VIVUS Inc. Q4 2007 Earnings Call Transcript

Executives

Timothy Morris – Chief Financial Officer

Leland Wilson – President and CEO

Analysts

Shar Yanni – JP Morgan

Mike King – Rodman and Renshaw

Rosanna Russel – Robins Group

Ken Trbovich – RBC Capital Markets

VIVUS Inc. (VVUS) Q4 2007 Earnings Call March 6, 2008 4:30 PM ET

Operator

Good day ladies and gentlemen and welcome to the fourth quarter 2007 VIVUS earnings conference call. (Operator Instructions) I would now like to turn your presentation over to your host for today’s call, Mr. Timothy Morris, Chief Financial Officer. Please proceed sir.

Timothy Morris

Thank you. During the course of this conference call VIVUS may make projections or other forward-looking statements regarding future events or the future financial performance of the company. We wish to caution you that such statements are just predictions and actual events or results may differ materially. Investors should read the risk factors set forth in the VIVUS form 10K for the year ended December 31, 2006 and period reports filed with the Securities and Exchange Commission. These documents contain and identify important factors that could cause the actual results to differ materially from those contained in our projections or forward looking statements.

I would now like to turn the call over to Mr. Leland Wilson, President and CEO of VIVUS.

Leland Wilson

Good afternoon and thank you for joining us. In today’s call I will review the accomplishments of the year, Tim will review the financial results for the quarter and the year, I will return to discuss our plans for the 2008 and talk specifically about the OB202 Diabetes Trial and the expected date of release. I will also comment on the FDA’s revised guidelines for diabetes drug development. And lastly, I will take your questions.

In 2007, simply put, we had an outstanding year. The management team and employees performed above all expectations. When I reflect on the accomplishments during the past year, I am amazed at what the teams have been able to achieve. In some ways, 2007 was a seminal year for VIVUS. We have completed the transition from a pure play sexual function company into that of a more broadly based pharmaceutical development company. Specific highlights for the year include approval of Evamist NDA.

The approval came on the [inaudible] date and was one of only 12 such NDA’s approved in 2007. With that approval, we’re able to out license Evamist to KV Pharmaceuticals for $150 million in cash and $30 million in milestone. Proceeds from the sale of Evamist are providing funding for the Phase III Qnexa study. These funds are saving an equivalent of at least 40% in substantial dilution versus equity financing. We also initiated the Phase III obesity study for Qnexa.

This milestone encompassed the development and scale up of Innova QD formulation, creation and approval of the clinical protocols completion of the FDA process and coordination of the VIVUS clinical CMC and regulatory groups with Medpace our CRF, CRO and the FDA. These highlights together with an aggressive investor relations campaign resulted in increases in share price, daily trading volume and institutional ownership. Over the last 12 months our stock price has increased by approximately 60% to greater than $6. The market cap increased by more than $130 million. The average daily volume more than doubled to 545,000. Institutional ownership increased to over 65% over the last year an increase of 15%. And lastly we picked up an important new analyst coverage from JP Morgan. I will now turn you back to Tim for the financial results.

Timothy Morris

Thanks Lee. Total revenue for the fourth quarter 2007 was $29.8 million. This represents a 21 and a half million dollar increase over the revenues of 8.3 million the fourth quarter of 2006. The increase in revenue over the fourth quarter last year was primarily due to the recognition of approximately $21 million in deferred license revenue earned from the sale of Evamist to KV Pharmaceuticals. We spoke last time about the revenue recognition of the $150 million in cash received from KV. Basically we will continue to recognize approximately $7 million per month through May 2009. Since we have received the $150 million in cash, and we have no related contingencies, the recognition of license revenue and the corresponding reduction of deferred revenue relating to the Evamist sale will have no impact on our cash flow from operations in future period. MUSE revenues in the fourth quarter increased to $8.8 million that’s up from $8.1 million for rhe same quarter last year. Net income for the fourth quarter of 2007 was $10.4 million or 17 cents per share on a fully diluted basis. This compares with a net loss last year in the fourth quarter of approximately $800,000 or 2 cents per share. The reason for the net income in the fourth quarter 2007 as compared to the fourth quarter of 2006, is primarily due to the recognition of the KV deferred license revenue also partially offset by an increase in operating expenses in the fourth quarter as compared to the fourth quarter of 2006. The increase in operating expenses was attributable to spending related to our Qnexa development program and higher non cash share based compensation expenses. Total R&D expenses for the quarter were $11 million. This compares to $2 million the same quarter last year.

