Surging COVID-19 Cases Could Alter Aytu BioScience's Path to Profitability

Health and Healthcare

Published: July 2, 2020 8:45 am

Some small companies are destined to be small forever. Others can grow into massive companies over time. The truth is that many factors come into play when it comes to how large a company can become. One factor that the stock market has managed to give companies almost limitless valuation is whether they can help the world fight the COVID-19 pandemic. After all, how much is staving off the Great Depression worth?

Aytu BioScience Inc. (NASDAQ: AYTU) is focused on commercializing products related to upper respiratory problems, and its shares surged in March of 2020 when the company became a coronavirus stock. That allowed its shares to more than quadruple initially, and they have been holding somewhat steady as an on-hold coronavirus stock since then.

Aytu has an exclusive distribution agreement for a COVID-19 rapid test developed in China. While it is valued mostly for its coronavirus efforts today, Aytu still is targeting low testosterone, insomnia and other conditions.

Back to a company’s size. Aytu’s market capitalization was close to $170 million on last look. That is a penny stock if there ever was one. What many investors can overlook in market cap is if a company can actually get to wild profitability. Even if a company can get to $100 million in maximum revenues, investors might value it immensely higher if it has wide margins.

What matters now is that Aytu offers an interesting value proposition as coronavirus testing becomes more available to the general public. It reached an agreement with Sterling Medical Devices in late April to finalize the development of the Healight platform technology. This is an endotracheal catheter that emits ultraviolet light and has been considered a potential treatment for COVID-19, although it has failed to entice investors into driving its share price higher.

While this is not new news today, management had conveyed the belief that the Healight platform could potentially affect outcomes positively for critically ill patients with coronavirus and other infections. Of course, this remains to be seen, but that could be worth vast amounts, along with tests, if it were to work.

Aytu previously announced support from Cedars-Sinai and that it was working with the U.S. Food and Drug Administration (FDA) to determine an expedited regulatory process for Healight. The goal at the time was to enable near-term use of the technology as a likely intervention for critically ill intubated patients.

Aytu’s quarterly results showed some promising data on year-over-year comparisons. In its first quarter of 2020 (ending in March), Aytu’s revenues rose to $8.16 million from $2.38 million in the same period of 2019. That is more than a threefold increase.

While it was still operating at a loss in the first calendar quarter of 2020, that loss was significantly reduced. The reality at the time, and the belief that has been ongoing, is that Aytu’s net loss per share likely would decrease if it was able to keep pushing out tests for the coronavirus.

The company had a net loss of $5.33 million for the quarter, an increase from $4.50 million in the first quarter of last year. However, net loss per share was only $0.15, compared to $0.50, so this is a big step in the right direction.

It seems hard to imagine that Aytu’s production and sales would become highly profitable, but its fiscal year-end sales in 2019 (a June year-end) were already above $7.3 million, versus $3.66 million the prior year. Sales for the current trailing 12-month period have been $14.4 million.

Most small-cap and microcap investors are looking for large growth opportunities rather than high income and boring old dividends that they can get in large pharmaceutical and consumer products stocks.

On June 9, Aytu had announced that a panel of 30 confirmed SARS-CoV-2 antibody positive and 80 SARS-CoV-2 antibody-negative samples collected prior to 2020 were tested in an independent validation study performed by the National Cancer Institute. The rates were reports as 96.7% and 100% sensitivity were estimated for IgG and IgM, respectively, and 97.5% and 100% specificity were estimated for IgG and IgM, respectively. This would be intended for use as an aid in identifying individuals with an adaptive immune response to COVID-19.

On June 1, Aytu announced that it had retired a $15 million debt obligation tied to the acquisition of the Cerecor commercial portfolio last fall to end up with debt of only about $1 million. The company said at that time that only the $86,840 fixed monthly payments are owed to Deerfield through the end of January 2021.

Late in May, the firm H.C. Wainwright issued a new Buy rating and a $3 price target on Aytu BioScience.

Many equity investors likely want more good news that will lead to a cure, a vaccine or a treatment of the coronavirus more than they are a company that can be wildly profitable. Only two firms issued revenue forecasts, but those are expected to grow to over $29 million in 2020 and then to over $80 million in 2021. For the “income” theme, Refinitiv shows that one analyst expects Aytu to post a profit in 2021, after a narrower loss in 2020.

The big question now is how long the rapid growth of COVID-19 cases will continue, and whether the surge would actually come at profitability for Aytu. There are many states and large populated areas where cases are exploding higher, and all of these are potentially worth major money to a small company if it is suddenly going to be profitable at a time that the FDA has pledged to keep strict rules in place before approving any vaccines or treatments for COVID-19.

Aytu’s shares closed down less than 1% at $1.41 on Wednesday, and its 52-week trading range is $0.34 to $2.99.