For risk adverse investors, buying any biotech company stock awaiting approval of its first drug that has completed phase 3 trials is too risky. But for the next month, there is a window to still consider buying shares in Vivus (VVUS). Within a month, we will likely know the fate of Qnexa, the company's anti-obesity cocktail drug. After VIVUS submitted a Risk Evaluation and Mitigation Strategy, the FDA delayed the decision until July 17, 2012. The FDA advisory briefing is available. You can delve in yourself and make a prediction as to whether the FDA should approve this drug, and more importantly for investing, will the FDA approve this drug. In the briefing, it is clear that the drug is effective and there are improvements in many clinical markers (blood pressure, lipid profile, blood sugar levels). Issues with safety, although not minor, are addressed. The advisory panel recommended approval of the drug. Indeed, the market may have already priced approval of this drug substantially into the current share price of Vivus.
Qnexa is a cocktail of phentermine and topiramate, both drugs are currently approved. Phentermine for weight loss, and topiramate is an anti-epileptic drug and used for migraines. A "beneficial" adverse effect of topiramate is weight loss. What is important to note is that Qnexa is formulated with lower doses of both these drugs. It has good efficacy and the decreased dose should decrease adverse effects, compared to the currently approved versions. Another key issue is topiramate use is associated with birth defects. Vivus has submitted and revised a Risk Evaluation and Mitigation Strategy that addresses this issue. The available information makes it highly probable that Qnexa will be approved, most likely with restrictions on use. The market has anticipated this to some extent, but what are the prospects for sales of Qnexa?
The market potential of Qnexa should not be impacted by prescription of lower priced phentermine and topiramate. First, Qnexa has a lower dose of both phentermine and topiramate, which makes it unlikely that physicians will prescribe individual drugs rather than Qnexa because of safety and patient adherence. Women of child-bearing potential is also a large pool of potential patients. The FDA has asked for changes in the Risk Evaluation and Mitigation Strategy which would impact this possibility. From the VI-0521 (QNEXA®) Advisory Committee Briefing Document, "FDA asked that VIVUS include less restrictive elements in its REMS program that focus on patient and physician educational measures because it was concerned that more restrictive measures may result in greater off-label use of currently marketed topiramate and phentermine products to treat obesity in WOCBP without the benefit of an appropriate risk mitigation program." This issue will affect sales. Another issue to consider is sales of other similar drugs. Sales of sibutramine (Meridia), before it was taken off the market, were over $300 million. Sales in this range probably do not justify the current market price of Vivus. Consider the market capitalization of Vivus is about twice that of Arena Pharmaceuticals (ARNA). Qnexa is more effective than Lorcaserin, Lorcaserin may have a better safety profile than Qnexa. On the other hand, there are millions of prescriptions for phentermine per year. If there is a substantial switch to Qnexa from phentermine, and there are new sales, then Vivus may well have substantial room for growth, and an increase in share price.
There are many examples of spectacular gains made by the stock of a biotechnology company after approval of its first drug. But the flip can happen. The stock price of Human Genome Sciences, Inc. (HGSI) is a nice example of a stock that soared initially after approval of Benlysta, the first new drug for Lupus in more than 50 years, only to see the share price gradually decline as drug sales disappointed. That's not to say that there may be substantial growth of sales of Benlysta in the future and indeed there is a hostile bid from GlaxoSmithKline (GSK) for Human Genome Sciences. GlaxoSmithKline apparently shares this optimism about the eventual prospects for Benlysta sales. Nevertheless, it is a good example of the importance of trying to predict potential revenues of a new drug in an effort to evaluate the price of the stock at this key time before drug approval (or denial).
There is a window between now and July 17, 2012 to consider buying shares of Vivus. Orexigen (OREX) and Arena Pharmaceuticals also are developing obesity drugs. A decision on lorcaserin being developed by Arena is expected in June of 2012.
Disclosure: I am long ARNA.
Additional disclosure: May initiate a long position in VVUS in the next month.