Now for the year end results. For 2007, total revenues were $54.7 million, this compares to $17.2 million for 2006. The increase in revenue is again mainly due to the recognition of the KV deferred license revenue. MUSE total revenues for 2007 increased to 19.4 million from 16.7 million in 2006. Although MUSE revenues have increased, this increase is not indicative of any particular trend. Research and development expenses in 2007 of $26 million increased by 13 million from approximately 13 million last year mainly due to the commencement of the Phase III study for Qnexa. Net loss for 2007 was 2.4 million or 4 cents per share.

This compares to a net loss last year of 21.6 million or 45 cents per share. The decrease in net loss again is primarily due to KV revenue recognition increase in MUSE revenues, interest income partially offset by increase in R&D expenses, income taxes and again non cash share based compensation expense as compared to the full year 2006. At year end, MUSE had cash, cash equivalents and available for sale securities of 179 and a half million dollars. This compares to the $58.9 million we had at December 31, 2006. The increase in cash, cash equivalents and available for sale securities was approximately $120 million consist of the $150 million received from KV, $2.4 million from exercise of stock options offset by the repayment of the loan toTanabe of 6.7 and cash used in operations and other cash uses of $25 million. I will now turn the call back to Lee to discuss plans for 2008 and the comment on the recent FDA guidelines for developing diabetes drugs.

Leland Wilson

Thanks Tim. 2008 is set up to be another exciting year for VIVUS. We expect significant data flow as we continue to make progress in all of our development projects. In the obesity area we announced on Tuesday the completion of enrollment in the Equate study OB-301. This study enrolled over 700 patients with BMI’s ranging from 30 to 45 at 35 sites in the United States. Enrollment was achieved in just over two and a half months, several months ahead of schedule.

Completion of the enrollment ahead of schedule should allow us to report data for this study before the end of this year. We continue to enroll patients in the pivotal Phase III studies specifically the Equate study OB-302 and the Conquer study OB-303. The Equate study is enrolling gastric bypass eligible morbidly obese patients that is patients with a BMI equal to or greater than 35. The Conquer study is enrolling obese patients with a BMI of 27 or greater with at least two serious co morbidities including hypertension, dipademia and type 2 diabetes. There is no shortage of patients for these studies and we expect enrollment to be completed ahead of our second end of second quarter schedule.

The Phase II study for Qnexa and type 2 diabetes also known as OB-202 was initiated in June of 2007. This six month study is nearing completion with reduction of HBA 1C as the primary end point. This study is intended to confirm the glycemic outcomes seen in private practice experience. The private practice data was reported at the 8088 meeting last year and summarized as a retrospective non placebo controlled review of 70 patients with type 2 diabetes. Results indicated a reduction in HBA 1C from baseline of .82 percent and an average weight loss of 15% over 39 weeks of treatment. Patients also had reductions in cardiovascular risk factors such as blood pressure, waist circumference and triglycerides. In the OB-202 study we are majoring a variety of secondary endpoints including weight loss, waist circumference, reductions in meds and various other cardiovascular measures.

The study has enrolled 210 patients in 10 clinical sites across the United States. As I have mentioned previously, we hope to present the OB202 data the first week in June at the American Diabetes Association scientific meeting in San Francisco. Our goal for this study is for Qnexa to compare favorably to existing oral diabetic medications. For example, Genuvia, the fastest growing new diabetes medication has an average HVA 1C reduction of approximately .7% with no changes in weight, LDL, triglycerides or blood pressure. As follow up to the OB202 study, we initiated an additional six month extension study DM230 in January 2008.

Patients from the 202 study will continue in their respective study arm in a blinded fashion for six more months. Data from the DM230 study should be available this year. For Luramist during 2007 we continue to make progress with the FDA on the development of Luramist for the treatment of hypoactive sexual desire disorder. Specifically working with the FDA we developed a Phase III efficacy and safety protocols. These protocols were submitted to the FDA in late 2007 and we expect to hear back from the FDA before the end of the first quarter of 2008. If we are successful in reaching agreement with the FDA as to the design of each of these studies, we will seek a corporate partner and hopefully initiate the Phase III program in 2008. For Avanafil in 2007 we completed the last of the required pre Phase III study. Tanabe is currently in the process of manufacturing Phase III clinical supplies and we will begin Phase III when the Phase III supplies are available and the necessary funding is secured.

