My Very Conservative Revenue Model For Vivus

Jul.30.12 | About: Vivus, Inc. (VVUS)

Edited by Kate Boehme

As I expected, FDA finally gave the green light to Vivus's (VVUS) weight-loss drug called Qsymia (formerly known as Qnexa). Approval of Qsymia also puts Vivus in a great position; Vivus is quickly developing an impressive portfolio of hugely effective drugs.

There is a great competition in this field. FDA approved Belviq, which was developed by Arena Pharmaceuticals (ARNA), three weeks before Qsymia. Belviq became the first weight loss drug to be approved in more than a decade. After the approvals, the focus has turned to putting these drugs in the market. Whoever wins the race to put the drug in the market first is likely win a bigger chunk of the market. By taking a closer look at the data, one can see that Qsymia has a lot better efficacy profile. Better efficacy profile can play a vital role in introducing and establishing Qsymia in the market.

Vivus is planning to introduce Qsymia into the marketplace in the last quarter of 2012. This drug now places Vivus in direct competition with Arena Pharmaceuticals , but Vivus retains a clear advantage as the first mover into this largely untapped market. Arena does not plan to market their own Belviq before 2013. Unlike Arena, Vivus has the complete marketing rights for Qsymia. A large-scale roll out is planned, with the company planning to use a sales force of 150 representatives at the start. This plan entails an initial focus on just obesity specialists, with a second phase that targets general physicians. Throughout this process, Vivus intends to gradually increase the scale of its sales force.

Obesity Market:

More than one third of US population is obese. About 36 percent of Americans are obese at present, and this number is expected to reach up to 42% by 2030. Healthcare costs for obesity now range between $147 billion and $190 billion. Currently, the US obesity market constitutes more than 80% of the market worldwide, although numbers are also increasing rapidly in China and Europe. The obesity market, currently measured at around $1.4 billion, could reach $3.1 billion by 2016. In fact, estimates published by the World Health Organization predict that by 2015, about 2.3 billion adults will be overweight and 700 million will be obese. Obesity in youth has more than tripled in the last 30 years. While only seven percent of youths were obese in 1980, the rate has now nearly tripled to 20 percent. Of these, 70 percent are at serious risk of cardiovascular disease. In addition, the United Kingdom is now also facing obesity problems. China, Russia and Brazil are also showing increases that raise concerns for the future health of their populations. China alone is predicted have 665 to 670 million obese individuals by 2015. This growing market is an opportunity for pharmaceutical companies to make healthy profits.

Vivus Revenue Expectations:

Many Wall Street analysts have predicted revenues of $1.6 billion for Vivus by 2016. However, it is important to mention that while high expectations for Vivus are certainly realistic, such large predicted revenues might be overly optimistic. With this in mind, below is an extremely straightforward and conservative revenue model I created for Qsymia. In this model, any assumptions have been kept clear and easy to understand. There are three scenarios presented: Best-case scenario, where the firm gets a lion's share of the market, moderate-case scenario represents a moderate market share, and worst-case gives the lowest market share to Vivus. In this model the dropout rate is kept quite high and constant at 50 percent. As there has been no news of pricing, I have focused on the numbers for the overall obesity market.

Vivus Revenue Model

   

2012

2013

2014

2015

2016

Best Case

           

Probability

40%

         

Obesity Market

$ in billions

1.4

1.7

2.1

2.6

3.1

Market Share For Vivus

in percents

0.3

0.4

0.55

0.6

0.75

Market Share Revenues

 

0.42

0.68

1.155

1.56

2.325

Drop Out Rate

 

0.5

0.5

0.5

0.5

0.5

Total Revenue Best Case

$ in billions

0.21

0.34

0.5775

0.78

1.1625

             

Moderate Case

           

Probability

30%

         

Obesity Market

$ in billions

1.4

1.7

2.1

2.6

3.1

Market Share For Vivus

in percents

0.15

0.25

0.3

0.45

0.55

Market Share Revenues

 

0.21

0.425

0.63

1.17

1.705

Drop Out Rate

 

0.5

0.5

0.5

0.5

0.5

Total Revenue Moderate Case

$ in billions

0.105

0.2125

0.315

0.585

0.8525

             

Worst Case

           

Probability

30%

         

Obesity Market

$ in billions

1.4

1.7

2.1

2.6

3.1

Market Share For Vivus

in percents

0.05

0.09

0.14

0.2

0.25

Market Share Revenues

 

0.07

0.153

0.294

0.52

0.775

Drop Out Rate

 

0.5

0.5

0.5

0.5

0.5

Total Revenue Worst Case

$ in billions

0.035

0.0765

0.147

0.26

0.3875

             

Total Expected Revenue

$ in billions

0.126

0.2227

0.3696

0.5655

0.837

Click to enlarge

It is clear, even with these conservative expectations; Vivus can produce revenues close to a billion dollars. Arena's weight-loss drug, Belviq, will enter the market in 2013, leaving Arena with only a fraction of the revenues while still bearing the costs of production. Orexigen (OREX) will not be able to market their drug, Contrave, before 2014, as it is currently still in clinical trials. Vivus will have a clear run in the market for at least two quarters. With such an advantage, I believe it can pull far ahead of the competition in these two quarters.

Summary:

The obesity market is immensely attractive to investors at the moment. Vivus is just one player, but one that could become the dominant force in this market. This company has a diverse portfolio of effective drugs, implying that their revenues are not entirely dependent on Qsymia, which makes it an attractive investment. However, Vivus has the drug that is currently set to be the most successful in the obesity market. Furthermore, the Vivus drug pipeline makes it an attractive target for an acquisition. The market is currently focused on the obesity treatment drugs, but Stendra, the Viagra competitor, is also a highly valuable drug in Vivus's portfolio. Whether Vivus is ultimately acquired by Big Pharma, or keeps working independently, I expect Vivus shareholders to reap nifty profits in the long-term.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.