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Uncovering the Valuation in VIVUS

|Includes: ARNA, DNDN, GSK, MED, NTRI, OREX, SOMX, Vivus, Inc. (VVUS)

  Cinderella stories within the biotech industry are hard to come by these days, especially considering the difficulty of attaining FDA approval while attempting to maintain a steady balance of cash on hand. Dilution, false promises and hopes run rampant during the recent renewed financial crisis. There are, however,
Cinderella stories within the bio-tech industry are hard to come by these days, especially considering the difficulty of attaining FDA approval while attempting to maintain a steady balance of cash on hand. Dilution, false promises and hopes run rampant during the recent renewed financial crisis. There are, however, success stories which seem to trump the odds, as was seen last year with Human Genome Sciences (NASDAQ:HGSI) that rose from $2.50 a share to well over $32, or who could ever forget Dendreon (NASDAQ:DNDN) who's advanced product Provenge helped propel the stock from $3.50 to a peak of $54, and last but not least, Somaxon (NASDAQ:SOMX), who's product Silenor was highly criticized by many specialists yet surprised the investment community with FDA approval and helped thrust the price from $1.50 to $9.50 in a matter of days. Taking on NutriSystem (NASDAQ:NTRI) and Medifast (NYSE:MED) will soon be the featured company, VIVUS (NASDAQ:VIVUS).

Indeed, as seen by these examples, it takes a lot more than simple luck to be able to uncover such hidden gems. More often than not, it takes only one man's concept to initiate the initial stages of the discovery in a cure for an unmet disease, or more importantly, one company to step up to the plate and take the lead. No better company exemplifies this principle than VIVUS Inc., who has had more than its share of roadblocks along the path to reaching financial and investment stability. To understand the vast potential this company offers, you also have to be a believer in old man Buffet's old saying, "Be greedy when others are fearful, and be fearful when others are greedy."

This article will look to uncover the highly undervalued market-cap (relative to product industry size potential), as well as draw comparisons to the other two companies competing for weight loss drugs, Arna Pharmaceuticals (NASDAQ:ARNA) and Orexigen Therapeutics (NASDAQ:OREX).

No more than two months ago, the company received a Complete Response Letter, or CRL, from the FDA regarding the Qnexa NDA. Unfortunately, the FDA issued the CRL to communicate its decision that the NDA could not be approved in its present form. This sent shock-waves across the investment community as shares tumbled from the 52-week high of $13.68 all the way down to the 52-week low of $4.69. This enfuriated investors and a class action lawsuit followed shortly thereafter, adding fuel to the fire, which by now had turned into an inferno.

So just how did this company gasping for air go from a fish left to die, to having FDA deputy director of Metabolism and Endocrinology, Dr. Coleman endorse the Qnexa product, along with Mr. Orloff who apparently has many ties to the FDA? Perhaps they too are interested in the drug with the best efficacy in helping Americans shed that unwanted weight, and achieve a healthy lifestyle away from obesity.

Lawsuit Holding Price Lower

This is perhaps the main firepower behind the driving force of the relentless 13.2 million shorts out of the total 80.5 million share float. As per the press release by Bernstein Liebhard LLP, "On July 15, 2010, the FDA Panel held a hearing to review Qnexa. Following the lengthy review and discussion, the FDA Panel voted against recommending Qnexa based on concerns regarding adverse effects and the unknown impact of long-term use beyond the 56-week clinical study period. The FDA Panel voted 10-to-6 in the negative on the question of whether the "overall risk-benefit assessment of Qnexa is favorable to support approval." When news of the vote was publicly announced on July 15, 2010, the market price of Vivus common stock plummeted, falling $6.70 per share, or 55%, in one day on unusually high trading volume of over 42.3 million shares. On October 28, 2010, the FDA followed the recommendation of the FDA Panel and rejected Vivus's NDA for Qnexa."

Lawsuits, rejected NDA, heck, you'd think being fearful was the only option that came to mind when you heard of VIVUS, and that couldn't be further from the truth. For you see, lawsuits in this industry are common, especially with the high risks involved in biopharmaceutical companies and their low percentage of FDA approval. On average, roughly 2% of the drugs per year end up making the marketing stage after passing the IND, Phase I, Phase II and Phase III, while also pleasing the FDA panel prior to the NDA.

