I should start this article by disclosing that this is only the second company I have written an article about on Seeking Alpha. The first, Real Goods Solar (NASDAQ:RGSE) (originally traded under RSOL) more than doubled within two months of my initial article in December. I feel as though the opportunity has again presented itself for a near term double in a company that I have followed closely.
Vivus (NASDAQ:VVUS) is a biotechnology company that has received approval for their two drugs Qsymia (for weight loss) and Stendra (for erectile dysfunction). After a long and frustrating approval process for Qsymia, Vivus finally achieved approval in 2012. After the disasters of fen-phen the FDA was reluctant to approve a new weight loss drug and made Vivus jump through some pretty difficult hoops. Add in the meddling of shorts and the seemingly endless antics of some overly aggressive bearish analysts (think the likes of Thomas Wei from Jeffries having a Sell rating and a $3 target price at time of approval because he thought that it would never get approved) and all could understand the excitement and relief of the subsequent move up over $31 in mid 2012. The first effective and safe weight loss management pill to hit the market in over a decade, Qsymia launched in September 2012. Couple this with another best in class drug in Stendra (for erectile dysfunction) that had a shorter time to progression and a lower side effect profile and all could see that the future looked bright for VVUS. After all, demand must be pent up given the rising secular problem of obesity and the lack of treatment options for an extended period of time. At least so went the thinking at the time. This, however, is where it all went wrong.
Given the thought process above, management decided against partnering the drug and assumed that a massive launch would either create untold riches with script traction and/or generate partnership terms much more favorable than what could have been extracted by Arena or Orexigen (two competing weight loss drugs that were also up for approval). Despite mail order only distribution, limited capabilities to educate physicians with a hired contract sales force of 150 reps, little to no reimbursement capabilities with insurance companies, and limited marketing and Dr. education capabilities, Vivus plowed ahead under the "if you build it they will come" mentality. Despite the warnings of many investors, analysts, and industry experts Vivus chose the go it alone approach and it was an unmitigated disaster. The optimism expressed in a $31+ stock with analyst price targets of $50 and higher quickly gave way to the stark reality of a company spending large sums of money with no real chance to drive traction given the above listed problems. In short order, and after an expensive proxy battle, Vivus management was shown the door in the summer of 2013. The incoming activists led by First Manhattan and Alex Denner of Sarissa (formerly head of Icahn Healthcare and famous for buying IMCL after it had gone from 70+ to 7; it would then go back to 70+ making Icahn a clean $2 billion) had thought that they would come in and get a partner immediately and right the wrongs of the previous management team. They were wrong, at least for the time being.
What First Manhattan and Denner didn't realize, or perhaps miscalculated in their considerations, was the speed with which they would be able to extract suitable terms from the right partner. I have no doubts that they could have partnered Qsymia with either a less than stellar deal or a less than stellar distribution partner. However, much like their predecessors had miscalculated, Qsymia and the obesity space had become a show me story. The $13+ entry points for First Manhattan and Denner quickly became bad prices. Big pharma and/or the right partner would take a wait and see approach as the space had a lot of uphill climbing to do.
All is not lost
Since the ousting of the previous management many positive things have happened. First, mail order only distribution was replaced with the ability to obtain scripts via the traditional prescribing route. Second, reimbursements (while slower and painful) have steadily increased and are approaching 50%. Third, the patent runway (much to the chagrin of vocal bears who were dead wrong on this issue) was extended to 2029. Fourth, persistency has been good and scripts have been rising (clearly not at the pace that many had hoped but traction is traction). The idea of a tipping point where the success of those who have achieved meaningful weight loss with the drug become the best marketers of it and the hockey stick uptake (alluded to by Spencer Osborne many times) could be in play shortly. Fifth, regulatory catalysts may be close. There has been bipartisan support for the idea of changing Medicare part D to allow for covering obesity medicines (The Treat and Reduce Obesity Act). After the legislation was introduced in June of last year and the subsequent endorsement of treating obesity as a disease by the likes of the American Diabetes Association and American Heart Association it would seem that Medicare is but a stone's throw away from massively transforming the payor backdrop for obesity medicines and is currently being scored by the non-partisan CBOE. Sixth, Stendra and Spedra have been partnered with 3 separate deals (despite analysts of all stripes writing off such a possibility prior to these deals) which could bring in a total of $461 million in revenue with only $61 million being received so far despite what is becoming clear to be a stellar initial launch (meaning $400 million still and more likely to now come).
