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Here's Our Verdict On Innovus Pharmaceuticals Inc (OTCMKTS:INNV)

Here's Our Verdict On Innovus Pharmaceuticals Inc (OTCMKTS:INNV)
Written by
Chris Sandburg
Published on
July 26, 2016
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Innovus Pharmaceuticals Inc (OTCMKTS:INNV) is up nearly 14% heading into the US open on Tuesday, as markets anticipate an FDA nod for its lead development candidate, and hype surrounding the candidate's impact on Innovus' financials hits press. There's plenty of coverage for Innovus circulating right now, some paid, some not, but what's really going on?Let's try and figure it out.There's credence to the suggestion that there's some upside potential on the pending FDA decision, so we'll start off with that. The company has submitted an ANDA for its hay fever product, FlutiCare. The product is currently one of the top prescribed drugs in the indication in the US, but it's not approved as an OTC, and that's what Innovus is going for. There's a big potential market, but there's a problem – it's already dominated by GlaxoSmithKline plc (ADR) (NYSE:GSK) and its Flonase product, which became available OTC in February last year. Companies spend billions of dollars marketing OTC pharmaceuticals to get them to peak sales projections, as illustrated by the Glaxo, Johnson & Johnson (NYSE:JNJ) dispute in this category last year. As such, in order to compete with current market leader, Innovus is going to have to come up with some serious cash.This brings with it some obvious issues – toxic capital raises being the primary. The company only generated $225K in the first quarter of 2016, and has since raised $2.25 million (in itself, very dilutive). Cash on hand at March 31 was $32K, so we can assume that Innovus has only this $2.25 million to work with right now.When GSK launched Flonase, it spent $71 million between launch day in February and End-May. In short, Innovus is not going to be able to able to get anywhere near the revenues generated by Flonase, and to eek out even a small percentage of the market, it's going to have to conduct some seriously dilutive financings.That said, even a small portion of the market could amount to tens of millions of dollars' revenues, which for a company currently generating less than $1 million annually, is a big step up, and would likely warrant an upside revaluation. There's also the fact that the OTC version will enjoy some residual brand recognition from the current prescription version, and so Innovus isn’t hitting markets cold – it's got something of a running start.So what's the verdict?Innovus has a current market capitalization of a little over $41 million. It generated $735K revenues during 2015, and claims it is set to generate somewhere in the region of $4 million revenues this year. However, its selling costs are high (around 6X revenues) and it lost a little over $4 million in 2015. The company is probably looking at a net loss of between $5-6 million in 2016. The current valuation is clearly pricing in the potential for an FDA nod for FlutiCare, but even with this approval, it's going to take a huge marketing push to get, say, 10% of the addressable market. This push will cost money and – more importantly – dilute current holdings dramatically.Our verdict is that, long term, Innovus has the potential to be a rewarding holding. The company has a decent portfolio of products, just acquired some important assets that should boost its revenues near term and has the potential, with FlutiCare, to compete in a blockbuster market. Right now, however, it's going to have to dilute its current base so heavily in order to start generating revenues from its under-review product, and this makes its current market capitalization look inflated.Near term, therefore, even with the FlutiCare approval, there's very little chance of any sustainable market cap upside. Of course, this doesn’t mean we won't see some gains. If FlutiCare gets approved, the promotional push (to investors, not the market for its product) will likely attract speculative and uninformed capital.Stick with us for INNV updates and sign up for our newsletter below!Disclosure: We have no position in INNV and have not been compensated for this article.

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