FDA Resubmission Arriving Shortly

Perhaps the most overlooked aspect of this whole situation is that no one out there has discussed the fact that the company, by December 15th, 2010, is tentatively scheduled to resubmit the FDA's requests for information included int he CRL and thus submit a written response to the FDA in order to file an NDA shortly thereafter. For teratogenicity, the FDA requested a comprehensive assessment of topiramate’s and Qnexa’s teratogenic potential. As part of the Company’s response, the Company plans to compile analyses integrating existing nonclinical and clinical data; available in published research for topiramate (currently marketed by Ortho-McNeil-Janssen Pharmaceuticals, Inc. as TOPAMAX and available generically from several manufacturers) and as generated by the Company, for Qnexa. The Company’s response will include a detailed risk management plan to mitigate any potential risks in women of childbearing potential. For cardiovascular safety, the FDA asked the Company to provide evidence that the elevation in heart rate associated with Qnexa does not increase the risk for major adverse cardiovascular events.  In the Company’s response, the Company plans to provide several new analyses to demonstrate Qnexa does not increase the risk for major cardiovascular events, which would include data from its SEQUEL (OB-305) and Sleep Apnea (OB-204) studies. The CRL also included a request for the submission of the final study report from the two-year SEQUEL (OB-305) study. SEQUEL was a 52-week extension study for a subset of 675 patients who completed the previously reported 56-week CONQUER study. The Company announced top line results from the two-year SEQUEL study on September 21, 2010, and a final study report is being prepared as part of the Company’s response. Data from the SEQUEL and Sleep Apnea studies were not included in the original NDA.

Just imagine would happen if the NDA goes through as scheduled, the lawsuit gets dropped, followed by a drastic rise in share price due to one of the most epic short squeezes seen in a very long time. Now it certainly becomes a little more clear as to why there seems to be a lot of opportunity amongst uncertainty for VIVUS.

Competitor: Orexigen's Obesity Drug Unlikely to be Approved

Key Resons Orexigen's drug might fail the upcoming FDA review:

  • The not-so-encouraging news for Orexigen: Ten of 20 Contrave panel experts also reviewed Arena's lorcaserin in September. Seven of these experts voted against lorcaserin, while three voted in favor.
  • Lorcaserin was voted down because the drug's marginal ability to induce weight loss was overwhelmed by the drug's safety risks. Contrave's efficacy isn't much better than what's seen with lorcaserin, while the drug also has concerning safety questions, mainly around blood pressure and heart rate elevations.
  • Contrave's cardiovascular risk profile somewhat resembles Abbott Lab's Meridia, which was recently pulled off the market after a September advisory panel meeting. Eight of the 10 experts who will be reviewing Contrave Tuesday voted to recommend Meridia's withdrawal from the market due to the drug's cardiovascular risks. These eight experts are the people Orexigen needs to be most worried about Tuesday.

Competitor: Arna's Poor Efficacy Highlighted by Forbes

Robert Langtreth wrote a brief article on Arna and Orex, highlighting the lack of performance. He stated,  "Doesn’t this mean that the FDA should be rushing to approve more obesity drugs, like those from Arena or Orexigen? Not necessarily. Their drugs generally have modest weight loss over placebo and often won’t get you in the type of weight loss range that could even achieve the modest 31% death reduction, even assuming there are no side effect issues. This great difficulty in producing highly effective fat pills that don’t have big side effects is why so few obesity drugs are on the market."



Product Highlights

Qnexa (Obesity)


Product Highlights

Qnexa (Obesity)

Beyond its impact on health, obesity economically accounts for 9.1% of U.S. annual health care spending - nearly $150 billion dollars. By 2030, if trends in the escalating rates of obesity continue, health care costs attributable to obesity may reach $956 billion, accounting for up to 18% of total health care costs, or $1 in every $6 spent on health care.

