Vivus Heats Up, Shorts Discouraged on Possible Bidding War Print E-mail
By Brian Wilson-Lead Contributor   
Thursday, 23 May 2013 15:41

Vivus (NASDAQ: VVUS) has been seeing relatively modest growth in QSYMIA (phentermine and topiramate ER) prescriptions since the drug launched in September 2012 under the FDA’s REMS agreement, which restricted the drug’s sales significantly due to the inability for patients to have prescriptions for the drug filled at brick-and-mortar pharmacies. Because of this, and because of an apparent and drastic overstatement of the true size of the prescription obesity drug market, investors have have mixed and overall bearish opinion on VVUS since the FDA approval of QSYMIA. The stock is trading at roughly half of its level post FDA approval.

While the larger trend since FDA approval remains negative, a relief rally that was initially discussed in a Bio-Wire note on April 18th brought the stock 17% higher since. This move was a reaction to a change in the QSYMIA REMS which could have a profound (and much needed) positive impact on QSYMIA sales in the H2 2013.

The company’s recently released Q1 2013 financial results were not particularly shocking in eithier the bullish or bearish direction. Throughout the first three months of the year, the company reported $4.1 M in sales revenue on the sale of about 59,000 prescriptions. About 21,000 of these prescriptions were written on a promotional program for QSYMIA that is designed to accelerate the drug’s adoption into the mainstream obesity care space. Up to this point, the company has seen particularly strong interest from endocrineologists who have obese patients that may have glandular problems, although the company seems to be looking to target primary care physicians who have a much larger pool of patients.

Vivus bulls generally expect this shift into primary care to provide a much-needed acceleration in QSYMIA prescriptions, which have been relatively stagnant in the last month.

Based on the valuation of Vivus, the company still needs to multiply QSYMIA prescriptions at least tenfold to justify the current price per share. The market capitalization of Vivus, at $1.4 B at the time of writing, requires that the company generate about $70 million in earnings each year to reach a typical P/E multiple of 20. The actual prescription counts that would be needed to reach this goal heavily depend on the pricing of the drug and the continuing existence of the QSYMIA promotional program, but based on the Q1 data and based on current margins and profit value we can approximate that the company will need to sell prescriptions in the millions down the road.   With only 59,000 prescriptions sold in Q1 2012, we can see that the company will have a particularly difficult time if the QSYMIA promotional program continues to represent a substantial portion of the total pool of QSYMIA prescriptions.

In the recent Q1 earnings conference call, Vivus management addressed the issue by discussing QSYMIA’s progress on the reimbursement front. In particular, the company is hopeful about recently instated Tier 3 coverage that limited patients’ copayments for 30-day prescriptions to $50. This, along with an amendment to the QSYMIA REMS which was submitted in October 2012 by the company which will bring the drug to “thousands of brick-and-mortar pharmacies in July 2013” according to the company’s statements, should begin to affect QSYMIA prescriptions dramatically. The problem is that we don’t know if this will be dramatic enough to multiple the drug’s sales enough times to justify the valuation of Vivus in the long run.

While most analysts have positive opinions of the company, Brean Capital’s Jonathan Aschoff and Jefferies’ Thomas Wei have sell/underperform ratings on the stock due to the underwhelming potential that Qsymia has demonstrated up to this point.

The Vivus situation got a lot more interesting with recent events, including a $220 M offering a 4.50% convertible senior notes which started on May 16th 2013 and concluded just recently. The conversion rate priced these shares at $14.86 per share – much higher than the price of the shares at the time (about $12.50 per share). Then, it was announced this morning that ~2% shareholder Alex Denner (the former head of health-care investments for Carl Icahn and owner of the new fund Sarissa Capital Management) joined the activist slate challenging current Vivus management. The effort is being spearheaded by 10% shareholder First Manhattan. First Manhattan believes that Vivus is doing a terrible job at marketing Qsymia.

While it’s generally agreed that Vivus is doing poorly, this is unlikely to be reflected in the company’s stock price as short sellers worry about a potential bidding war between activist shareholders and Vivus management. The market may take some time to fully digest the implications of the aggressive moves of activist shareholders, but what we do know is that VVUS may see extremely movements that don’t reflect changes in the underlying company’s financials.

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