Why Is Vivus Diluting Existing Shareholders?

Vivus, Inc. (VVUS) announced after market hours Wednesday that it plans to sell 9 million shares of common stock in a public offering, of which J.P. Morgan (JPM) is sole book-running manager. Underwriters get a 30-day option to purchase up to 1.35 million additional shares to cover any over-allotments.

The company has about 70 million shares of common stock diluted and outstanding, and the shares are to be issued directly by the company pursuant to an existing shelf registration, so this offering represents up to 15% or so dilution of existing shareholders.

VVUS benefits by getting cash and, of course, JPM benefits by getting fees -- the fees we just heard the other day that they would not be getting for advising on any "partnership"/takeover regarding VVUS's flagship drug Qnexa, currently in late-stage Phase III trials.

It is not immediately obvious why the company needs the cash, or that at least some of these shares could not have been purchased on the open market if the buyer(s) wanted them so badly (VVUS 3-month average daily volume is about 3.8 million shares). If anyone has cash in the obesity space, it's VVUS. It certainly cannot be said that increasing the market cap 15% makes the company particularly more attractive to a potential buyer, all else being equal. But we can now assume whatever happens with regard to this buyer (or "marketing partner") has to wait until the FDA decision is made, expected in late 2010.

VVUS share price fell 44 cents, or 3.9%, to close September 16 at $10.79. Whoever's supposed to buy in to this raise now apparently did not like the risk-adjusted returns back in March, when at one point you could have picked up VVUS at around $3.50 per share. Over the same time period, your investment in JPM would have roughly doubled.

On those lines, I was interested to note that JPM doesn't seem to be a sizable holder of VVUS itself, unless I've completely lost the paper trail. Either this raise is JPM's opportunity to buy in, or it amounts to, "Take our advice, customers, we're not using it."

Finally, a side note: It's okay with me if VVUS wants to buy back Evamist (a spray estradiol) from ailing KV Pharmaceuticals (KV.A) and then maybe package it with Luramist (another metered dose spray for women, this one for low libido) for resale, but investors really should not want to see VVUS buy the whole beleaguered company KV.A, no matter how cheap it gets.

Disclosure: Long JPM, no other positions in stocks discussed

Comments

[Biotechs_Maven:]

Dear Ruthanne,

First of all, I want to tell you that I RESPECT your BALANCE article today !
It show that you are not a blind pumper analyst of VVUS !,
and you are a PROFESSIONAL Analyst !
and you are really looking at both angle !

Salute to you !

Sincerely,
Me

Sep 17 09:19 AM

[APP:]

Where did you hear that Vivus might buy back Evamist? From Vivus?
Thanks

Sep 17 11:30 AM

[Ruthanne Wi...:]

@APP: No, I didn't hear that from anyone. I thought up the idea all by myself, while racking my brain for possible ideas as to why VVUS might want to do this raise. So please consider it on its own merits only. Thanks for reading!

Sep 17 11:40 AM

[Wake up to ...:]

This seems pretty simple- they don't want to worry about this stock market to continue to levitate to sell some shares to have enough cash in the bank to get through whatever unexpected FDA hurdles are raised. It is difficult to be too financially conservative when dealing with the FDA. If they can sell shares above $10, and discard any obligation to use JPM for a deal, why not. Seems like a simple and sound move to me. Why is this controversial?? It also gives them more leverage with negotiations with a partner or buy-out, as they don't have the dreaded "we have only xx months left to live with our cash-burn" over their head.

Almost not worth a story, it seems so obvious.

Sep 17 11:52 AM

[Biotechs_Maven:]

@wake up to ....

so you or VVUS simply expected that FDA might not approve Qnexa
at first pass around end or 2010, so they need to have cushion of cash if that happened in worse case scenario... right ?
that is very significant and worth a story, cause that mean,
investor will have to wait much longer before VVUS shares can go up from here due to selling Qnexa !

and VVUS currently have lot of cash and actually not in desperate need to raise more money.
between now and PDUFA date is minimum 1 year,
and in those 1 year, VVUS should be able to get partner or even get buy out if the result (especially safety) is as good as what VVUS had indicated from the press release !

so this move show that VVUS is NOT Confident at all in getting
partnership or buy out !

