Vivus (VVUS), a biotechnology company that focuses on obesity, diabetes and male sexual health is up roughly 150% year to date. Vivus has never had any revenues and operating losses since its existence, yet still sports a $2.1 billion market cap. This market cap solely rest on the hope of approval for its obesity medication Qnexa. As many investors know, weight loss medications have historically had a very low likelihood of gaining FDA approval. The overall market for obesity treating medications is tremendous and estimates range anywhere from $5 to $10 billion dollars by 2017.
So far, Qnexa's road toward approval has been a rocky one. As with all prior (or lack thereof) approvals for anti-obesity medications, Vivus faces the same challenges as many other companies focusing on this space. Qnexa, is a combination of phentermine, (the "beneficial" part of now extinct fen-phen) and topiramate an ingredient which controls the brain receptors associated with hunger. Both ingredients are currently available in generic formulations and already often used by many bariatric physicians. The one pill form Qnexa currently is being evaluated by the FDA for mainly its safety and overall effectiveness.
Here has been the progress for Qnexa so far: In October 2010, a panel evaluating the medication, reversed a prior course and recommended the denial of Qnexa. The primary reason for denial: Qnexa lacked the "safety data" on longer term basis of more than one year and the panel found Qnexa possibly causes birth defects in pregnant women. The expert panel mentioned the major concern was the topiramate part of the medication which is often linked to negative side effects. Topiramate being the ingredient found in fen-phen and falsely responsible for cardiac episodes in patients taking fen-phen (patients that already had preexisting heart conditions).
Fast forward to December 2011, Vivus announced results from the follow up SEQUEL study, showing Qnexa had longer-term efficacy and safety in 676 overweight subjects with cardio-metabolic diseases. Patients showed significant and sustained weight loss compared to those on placebo, now over a more definitive two years' time period. Yet overlooked within the good news, Vivus had not yet provided evidence that Qnexa avoids elevated levels of cardiovascular risks. SEQUEL trial results, showed Qnexa was well tolerated and reduced weight in patients, with no new adverse events. The most common side effects observed in SEQUEL, were upper respiratory infection, constipation, tingling, sinus infection, dry mouth and runny nose, some of the same symptoms associated with fen-phen, but common nonetheless.
While Vivus had yet to address FDA demands on longer term effects on cardiac health in association with the medication. Another expert panel subsequently came out and announced support for Qnexa's approval in January 2012. Consistent with prior procedures, the FDA requested additional information last month and pushed back approval hearing by three months. Vivus resubmitted a Risk Evaluation and Mitigation Strategy (REMS), which is a major amendment to the initial NDA submission, and specifically address side effect risks and leads to labeling decisions if approved. REMS are routinely issued to cover all possible risk factors associated with the medication and according to Vivus call, FDA was extensive in requesting the information pertaining to trials. By extending PDUFA date for additional safety data review the new date is July 17, 2012 (three months considered standard extension period with REMS supplement). The next milestone for Qnexa will be this quarter when European regulators address their issues with the approval process.
And yes, once again, investors and speculators are licking their chops over the prospect of approval for a weight loss medication. Once again I believe these investors will be disappointed by the FDA's decision. Estimates for Qnexa alone are roughly $5 billion in annual sales, just into the developed markets alone. However, investors must realize the FDA has not approved a weight loss drug in over 10 years, when Roche's (RHHBY.PK) Xenical won approval. Xenical is currently the only approved weight loss drug and the approval was made under the condition that it not to be proactively marketed as a weight loss medication. Since 1999, the FDA's pattern of behavior has been to continually reject or pull weight loss medications off the market completely.
New and innovative indications from companies like Arena Pharmaceuticals's (ARNA) drug Lorqess was rejected in 2010.Orexigen's (OREX) drug, Contrave, will most likely be rejected as well this or next year. The FDA has gone further on its war on weight loss drugs by pulling legitimate medications like Abbott's (ABT) drug Meridia and Sanofi's (SNY) drug Acomplia, claiming psychiatric side effects. Obesity remains the second leading cause of preventable death and directly contributes to numerous life-threatening conditions including diabetes, cardiovascular disease, hypertension and stroke. These approved medications are being pulled off the market despite their beneficial properties raises the question why is the FDA so resistant on approving these weight loss medications?
The answer is that Fen-phen's legacy still looms too large over the FDA. The agency has taken the role of being overcautious and finds the need to take preemptive measures to protect the health of people who may benefit the most from weight loss treatments. When the U.S. government removed fen-phen in 1997, it was the primary cause of American Home Products/Wyeth to sell itself to a more financially stable Pfizer (PFE).
The courts ruled significant monetary awards against AHP and the collateral monetary damage was enormous to the company. More importantly, the FDA forever increased its influence in the commercial pharmaceutical marketplace. Now, not only did the FDA have sole power to make approvals, with fen-phen decision, it exercised the power to sway the direction of the supply/demand dynamic of the marketplace. It became advantageous for regulators and legal professionals to directly engage pharmaceutical companies in a battle of safety post approval, just as the FTC case against the tobacco companies around the same time period. The FDA realized by targeting weight loss medications it was able to reach its tentacles to areas associated with obesity healthcare risk.
If Qnexa somehow does get approval, investors must ask, what restrictions will it come with and what kind of label warnings will be attached to it. It is a certainty FDA will put stringent stipulations on the medication if it is approved. It may only approve the medication partial to those that do not exhibit existing risk factors, which would extremely narrow the potential market of overweight patients. FDA may only allow dosage levels that would supplement existing statins while not approving dosages that would have real beneficial weight loss results. Various scenarios exists but it is difficult to see FDA granting Qnexa a flat out approval across the board for all patients. By doing so, FDA increases its liability and rises the previous concern of the past associated with the ingredients in Qnexa.
Another factor to consider with buying Vivus shares at these levels are the economic realities of such a role out. The company has already begun its own sales management hiring and contracted a third party sales rep company. Vivus announced it already hired top industry talent to join its in-house development managerial team to oversee and train sales representatives. Initially Vivus will outsource roughly 150 sales reps, with specific geographical regions, fitting an overweight/ high cholesterol demographic profile.
For a small company with no revenues and one recent drug approval, this is a very ambitious plan for Vivus to take on upon itself. It will be interesting to see how investors react to a enormous jump in operating expenses associated with the Qnexa roll out and how investors will react to the possibility of additional capital raising measures that will dilute share values. Vivus anticipates directly funding this roll out through its balance sheet and not seeking any additional partners for the business execution strategy.
Realistically, a potential multi-billion drug would need a major partner for distribution and scalability efficiencies. The eventuality of this reality would mean Vivus would have to arrange a licensing agreement that would result in paying royalty milestones or splitting profits. Partners will include one on the domestic scale and another partner for international distribution, unless the partner has scalability on both fronts, names like Merck (MRK) or Roche are potential partners. However, major U.S. pharmaceutical companies have long memories and will be hesitant to get themselves back into the weight loss medication space.
The potential liability exposure is too great, therefore it would be safer to let an international pharmaceutical company take the risk. Europe in general is more lenient when it comes to drug approvals and Europe usually dictates what the FDA decides as well. EMA's information request this quarter will provide investors additional insight into July's decision and requirements. Regardless of the proven benefits of weight loss drugs, it is much easier for the FDA to err on the side of caution on Qnexa's approval.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
