'm excited about that part of it.

So you're absolutely right. We will continue to raise the dose in 3 cohorts at a time. At the same time, we're going to be allowing the patients with the lower doses to go from 1 week on to 2 weeks off to 2 weeks on to 1 week off to 3 weeks on, no time off. So we're going to get that information. And interestingly, the final thing that we'll be able to pull from this study for those patients that don't progress is what's really happening with progression-free survival. And so we know for this patient population based on the literature that their progression-free survival is about 3.5 months. And so what that means is that these are sick patients. And so we're very encouraged by these early results.

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Brandon Richard Folkes, Cantor Fitzgerald & Co., Research Division - Analyst [4]

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Okay. Maybe just one follow-up. Just to confirm, we would only get data at the end of the study. So essentially, the longer, we don't get data for perhaps --

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [5]

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Not necessarily. So my thinking is that as we start moving towards -- you can have a study, and because it's open-label, we can provide data, okay? So the idea is that at the scientific meetings and particularly on the calls, I'll be able to update you. But we are starting to target some of the scientific meetings to present the data set. And even though it will be partial because we haven't reached toxicity, you'll be able to see at least what we're seeing and particularly on the safety side because that's why you do the Ib, and we're just not seeing this repeating, we're just not seeing neurotoxicity, we're not seeing liver function issues, but yet we are seeing PSA stabilization as we are seeing PSA reductions. So you're in the window for activity, but we're not seeing the safety. So the answer is, yes, we could see the Phase Ib data, as I mentioned in the call, sooner.

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Operator [6]

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Our next question is from Kumar Raja of Brookline Capital Markets.

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Kumaraguru Raja, Brookline Capital Markets, LLC, Research Division - Director & Senior Biotechnology Analyst [7]

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So one more on VERU-111. So in terms of the PSA stabilization and the reductions, at what doses and at what time points do you see that? And also in terms of the 21-day cycles, what are you seeing there? Or do you see patients continue to move forward there? And at what doses are you seeing that?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [8]

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Yes, good question. So what I can tell you is that we -- and I mentioned this on the previous call, is that we -- even at the lowest doses, which is the 4.5 and the 9, we're seeing stabilizations and reductions. So it appears this drug is active, okay?

As it relates to your question about the 21-day cycle, so where we are now is these patients -- almost all of these lower-dose patients are moving into the 14-day on a 1-week off, we're just starting patients that are moving to the 21 days on and continuous. Because if you think about it, if you do 3 cycles at one dose and then you switch to 3 more cycles as a second schedule and then you do -- you move on, you're looking at 9 weeks and now it's 18 weeks. So that's 4.5 months. So they're getting past the 3.5 months, which is what you would have expect for the progression-free survival.

So we are -- so we're just starting to see the 21-day cycle -- 21-day drug on cycle, and so there's not much I can say much more than that. But I could tell you so far for the 14 days on and 1 week off, as I said in my comments, my formal comments, we're not seeing neurotoxicity and neutropenia liver function changes.

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Kumaraguru Raja, Brookline Capital Markets, LLC, Research Division - Director & Senior Biotechnology Analyst [9]

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Okay. And how quickly can you move to the Phase II part once the Phase I is done? And also for the zuclomiphene Phase II data, what would you consider a home run?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [10]

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Ha, good question. All right. So you snuck 2 questions there. So I'll answer them. For VERU-111 because we've already precleared -- I think that's the best way to say it. We've precleared the Phase II design with the FDA, and literally there is no -- nothing that has to be done except that we pick the dose and we can immediately expand into the Phase II. So when we hit a dose-limiting toxicity, the way that works is you take another 3 patients at that dose that saw the toxicity and you're looking to see whether in 6 patients where does that rate, and that will inform you to your Phase II dosing. So there's just -- you'll have a -- once you get your toxicity, you have at least a month where before you can't go to your Phase II because you've got to double check the toxicity, if that makes sense

As it relates to zuclomiphene, great question. So -- and as you know, we've been thinking about it. So what makes this study a little different is you'll see in the literature that estrogens can reduce hot flashes by 80 -- 70% to 80%. But what the literature does is it combines all of the types of hot flashes, in other words, you can have mild hot flashes, you can moderate hot flashes, you can have severe hot flashes. Moderate means you just feel warm -- excuse me, mild means you just feel warm; moderate means you feel warm and you sweat; and severe means you feel warm, you sweat and you have to stop doing whatever activity that you're doing, okay? The FDA does not -- even though the literature says an 80% reduction, the FDA views as clinically meaningful that you have to fix, is the moderate to severe, so not the mild. So now that means that you're taking the worst of the worst and then asking the question when there's no option right now, what kind of reduction would you see.