Key Data

Highlights from the EQUIP and CONQUER studies include:

-- Average weight loss of 14.7% (37 lbs) was achieved by patients treated with Qnexa for 56 weeks in the EQUIP study; -- Significant improvements in cardiovascular, metabolic and inflammatory risk factors among patients treated with Qnexa; -- FDA efficacy benchmarks for weight loss agents exceeded at all three doses of Qnexa tested in the clinical program; -- Completion rates up to 69% were significantly higher than placebo at all three doses of Qnexa, indicating favorable tolerability; and -- Favorable benefit/risk safety profile for Qnexa. -- Average weight loss for Qnexa patients completing the EQUIP study was 37 pounds and 18 pounds with full-dose Qnexa and low-dose Qnexa, respectively, as compared to 6 pounds in the placebo group; -- 60% of the full-dose Qnexa patients who completed the study lost at least 10% of their baseline weight; -- 43% of the full-dose Qnexa patients who completed the study lost at least 15% of their baseline weight; -- Completion rate for EQUIP was 47%, 57%, 59% for patients taking placebo, low-dose Qnexa and full-dose Qnexa, respectively; and -- Patients treated with full-dose Qnexa had significant improvements in blood pressure, triglycerides and cholesterol.

Qnexa (Diabetes)

There are 23.6 million children and adults in the United States, or 7.8% of the population, who have diabetes. While an estimated 17.9 million have been diagnosed with diabetes, unfortunately, 5.7 million people (or nearly one quarter) are unaware that they have the disease. It is estimated that there are nearly 250 million diabetics worldwide.

Qnexa (Sleep Apnea)

Obstructive sleep apnea (OSA) is a sleep-related breathing disorder that involves a decrease or complete halt in airflow despite an ongoing effort to breathe. It is a common yet serious disorder characterized by repeated pauses in breathing during the sleep cycle. Approximately 18 million Americans are afflicted with OSA, though an estimated 90 percent of patients remain undiagnosed or untreated. Studies have identified a causal relationship between OSA and a number of cardiovascular and metabolic diseases including hypertension, diabetes, stroke, congestive heart failure and sudden cardiac death. Patient compliance can be an issue in treating OSA and can limit the effectiveness of currently available treatments which include lifestyle changes, continuous positive airway pressure (CPAP) devices and surgery.

Currently, there are no approved pharmacologic treatments for OSA.

Avanafil (Erectile Dysfunction)

In their latest press release, the company announced "Positive Results From Long-Term Phase 3 Study of Avanafil in Erectile Dysfunction".

In the study, patients treated with avanafil who attempted sexual intercourse (SEP3) within the first 15 minutes of dosing had success rates of 80%.

Comparison of Competitors: King of Sexuality

Viagra vs. Cialis vs. Levitra vs. Avanafil

Success Rate

All three currently approved drugs (Viaga, Cialis, Levitra) work for approximately 70 percent of all men. For Avanafil, this success rate is 80%, quite a drastic improvement.


Viagra: Pfizer
Cialis: Eli Lilly and ICOS
Levitra: GlaxoSmithKline and Bayer

We can clearly see here that a partnership or buyout is looming for its rights to the drug given its current success.

Side Effects

All three drugs share most of the same side effects. Some men may experience headaches, flushing, back pain, runny noses, stomach aches, or even changes in vision (example: some Viagra studies have revealed that on rare occasions a man may begin seeing a bluish tinge but that should go away after the drug has been eliminated from the body). These are all common side effects and should not be reason to worry excessively.

Less side effects for Avanafil:

  • The most common side effects reported were headache (5.6%), flushing (3.5%), nasopharyngitis (3.4%) and nasal congestion (2.1%)
  • There were no drug-related serious adverse events reported in the study

Fundamental Standpoint

As per its latest 10-Q, The company currently has $175 million assets on hand, with a burn rate of about $45 million per year, thus allowing it sufficient funds to be ablet o avoid dilution prior to meeting FDA deadlines for its product pipeline.

The company's float is 54% held by Institutional & Mutual Fund owners, thus showing a high amount of faith in its ability to meet marketing approval. Among the top holders include: Chilton Investment, Caxton Associates Vanguard Group, First Mantahhan, BlackRock Fund, and Wentworth.

At a quick glance on options reveals a bullish story developing, as volume has been high on the December, 10, $8.00 call options, as they jumped nearly 46% with 1,335 traded on 20,686 open interest. January $9 calls have also been gaining traction. They are up 23.53% on 797 volume with 2,835 open interest, as investors seem to be serving their appetite for risk.

Disclosure: Long VVUS


Disclosure: I am Long VVUS.