How did we get to a $6 stock!
Despite all of the missteps listed above, I still need to do a double take when I think of VVUS as a $6 stock. When you think of obesity as being the largest health problem facing the world and VVUS having the best in class drug (Dr.'s opinions not mine, although I agree, see Cowen upgrade in September where he polled over 100 primary care prescribers which confirmed what we all should have known from reading the data ourselves: that Qsymia was the most efficacious and safest of the 2 obesity drugs) how could this be anything but a massive blockbuster drug? The simple answer is that a lot of damage was done by fen-phen and the other obesity drugs that were pulled from the market. Repairing the perception and educating doctors that there is a safe and efficacious medicine available as a treatment weapon takes time. Getting insurance and the government to reimbursement takes time. Getting the public awareness raised about the product takes time. A hyperactive analyst community hell bent on one upsmanship vs. their peers has created a price spiral. Several big investors have given up and/or reduced their positions. The company has been slow to reduce their expenses in the face of weaker than anticipated script pace. However, all is not lost! If you read the content of the bearish analysts, or the newly minted bearish analysts, you will see things that have just gotten out of hand. I read the Merrill Lynch piece talking a $6 price target because the company was going to need to tap the capital markets shortly. While I can understand the frustration in the company being too slow to cut expenses (tone deaf management and board to blame here), the assumption that capital is needed right now is absurd. As of December 31st the company had $343 million dollars in cash. If you assume current burn rates into perpetuity and current scripts making 0 progress as well, the company has two years of cash. However, the major flaw in this analysis is that there has and will be script progress and potentially a hockey stick coming for reasons listed above. To the extent script progress is slow, the company can reduce burn in many ways and easily double the runway of time before cash is exhausted. The analyst community is caught in the race to see who can have the lowest price target now much like they were doing in reverse at the top. This is how market bottoms are put in. Everyone is bearish. Everyone should take a deep breath. This is a company with the best in class drug in the largest market with a huge runway of time and a large cash position. Not to mention Stendra is having immediate success and can generate an additional $400 million in 100% margin revenues to Vivus.
What is VVUS worth
Let's assume that by year end Vivus has net cash of around $100 million ($1/share), Add to that the $700-800 million in NOLs ($3/share on a tax affected basis), and the NPV of the Stendra/Spedra royalty stream which could be as much as $400m of 100% margin revenue over time (we'll call that $2/share discounting it back and assuming they don't get it all). That gives you a valuation of $6/share before even considering the value of Qysmia. Given that ARNA carries a $1.4B market cap for a 35% stake in an inferior drug, it isn't too hard to see a strategic buyer assigning as much as $14/share in value for Qysmia giving a total of $20/share for the company. A purchaser won't pay up 400%, so even if that makes sense, it probably sells for closer to low double digits.
I believe the chicken or the egg metaphor is upon us. How can you get a big pharma to partner without a script hockey stick and how can you get a script hockey stick without a big pharma? Either scripts need to accelerate to justify the status quo approach which carries a large spend/burn or the company would need to either lower spend or put itself up for sale. The alternative assumes idiots are running the ship. That First Manhattan and Denner will sit idly by and watch the company spend themselves into a liquidity problem in a couple years time seems as ridiculous as the analysts who suggest as much. They are neither stupid or non-motivated. If scripts don't ramp large enough in the near term to attract a big pharma partner, at attractive terms, or reimbursement isn't changed via the Treat and Reduce Obesity Act then the optimal shift in strategy will be to put the company up for sale or massively reduce burn and elongate the runway to allow for scripts traction over a much longer period. In either scenario the same condition prevails which is that we are in a short term window where the players who control this situation will have to make a move in the coming month or two. When this happens I expect the large purchases in November by Denner in the 8's to be very profitable.
Disclosure: I am long VVUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: and intend to trade it actively based on price