This dilutions translate to a 15% DILUTION to current shareholder !
no matter how you look at it 15% is a SIGNIFICANT DILUTION !
so why did VVUS did this kind of large dilution ?

remember if VVUS able to get partner right now,
VVUS shares can still go up at least 50% from current price!
and if after that VVUS want to do a dilution,
it will be done at much better price...

why can't VVUS wait to do the dilution until AFTER the partnership ?
Leland Wilson was so confidence at VVUS ability to get partner.
but this dilution show the opposite...

FOLLOW THE MONEY !
ps: can you imagine if you are a CEO of a company, and you are
asking investor to participate in the share offering,
while at the same time you are selling your own personal shares ?
Does that sound CONFIDENCE to you ?

Sep 17 02:56 PM

[timeisinternet:]

Really? You don't know why VVUS is raising money? Well it's the same reason HGSI and DNDN did an offering after their positive phase 3 trials and stock price rose even though both had lots of cash on hand. And honestly, it's really quiet obvious. It's not cheap to bring a drug to the market. Viagra was dropping $100 million in ads at one point per year! VVUS has to prepare to go it alone and while they are likely will be bought out preparing to do it yourself forces the value of the company to increase which in turn causes the buyout price of said company to go up. Preparations to bring this drug to the market are going on now including the market concept this is not cheap to do. The fact is the drug industry spends more money on marketing and lobbying the government than they do on R&D. VVUS knows the game and is getting the house ready so they can become a major player it. Google QNEXA today and you get 180,000 results. Google it 1 year from now and I bet it's over 1 million results, that marketing my friend and it costs money.

Sep 18 01:51 AM

[Biotechs_Maven:]

@timeisinternet,

HGSI drug is for Lupus, not obesity
DNDN drug is for Prostate cancer not obesity.
and DNDN is raising money to build their manufacturing facility,
which needed as part of FDA approval process too.

both HGSI and DNDN is very confident at their chance of getting approved by FDA this time, since their drug had UNMET medical needs on which the patients can die !

Obesity had several drug approved already, and it is not as bad as cancer in term of how fast the patients die, so even though it is an unmet need, the safety profile of the obesity drug is very important consideration for FDA approval !

If VVUS want to raise money for marketing,
they can do it AFTER the FDA approve their drug.
because the PDUFA date will be end of 2010 at the earliest !
and if VVUS raise money at that time, they will be getting much less dilution and VVUS share price will be higher (if FDA approve Qnexa).

so the current dilution is definetely not for marketing purpose !
VVUS CAN NOT market Qnexa before FDA approved it.
That is ILLEGAL !

The only reason why VVUS raise money today is
because they worry that FDA might not approve Qnexa at first try,...
or even might not approve Qnexa at all.
So they need to raise money to have cushion of cash in case the worse things happened.

plus VVUS also do not see any partner or buy out coming soon,
otherwise, they would not raise money and dilute shareholder,
when a partner can easily pay the $100million VVUS want to have as upfront payment !

so no way VVUS raise money this time for marketing purpose...
when there is no Qnexa to be marketed in the first place,
and again IT IS ILLEGAL to market a drug that had not been approved....

heck some big pharma even get billions of dollar in fine because
they market their approved drug for OFF LABEL purpose !

Sep 18 02:53 AM

[Biotechs_Maven:]

@timeisinternet,

below is what VVUS officially said today on how they want to use the funds after they announce the $10.5 price for this offering today:

The Mountain View, California-based company said it expects to use the net proceeds from the offering to fund its research and development, including manufacturing; clinical trials, and for general corporate purposes.

so it is not for marketing !

below is the link to the article:
www.reuters.com/articl...

Sep 18 02:57 AM

[johnny inca:]

anyone who has paid any attention to the market over the last year should realize that the best time to raise capital is when you don't need it. Now is the perfect time for VVUS to strengthen their balance sheet.

The better prepared they are to work w/o anyone else's money the better the buyout offers will be when they finally come.

Sep 30 01:20 PM