So right now, the literature is telling you you're seeing in your placebo group about a 20% to 22% reduction. What would be a home run in a hot flash study, I mean, for you, 40%? I mean, 60% with no option right now? So if you can -- so that means 1 in 3 to 1 in 2 patients will see an improvement in their hot flashes so they can continue the medicine that's required to treat the underlying disease, that would be pretty good.

So to me, there's 2 parts to the home run because everything in drug development is benefit versus risk. So the benefit is you're statistically and clinically meaningfully better than placebo. And then the second thing is, boy, you got good safety. Because if you have good safety, we are expecting to use this drug chronically, and we have set up the development of the drug as a chronic drug, and the agreement that we have with the FDA is this is going to be a chronic drug. And these patients on androgen deprivation stay on androgen deprivation for potentially decades. The safety part can bode extremely well for a very -- what could be a very successful product.

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Operator [11]

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(Operator Instructions) Our next question is from Yi Chen of H.C. Wainwright.

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Yi Chen, H.C. Wainwright & Co, LLC, Research Division - MD of Equity Research & Senior Healthcare Analyst [12]

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Looking at the operating expenses in the third quarter, my fear is that it was meaningfully higher than the second quarter. So how should we look at the R&D and SG&A expenses going forward?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [13]

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Good question. So I'll answer the big picture, and then I'll have Michele also provide some comments. As you know, we have 3 programs, and we have been budgeting for those clinical developments for those 3 programs. And as we had mentioned that given the current budget, we're going to be able to -- with the revenues coming in existing sources of capital, be able to make it to the end of 2020 and certainly, beyond if the revenues continue to go up. So from that standpoint, the way to think of it is that we're still on track to be able to manage our business given where we are now.

However, one of the things that's very interesting is now we're starting to see some very promising signals of this data from the cancer program. And when you look at the aggregate hot flash data with the safety and the degrees of hot flash benefits that we're seeing in the aggregate data, and now we've also added VERU-100, which is GnRH antagonist long-term depot, and the FDA is telling us all we have to do is a 60-patient study and a 100-patient study and you can sell on the market, there may be an opportunity based on this to potentially increase some of our spend. But at this point now, the way to think of it immediately, would you like to answer that Michele?

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Michele Greco, Veru Inc. - CFO, Executive VP of Finance & Chief Administrative Officer [14]

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Yes. As I mentioned in my comments, looking back when we compare this period to the last period, whether it's for the quarter or for the 9 months, we did have some unusual items in there which we did separate out. And our expenses, they're not as predictable for the research and development. You can't just look at this quarter and try to determine that this quarter is indicative of what the next quarter is going to be for research and development because, as Mitch said, we're continuously progressing these drugs. And so costs change depending on which phase of the program you're in.

And as far as the selling and administrative expenses, we did have a change in the sales strategy. So we're starting to see the impact or, therefore, the reduction in looking at our expenses. So our expenses are getting a little bit more normalized, but there, again, there are different things and facts and circumstances that change. I would say that they're a little bit more aligned with what you're seeing here in our third quarter to be experiencing in the fourth quarter.

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Operator [15]

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The next question is from David Sable of AWM Investment Co.

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David Sable, [16]

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Just maybe a question for Michele. And I'm sorry if I missed this earlier, could you flesh out the net cash provided by financing activities in the 9 months in the cash flow statement, please?

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Michele Greco, Veru Inc. - CFO, Executive VP of Finance & Chief Administrative Officer [17]

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Sure.

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David Sable, [18]

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Plus, we have the $9 million.

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Michele Greco, Veru Inc. - CFO, Executive VP of Finance & Chief Administrative Officer [19]

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So that was -- $9.1 million was the public offering we did in October. The $3.6 million relates to sales of shares under the Aspire agreement, and $200,000 relates to stock option exercises, and then we had a payment under the -- total payments under the Synthetic Royalty of $4 million.

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Operator [20]

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The next question is from Natalie Hurtig.

