If you are looking for a textbook example of how to completely mismanage expectations, look no further than the obesity drug sector and VIVUS, Inc. (NASDAQ:VVUS). After suffering a rejection by the FDA, VVUS clawed its way back and got approval for its prescription obesity drug (now marketed as Qysmia) and in conjunction saw its share price triple in the first 7 months of 2012.
A couple years and countless bagholders later, VVUS finds its stock price at its lowest levels since 2009 and the future isn't any brighter based on its current trajectory. It is for that reason (among others) that the recent developments about a potential buyout should be taken with a huge grain of salt. In fact, this can be viewed as another red flag for the company and further confirmation that VVUS remains a high conviction short.
The purpose of this article is to highlight:
- The questionable party involved in the recent SC 13D filing
- Why the extremely "coincidental" timing of a recent SC 13D is nothing more than a borderline fraudulent set of smoke and mirrors
- How similar activity in other stocks has proven to typically end poorly for the company, and anyone long the stock
Aspen Investment Fund…Oh, you haven't heard of them either???
On May 28th, 2014, a Schedule 13D form was filed to the United States SEC by Aspen Investment Fund. Aspen disclosed a 9.65% stake in VVUS stock, and also mentioned that they could be making an offer to acquire VVUS by mid-June.
On the surface, this seems like your run of the mill disclosure that many funds routinely make. However this one seemed a little fishy, and a deeper dive into the finer details suggests that there are likely other motives/parties involved in the filing.
First off, I need to give credit where credit is due for digging the details about the person(s) involved with Aspen. After word of the filing became more public, Adam Feurstein was able to provide some details in his blog post Wednesday morning.
- Aspen Investment Fund filed for incorporation as a Delaware based LLC with an address of 16192 Coastal Highway, Lewes, Delaware.
- A deeper look into the address reveals that the address is home to Harvard Business Services, a company that claims to be "proud to provide the premier Delaware LLC, incorporation, and registered agent services."
- Aspen has not invested in any other company or had any sort of regulatory interaction.
- Aspen has one managing member, Zoe Potsi, who is a lawyer living in Cyprus and has ZERO experience in biotech/healthcare based on a look at her resume:
- Aspen did not buy VVUS shares outright; shares were/are being acquired via calls options and forward contracts purchased from 5/16-5/23 which approximates to a 9.65% stake in VVUS.
All of those points alone bring about so many additional questions…
- Why did Posti all of the sudden feel the need to venture into investment fund management?
- What was the big rush in buying VVUS options on the same day Aspen was incorporated?
- Why would someone with no apparent interest in or knowledge of biotech investing want to acquire that large of a position in shares?
- Even more importantly, why would they want to buy a biotech company…especially if they are a full time lawyer in a different country?
- Why not buy the shares outright?
- Why put a value in the SC 13D for your potential "offer"?
I think you get the point I am trying to make here…the degree of "fishiness" keeps on rising and is heading towards Amarin (NASDAQ:AMRN) level fishiness. It seems very apparent that there are some other players involved here, and the likelihood of Zoe Potsi's brand new fund making a $640M offer to buy VVUS are very, very slim. In fact, I would not be surprised if this spurs some sort of regulatory/legal investigation down the road.
The Timing was Just One Big Fat Coincidence…right??
5/5/2014 - VIVUS Reports First Quarter 2014 Financial Results
- A DECREASE in quarter over quarter growth seen in Qysmia prescriptions.
- An abysmal $9.1 M in net product revenue from Qysmia.
- Nothing to suggest any notable increase in expected growth/demand anytime soon.
5/9/2014 - VIVUS files an 8K form to provide notice that Actavis has filed an Abbreviated New Drug Application (ANDA) for generic versions of all strengths of Qsymia.
5/9/2014- VIVUS files an 8K form containing the earnings conference call transcript, which among other things sheds light on:
- Increase in upcoming expenses (i.e. $180-$240M for CVOT trial).
- Management failing to disclose STENDRA royalty amount/economic value (likely because it is so bad).
- A reminder of their significant debt levels and current interest and debt principal repayment.
5/15/2014- VVUS stock price drops below $5 after being over $15 less than 1 year before.
5/21/2014- VVUS stock price reaches 5 year lows hitting $4.56.
Needless to say, things are not going well for VVUS and there isn't much to get too excited about moving forward.
Meanwhile…7,000 miles away a litigation attorney working in Cyprus decides to incorporate an LLC in Delaware, United States and create an Investment Fund.
5/16/2014 - Zoe Potsi has created and serves as Managing Member of Aspen Investment Fund.
5/16-5/23/2014 - Aspen acquires VVUS "subject shares":
- 5/16/2014 Aspen buys 296,400 via OTC Equity Forward for $4.88.
- 5/19/2014 Aspen buys 1,070,845 via OTC Equity Forward for $4.71.