Now I’ll spend a moment talking about the new FDA guidelines on diabetes. The FDA issued these new guidelines last week for the development of drugs for the prevention of diabetes. The importance of this guideline to VIVUS is significant. The prospective leaders as well as regulators regarding the characteristics of an ideal diabetes medication are changing. Reduction in HVA 1C remains the primary eppacacy standpoint. However greater consideration is now being given to the importance of weight loss and reductions in cardiovascular risk factors. Weight gain is the primary cause of type 2 diabetes. Diabetic therapies that promote weight gains such SFU’s, TCD’s and insulin are in many ways counterproductive. The weight gain caused by these drugs may be a significant reason why type 2 diabetics typically need to add additional diabetic meds over time to control their HVA 1C levels. As weight increase, the number of meds needs to increase as well. It is also counter productive to prescribe meds that have the potential to increase cardiovascular risk factors. Most diabetics end up dying from cardiovascular disease. The TCD and Avandia are good examples of drugs that lower HVA 1C but increase the risk of cardiovascular death. We believe an ideal diabetic drug would therefore be one that significantly reduces body weight as well as cardiovascular risk factors such as blood pressure, low density lipid proteins and triglycerides. Today’s FDA is well aware of the importance of weight loss and reduction in cardiovascular risk factors in treating diabetic patients.

This is evident in the recent GAAP guidance. For example it is no longer requirement that a diabetic medication show reduction in HVA 1C independent of weight loss. It is also clear that reductions in cardiovascular risk markers will also receive an elevated level of importance in the approval process. In today’s oral diabetic market, Genuvia has achieved dramatic success in spite of producing only moderate decreases in HVA 1C. We believe this success is largely because it is not associated with an increase in body weight or cardiovascular risk factors. We are hopeful that data from our OB202 trial will show that Qnexa produces significant reductions in HVA 1C as well as significant reductions in weight, blood pressure, low density lipid proteins and triglycerides.

With this profile, if approved, Qnexa could compete very favorably with Genuvia. We’re encouraged by the publication of the revised guidelines and reversal of the FDA’s historic stance in having to show glycemic control outside of weight loss. As far as our plan goes for our development of Qnexa for a separate diabetes indication, we will await the data from the OB202 study prior to making any final decisions. Its clear from the FDA guidance document, diabetes indication will be required a separate and distinct development plan for the obesity indication. With that I’d now like to turn the call over to Tim or open it up for questions. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) First question comes from the line of Shar Yanni with JP Morgan, please proceed.

Shar Yanni – JP Morgan

Thank you so much for taking my call. I had a couple questions. First of all I wanted to know if the FDA draft guidelines has changed your thoughts regarding potential design of a pivotal program for diabetes.

Leland Wilson

Thanks Shar. Fortunately we have been in discussions long before the release of this document with the FDA concerning the diabetes indication. So we were fully appraised and knowledgeable about what the FDA requirements are. So it really hasn’t changed our position significantly at all.

Shar Yanni – JP Morgan

We can assume the Phase III design will follow the guideline fairly closely.

Leland Wilson

Absolutely. Now there are some considerations here. First of all they are guidelines. Second one is that we have been in discussions with the FDA prior to the release of these documents and the third one is that we’re dealing with—we’re not dealing with new chemical indices. So all those go into the mix as to what the FDA is finally giving us guidance for our Phase III program. But it’s going to follow very closely to what the advisory document recommends.

Shar Yanni – JP Morgan

And then regarding Qnexa, have you seen any fall out from the FDA alerts? Has there been any negative reaction or concern expressed by the physicians?

Leland Wilson

No. Not to my knowledge. Tim any feedback?

Timothy Morris

We haven’t seen anything, so I mean, that was probably a one day news item.

Shar Yanni – JP Morgan

And has it altered the studies consent in any way?

Leland Wilson

No, and we’re aware of the FDA class review of those anti epileptic so all that was taken into consideration in the design Phase III for obesity.

Shar Yanni – JP Morgan

That’s good to know. And then finally given that [centromin] is a controlled substance is there a need at all for a dependence or abuse potential study with Qnexa?

Leland Wilson

We haven’t finally negotiated that with FDA. When we get that done we’ll let you. But I’ll give you my personal opinion that Centramine should not be scheduled and there’s a possibility that we can get it descheduled but I’m not going to promise that at this point. We’re looking at it.

Shar Yanni – JP Morgan

Great, thanks so much.

Operator

Your next question comes from the line of Mike King of Rodman and Renshaw. Please proceed.

Mike King – Rodman and Renshaw

Hi guys can you hear me?

Leland Wilson

Yes we can Mike, thanks.

Mike King – Rodman and Renshaw

Thanks for taking my question and congrats on the progress you made in 2007. I wanted to know Leland further to the FDA guidelines one of the key points I thought from reading the draft document was the requirements for safety considerations in terms of numbers of patients out at one year on therapy and I just wondered if you could remind us again what VIVUS expects will be the number of patients and whether you feel you’ll adequately meet those requirements.