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Stephen Dearholt, [21]

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Mitch, this is actually Steve Dearholt. And my question is in concern of -- you mentioned the value of having a safe drug. Do you anticipate being able to use this, the VERU-111, in other types of cancers? Are you thinking about that for your future and maybe even licensing that for -- with other drug companies?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [22]

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Yes. So Steve, thank you for the question. Absolutely. So let me kind of -- and this kind of gets to a little bit of why I was saying because of the promising information that we're seeing. Our job is to increase the value of the asset and to ultimately provide the VERU-111 not only, again, to increase shareholders' value but to get it to patients that need the drug. And if you have a drug that's an antitubulin, antitubulins traditionally have been incredibly toxic. But we know if you get more, it's better. Well, antitubulin is not a prostate-specific targeted mechanism, and it just happened to be, in prostate cancers, very effective. And prostate cancer, you can look at PSA, which is a fast way to get a read on whether you're seeing activity. But there are so many cancers today that are sensitive to antitubulin like taxanes and epothilones and vinca alkaloids that we would very much consider sooner rather than later to expand into other tumor types because that will show the value of the drug.

So to give you an example, Medivation, which was sold to Pfizer for $14 billion, their drug is only a prostate cancer drug. Endocyte that was sold to Novartis for $2 billion-plus, only a prostate cancer drug. Cougar and Aragon both were sold to J&J for about $1 billion a piece, only a prostate drug. So if you were able to show that you're a prostate cancer drug and you had activity outside of prostate, then I think it will really truly increase the value of the drug and increase the likelihood of a significant partnership because then you're thinking about loaning it out into multiple tumor types, which we should be doing.

With that said, I think as a small company, we can take on the task of additional Phase IIs with small numbers of patients that show signals, just like we're doing in prostate. And with that very little investment, I think it will increase the value of the opportunity. So this is different. We stuck with prostate because that's how -- as I say, stick with your knitting, what you know. But on the other hand, it's very clear that this could be a major oncology product.

And even in the field of IV chemo and the whole field of medical oncology, oral agents are taking over. Patients just don't want to sit in chairs anymore and get IV chemo if they can get something orally at home where you can manage the dose by just decreasing the number of tablets and keeping the patients for having to spend 8 hours on an infusion chair. And you have less toxicity than these other agents, particularly neurotoxicity and neutropenia. This is -- knock on wood, it's looking very attractive.

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Operator [23]

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The next question is from Peter McMullin.

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Peter McMullin, Independent Portfolio Consultants, Inc. - Investment Strategist [24]

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Speaking to you from the of the [Seoul International Airport]. Congratulations on a lot of the cylinders working properly here. My question would be what's keeping you awake these days at night? Or what could go wrong could go wrong?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [25]

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Yes. So good question. So when you look at your base business, the first thing -- the thing that worries you for the FC2 business -- PREBOOST business, I'm not worried about. That's growing, and it's an exclusive, and Get Roman is good. As it relates to FC2, you're breaking into public sector, and FC2 prescription business will keep me at night in the public sector, which I think would mitigate -- mitigated with the FC2 prescription business is, at the public sector, even though we have about 90% market share, they're -- just as anticipated, competition is coming in and the pricing has to come down.

All the things that we predicted and the reason why we did the transaction with the Female Health Company has come to be. And so here we are now. If we did not diversify as the Female Health Company Board had done, we would be in a whole hell of trouble. If you look at our numbers, you can see that everything grew except the number of units this last quarter in the public sector, and we're getting less for those units in the public sector.

So what keeps me at night -- keeps me up at night, we sort of solve that problem by having a more robust U.S. business. And so in fact, we've been able to -- and I think we're on track, guys, to have the best revenue year that the Female Health Company in our view has ever had. So I'm pretty excited about that.

As it relates to the drugs, drug development, you're putting a poison in that patient that it hadn't seen before, and so literally every day you wake up wondering what you're going to see. The longer you go and the higher the dose goes and you don't see something, you start to feel pretty good. But that keeps you up at night because drug development is all about, whether it's some of the off-target effects you didn't expect. And of the drugs that we have, VERU-100 seems to be -- the one that's GnRH antagonist, seems to be the most straightforward, both from a regulatory clarity standpoint. It's not going to cost a lot of money. People understand the drug so it's pretty attractive from that standpoint.

Zuclomiphene is [blowing] away. We know estrogens work for hot flashes, but -- and we also know that estrogen is dose limiting in terms of its toxicity, and we did find an oral agent. Again, we didn't know that before, but we know this now, based on the aggregate data. We found an oral agents that's not giving gynecomastia, that's not giving us breast candidates, and we're not seeing the rate of venous thromboembolic events that you would expect. So that used to keep us up at night. We feel better.

And then VERU-111, this is an exciting drug that we finally have in man, and it's playing out, quite frankly, very much like the preclinical models in animals, where we did not see neurotoxicity, we did not see neutropenia. And people always say you can't translate that into man, but that's what we're seeing. So in general, I'm very, very happy with the business. I'm very happy with the team, and I think we've made great progress.