- 5/20/2014 Aspen buys 1,453,000 via OTC Equity Forward for $4.67.
- 5/21/2014 Aspen buys 1,543,000 via OTC Equity Forward for $4.62.
- 5/22/2014 Aspen buys 1,754,000 via OTC Equity Forward for $4.63.
- 5/23/2014 Aspen buys 3,850,000 via OTC Call Option for $4.62.
5/28/2014 - SC 13D is filed to notify SEC and investors of share purchases and intent to make an offer to acquire
In addition to questioning the legitimacy of Aspen, as well as the timing of the filing, there are several important sentences to make note of that could support the notion that the buyout will never happen.
Red Flags Galore cont…
The Reporting Persons believe that the Issuer's Common Stock is undervalued and is an attractive investment.
The Reporting Persons intend to review their investments in the Issuer on a continuing basis. Depending on various factors and subject to the obligations described herein, including, without limitation, the Issuer's financial position and strategic direction, actions taken by the board, price levels of shares of Common Stock, other investment opportunities available to the Reporting Persons, concentration of positions in the portfolios managed by the Reporting Persons, market conditions and general economic and industry conditions, the Reporting Persons may take such actions with respect to their investments in the Issuer as they deem appropriate, including, without limitation, purchasing additional shares of Common Stock or other financial instruments related to the Issuer or selling some or all of their beneficial or economic holdings, engaging in hedging or similar transactions with respect to the securities relating to the Issuer and/or otherwise changing their intention with respect to any and all matters referred to in Item 4 of Schedule 13D.
Aspen Investment Fund is currently contemplating a conditional non-binding offer to acquire the Issuer at a total consideration of $640 million, which would be financed using Aspen Investment Fund working capital, Issuers cash & cash equivalents and debt from top tier investment banks. The conditional non-binding offer should be submitted to the board by June 13, 2014. Although Aspen Investment Fund currently expects to make an offer, it is under no obligation and provides no assurances it will do so, if there are any material changes to the Issuers operations, financial situation or enterprise value.
Although it might seem counter-intuitive at first, the first red flag in this section is "contemplating a conditional non-bidding offer to acquire the issuer at a total consideration of $640 million." It is quotes like this one that lead me to start thinking the one of the primary motives behind this filing was solely to get a spike in share price. For those who don't speak BS, this is basically the equivalent of "we don't really intend to acquire the company, but the best way to get a big spike for people to sell into is to list an offer value that is still way too high."
It is evident that the verbiage and language used in the filing was well-thought to ensure it got people's attention and caused a buzz, while at the same time there is enough ambiguity and "maybes" to remove a lot of their "liability."
I could write page after page about the details associated with Aspen's VIVUS ownership. However, I think the points discussed so far set a good context for the other areas I am about to talk through.
Paying Any Premium to Acquire VVUS Right Now is Financially Irresponsible
There is a reason that VVUS was trading at 5 years lows a couple weeks ago…because the growth in Qsymia sales are significantly below already tempered expectations. Additionally, the abysmal # of prescriptions is somewhat inflated due to the high number of discounted/free offers.
source: VVUS 10-Q
The fact that quarter over quarter Rx growth for Qsymia is not in the high double digits at this point in the launch should be a major concern for bulls. If they are having difficulty now, just wait until more obesity treatments make it to market.
As of now, VVUS has to compete with ARNA in the obesity drug sector. However, by the end of this year a new drug will likely be on the market (OREX's Contrave) and there seems to be an increased interest in the use of medical devices such as bio electrics. As a result of a series of workshops last May, the FDA has a new and much different approach for approving medical devices in comparison to drugs, especially when it concerns obesity. None of this bodes well for VVUS's future. I am not going to waste too much time discussing Stendra, their erectile dysfunction drug, because frankly VVUS management seems to lack enthusiasm about the prospects in that area (as shown below in the excerpt from the Q4 conference call):
Connecting the dots…
I encourage the conspiracy theorists out there to put their detective hats on and try to possibly track down some more information about the "Aspen Investment Fund" and its sole member.
Who knows, maybe at the end of the day it is just a big coincidence that this buyout offer claim popped up out of nowhere at the same time the stock was at 5 year lows and facing a tough road ahead.
I do know that more times than not, these buyout rumors and/or unofficial offers turn out to be false alarms and present prime short opportunities. In fact, a 5 year study was conducted to track this exact thing.
Electronic news services, brokerages and newspapers reported at least 1,875 rumors about potential buyouts of 717 companies during a 5 year period. A total of 104, or 14.5 percent, were acquired, the data show. While stocks that were the subject of takeover speculation initially jumped 2.9 percent, betting on declines yielded average profits of 1.2 percent in the next month, an annualized gain of 14 percent. This statistic, coupled with the fact that VVUS is far from a prime takeover candidate given its dismal future, makes for a compelling short case in my opinion.
Disclosure: I am short VVUS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.