Seeking Alpha
Small-cap, long/short equity, special situations
Profile| Send Message|
( followers)  

There is a benefit to longevity in the investment world - perspective. When an associate analyst suggested Vivus (NASDAQ:VVUS) the other day, I was surprised the company was still around. There was a day when Vivus was routinely vilified by financial pundits. Today I learned that at least four of the dozen or so analysts following Vivus have recently increased estimates for the company, apparently in anticipation of sales of Vivus' erectile dysfunction drug, STENDRA, and a weight management treatment, Qsymia. Both were recently approved by the FDA for sales in the U.S.

Clearly things are looking up at Vivus and the stock price near $22.00 reflects it. Shares of Vivus have tripled since the company went public. That statement on its own sounds impressive, until adding the clarification that it took nearly two decades to get there. Under any circumstances that is a long time to wait for an implied a rate of return of just 6%. Nasdaq returned 8.3% in the same time period.

Vivus went public in the 1990s and has experienced some boom and bust times, hitting a high of $37.50 in September 1997 and cratering at $2.03 in November 2000. The stock chart is a roller coaster of drug development promises and clinical trial setbacks. The most fortunate shareholder sold short at that 1997 peak and covered in that millennial year. Few of us are that smart or lucky. Most of us are just plodders.

So for the plodding investor, who bought at the beginning and has held shares all these years, where is the value in Vivus? More importantly, what can the plodder tell a newcomer about a smart VVUS trade today?

By the time Vivus last reported financial results at the end of June 2012, the company had racked up a $389.1 million deficit arising from two decades of consistent losses. Vivus operations burned cash in all but four fiscal years, bringing total cash usage to over $500 million since inception in 1991. This represents a significant portion all of the $696.3 million in total capital paid in by common shareholders.

Vivus flirted briefly with commercial success in the late 1990s and delivered profits in 1997, 1999 and 2000, on sales of its first drug product. Vivus' developed an erectile dysfunction treatment based on the compound alprostadil and sold it under the brand name MUSE. Vivus managed to get MUSE into the market place at a time when there were few alternatives for men with that sort of difficulty. Then Pfizer crashed the Vivus party with the 1998 approval of sildenafil, which Pfizer began selling in an easy, oral dosage under the brand name Viagra. Vivus sold MUSE to its European distributor in late 2010 for $22 million.

With competition from the little blue pill and other erectile dysfunction antidotes that followed in Pfizer's path, MUSE never returned sufficient profits to cover the $75 million Vivus spent on research and development to get it to market. Certainly MUSE never delivered enough profit to support Vivus' subsequent development work. Vivus has reported just north of $450 million in total R&D expenses since the company's scientists first started work on the erectile dysfunction in the early 1990s. Over half of those expenses were incurred in the last five years as Vivus stepped up efforts to get Qsymia approved by the FDA.

With MUSE a thing of the past, investors must look to STENDRA and Qsymia sales to bring home the bacon for Vivus. Both are now proudly displayed at the Vivus corporate web site in the Products Section and Vivus is casting about for a partner to market STENDRA. The consensus estimates for Vivus suggest most of the analysts following the company expect the two products to deliver profits to the bottom line beginning in the year 2013 - $0.38 EPS on $$26.8 million in total sales. That said there is hardly complete agreement. At least one analyst is still expecting a fairly deep loss of $0.63 per share. The low estimate for sales is $68.6 million, which seems out of place against the high sales estimate of $335.9 million.

All that enthusiasm for future earnings on new products is fascinating. However, I cannot help wondering if Vivus is set up for another fall. STENDRA and Qsymia are entering very crowded markets. Besides Alli from GlaxoSmithKline (NYSE:GSK) and Xenical from Roche, there is are also lower-cost generic weight loss and obesity drugs. In the erectile dysfunction market, Pfizer (NYSE:PFE) remains a strong competitor with Viagra despite the entrance of Eli Lilly's (NYSE:LLY) Cialis and GlaxoSmith Kline's Levitra. Generic drug producers have already begun preparing for the expiration of patents and Pfizer has attempted legal action against Teva Pharmaceuticals (NYSE:TEVA). It is a rough play ground and Vivus does not have a history of strong market penetration.

A key to answering the marketing question can be found in one sentence in the company's 2011 annual report. "Our goal is to build a successful biopharmaceutical company through the development and commercialization of innovative proprietary drugs." After being in business for over twenty years and operating as a public company for eighteen years, Vivus leadership still characterizes the company as a developmental stage with a future on the horizon. I believe this says something about the corporate mindset and perhaps corporate knowhow - the kind of knowhow that leads to successful market penetration.

There is clearly worth in Vivus' new products. What is not so clear is whether the company can realize it. For me that means any investors taking a long position at the current price level should be very careful.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

Source: Perspective On Value At Vivus