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Peter McMullin, Independent Portfolio Consultants, Inc. - Investment Strategist [26]

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About to get on my flight so I'll just work in one quick one. The judge dismissed the lawsuit, and I guess, they had 30 days to appeal. Is there any continuing issue there?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [27]

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Yes. So as you saw from the press release that they dismissed everything, and it's completely dismissed. And the other side, they always have a chance to appeal. And at this point now, to our knowledge, they have not. And so that's all we can say at this point. But if you look at it, everything that case was based on, the judge, he said no and dismissed it. So we feel pretty good, and we've got a good case. And so far, every step on the way, it's been in our favor. So we're feeling pretty good.

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Operator [28]

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The next question is from Shawn Boyd of Next Mark Capital.

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Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [29]

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Can you hear me okay?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [30]

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Yes, perfectly.

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Shawn Boyd, Next Mark Capital, LLC - Founder & Portfolio Manager [31]

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Great. Just wanted to go back to FC2 for a second. The U.S. prescription sales -- well, I mean congratulations on the growth in both major areas there, the public sales and the prescription sales. But prescription sales in particular, that growth, can you help us just a little bit on how you're penetrating that and sort of maybe for those of us newer to the story, what you're targeting? Just how big can that be? And maybe just give us some parameters to think about as we finish the year here and go into 2020.

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [32]

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Yes. So first of all, if you're new to the story, one of the things that we did is we took advantage of the Affordable Care Act. The Affordable Care Act, now almost 9 years ago when it was enacted, basically said that for female contraception, which the female condom is #12 on the list, that insurance companies were mandated to pay for the product with no copay. And the drug was -- at that point -- the product, FC2, at that point, was Class III medical device. It's now -- it's been downgraded to a Class II medical device, but that hasn't changed anything. We still have essentially the largest market share in that product.

The -- what we did is we said, you know what, if this going to be paid for by insurance companies, then we need to make it available by prescription. Making it available by prescription doesn't just mean you say you're available by prescription. So we spent first 1.5 years creating the infrastructure and making sure that 98% of retail pharmacies actually have the product, that we package it in 12 packs so that it makes sense for a woman that wants to get it, that it had all the right codes. It was in the compendium. It was truly a prescription product. Then we went after 6 different channels by which the sale -- but I'll just tell you 2 of them. One was by traditional marketing and selling with a sales force. We had a sales force of 12. And then we had an independent contracting sales force of 80. And then we decide to see what would happen if we hooked into telemedicine. And telemedicine and telepharmacy is where it took off.

So as you would imagine, if you want to do marketing and sell it like a drug, you got to pay bonuses and people and salary, and all of a sudden, you're putting a lot of money out to get very little. But if you want to do telemedicine, and telemedicine is basically an Internet-based group that has doctors that interact with the patient either through an intake form or through Skype and basically are providing them with female contraception. Some of them have cash pay, some of them are by insurance. And essentially, they fill the prescriptions, and they actually deliver the prescriptions to their homes, just like the Walgreens would or CVS would. And that's how it grew.

It's basically tapped into, what I would call, a blue ocean, meaning that there is so much pent-up demand for women to try to avoid having to make the schedule with the OB-GYN doctor or the primary care doctor and make the appointment, pay for the appointment, get the prescription. And so the barrier to entry is the doctor. I'm a doctor. We're the barrier of entry. And so what telemedicine does, it goes -- it circumvents that in a sense that the women will interact in a discrete way, get her birth control in a discrete way, and the birth control is mandated to be paid for by the Affordable Care Act. It was kind of a perfect storm. So all these telemedicine groups started springing up around the birth control pills, emergency B contraception and then now our female condom. And it's like it's allowed me to provide a portfolio of female contraception that they didn't have before.

And so we hooked in, and it turns out, and I'll give you roughly the numbers, roughly, so we went from something like 1,400 prescriptions in first fiscal year 2018. By time we got to fourth quarter fiscal year '18, we were at about 15,000 prescriptions. And this quarter, I think, this is -- fast forward another 6 months, this quarter, we hit about 51,000 prescriptions and so -- per quarter.

And so to answer your question, that's where the growth is. And to be able to use the Internet, and some of these telemedicine groups are licensed in all 50 states, some of them fewer, and we have moved our role from being a marketing and selling organization spending money to have a sales head and having salesmen -- salespeople and all of that stuff, to becoming a wholesaler where all we're doing now is basically providing the product to the telemedicine networks. And so what that means is we've gone from having a U.S. FTE base of about 18 to 20, to about 3 or 4 to make that kind of money. And so we've been able to now take that money and plow into our drug development.