Leland Wilson

Yes, again we haven’t reached final agreement with the agency but our approach will meet the guidance that’s given there. We’ll have 2,500 patients in the trials that we’re thinking about right now and we’ll have an adequate amount of patients that will meet the one year requirement at the time of submission of the NDA.

Mike King – Rodman and Renshaw

Can you put a specific or approximation number on that?

Leland Wilson

As far as the number—well the way its done, I don’t want to get in too much detail here, we’re proposing comparative studies against other diabetic meds like neform and sfu’s and insulin even, et cetera. Genuvia, et cetera. So we’ll do studies which are comparative studies with them as an add on therapy and those studies will all last a year. So we can easily get benefit from both marketing standpoint and from a regulatory standpoint of doing those studies so I don’t think its going to be a major challenge to reach the one year requirement for us in these studies just because what I think we’ll need to do just in order to number one satisfy regulatory requirements but two to have a strong marketing position when we launch the product.

Mike King – Rodman and Renshaw

I was also curios on one of the interesting developments in the draft guidelines is also the I thought suggestion the openness of the FDA to end points other than A1C as a metric for glycemic control and I wonder if you guys have contemplated anything such as post prandial glucose or area under the curve or any other novel sort of glycemic control end point for the diabetes indication.

Leland Wilson

Well we’re going to do them all belt and suspenders so that we can determine at the time of the NDA submission or time of approval which one is the correct one for them, so we’re not going to be short on any the possible end points that we can measure so all those are being considered. And I would emphasize again that things are—the view at the FDA is changing. Just kind of as a side, looking at HVA 1C there are those who believe it’s not really the primary goal of treating diabetic patients. It certainly is one of the goals, it has historic foundation in doing this, but clearly treating HVA 1C has really not significantly extended either quality or quantity of life in diabetic patients. And in fact, there are those who go even further to say that controlling blood pressure is significantly more valuable than controlling HVA 1C.

Even further it’s thought that insulin by some thought leaders is the culprit here in causing decreased metabolic function as diabetics age et cetera so measures of insulin volumes are very important in the ongoing NDA et cetera. So we’re taking a very broad approach to looking at this partly as a regulatory approach to meet the requirements but also to make sure that we’re involved with the research as to how diabetics should be treated in the past. You’ve heard me say that the cause of type 2 diabetes in the majority of patients is weight gain. And what we currently do today is treat the symptoms such as blood pressure, lipids and HVA 1C.

What we think the future will be is to treat the cause and that is the cause being the weight gain and if we’re successful in treating the cause as has been shown in bypass patients and lap band patients et cetera that they can come close to near curing type 2 diabetes. And also the final point that I’ll make is that diabetics die from cardiovascular disease. They don’t die from high HVA 1C. So that’s we’re really in a way treating these patients as cardiovascular patients and clearly loosing weight, exercise, proper diet and controlling their blood pressure, lipids, triglycerides et cetera are where I think the marketplace is going in the near future.

Mike King – Rodman and Renshaw

OK terrific. And then just not to take too long but I wanted to ask a financial question of Tim do we have—maybe I missed it but are you providing any guidance in ’08 either in year end cash estimating net loss, can we get some financial metrics from you for ’08?

Timothy Morris

Yeah Mike I think the guidance that we want to put out there is we expect to spend about $50 million on Qnexa obesity development this year and in addition to that we kind of always have a continual G&A burn of approximately $10 to $12 million.

Mike King – Rodman and Renshaw

Okay great thank you.

Operator

Your next question comes from the line of Rosanna Russel with Robins Group. Please proceed.

Rosanna Russel – Robins Group

Good afternoon everyone thanks for taking my call. I have a pretty dull question for you Tim. Can you walk us through this thing that happened here with the AMT, the alternative minimum tax?

Timothy Morris

In terms of the tax provision?

Rosanna Russel – Robins Group

Sure just is this something that’s kind of a one off this year or is this the way it’s going to look every year from here on out?

Timothy Morris

No not at all. Basically we took a tax provision expense in the third quarter and what’s happened in the fourth quarter, we basically have trued that up and see we have the full year results so this is kind of a one off based on the utilization of all the NOL carry forwards as a result of the receipt of the proceeds from KV Pharmaceuticals.

Rosanna Russel – Robins Group

Right okay so this is just the last tying off of that loose end from that.

Timothy Morris

That’s correct.

Rosanna Russel – Robins Group

All right and you’ve both been so comprehensive in describing the quarter that I guess I’ve nothing more to say than congratulations.

Timothy Morris

Right, thanks Rosanna.

Operator

Your next question comes from the line of Ken Trbovich with RBC Capital Markets, please proceed.