So if you're new to the story, I think that has been the success. Can it continue to grow? Yes, there's a lot of things we haven't learned. For example, what's the reordering rate, right? The other we have to learn is, so far, it looks like some of the new telemedicine groups are starting to show up. It's like -- Get Roman is a perfect example. They want -- they're in men's health now. There are many that are focused just in women's health, and they're expanding and they're contacting us.

So I don't know the answer. Right now, I can tell you every time our team looks up, there is another 2, 3, 4 or 5 of these telemedicine groups that are coming to the table, and all we have to do is provide it as a wholesaler. And so it's been a very interesting ride.

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Operator [33]

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The next question is from Paul Sonz of Sonz Partners.

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Paul D. Sonz, Paul D. Sonz Partners - President [34]

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Can you hear me?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [35]

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Yes.

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Paul D. Sonz, Paul D. Sonz Partners - President [36]

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Good. I wondered if you could talk a little bit about your partnering and licensing strategy going forward. For instance, when do you think it would be viable to start looking at those discussions?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [37]

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So I can tell you from my experience that when you see a company all of a sudden announce good news on their drug development programs and then, all of a sudden, 2, 3 weeks later, it's a big pharma deal, it's -- look, it didn't happen in 2 to 3 weeks. What typically happens is that you begin talking to large pharmaceutical companies 18 months, 12 months before you think you're going to be announcing that news. And you do that because you want to keep them up to date. Some of them will sign nondisclosure agreements, and they'll come in and look at the data. Most companies, at least in our situation, we would hold them off because our thinking is we want -- we're going to have more value for the shareholder the more that we have data. And -- but you just can't engage in the last minute and expect to -- it just takes time.

So we have already started the process now over the last 1 year or 1.5 years of talking to large pharmaceutical companies that you would expect would be very interested in a product like VERU-111, particularly if we can be used after to their product, with their product or before their product. And they already committed to the $6.5 billion revenue they're getting now in 2018. They can do everything they can to protect that. And so we're on the radar for VERU-111.

Zuclomiphene, the same thing. We've already started discussions for about 1 year to 18 months. VERU-100 is new. We just announced that one. So that one, we haven't done much with. TADFIN, for the last 18 months, we've been extremely active outside the U.S. trying to secure a partner. That has been moving very, very nicely. In the U.S., our strategy is that you hold on to it for -- potentially launch it through telemedicine so that you don't have to have a marketing and sales group, but we can use that money to continue to support our clinical development and invest in our clinical development. So from that standpoint, I would say that we've already started doing what one should do, to be able to secure a partnership in a very efficient and expedited way at the time we have good news.

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Paul D. Sonz, Paul D. Sonz Partners - President [38]

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What do you think the minimum hurdle is to have a deal for VERU-111? Would it be Phase II data?

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [39]

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I think if we do a good Phase Ib, which we are, which means its patients that are intended to be your patient group. So it's not like a healthy volunteer group, which we would never do with a cancer product. So the patients that we're treating in Ib are going to be basically the same patients that we would be treating going forward. The Phase II is important because now you take that dose and you expand it into more patients.

So I would say that the maximum value for a company would be to -- it's open label, okay, which means you don't have to wait until the end and you're not getting to get a postcard that says this is the data. It's open label. So from that standpoint, I think, you're correct. I think the maximum value that we can get for this asset right now would be the Phase II data with prostate. If the Phase Ib looks good, and we decide to expand and accelerate to other tumor types, then I think the deal will look even more attractive if we can show activity in other tumor types in addition to prostate, all which can be done in a small number of patients in a Phase II study.

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Operator [40]

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Ladies and gentlemen, that will conclude the question-and-answer session.

I would now like to turn the conference back over to Dr. Mitchell Steiner for any closing comments.

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Mitchell S. Steiner, Veru Inc. - Chairman, President & CEO [41]

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Thank you, thank you. I appreciate you -- I appreciate everybody joining us on today's call, and I look forward to updating all of you on our progress at our next investors' call. Thank you.

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Operator [42]

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Thank you, sir. Ladies and gentlemen, the digital replay of the conference call will be available beginning approximately noon Eastern Time today, August 8. By then, you can access that by dialing 1 (877) 344-7529 in the U.S. and 1 (412) 317-0088 internationally. You will be prompted to enter the replay access code, which will be 10133960. Please record your name and company when joining.

Ladies and gentlemen, the conference call has now concluded. Thank you for attending today's discussion. And you may now disconnect your lines.