Description

If you were told that a company has developed a drug that has been proven to safely and effectively treat obesity and has secured FDA approval to market that medicine, what would you guess is the market value of that company?

Vivus is a small pharmaceutical company that has developed a medicine called Qsymia.  Qsymia received FDA approval last year and launched in the US in September 2012.  The market cap of Vivus is approximately $1.25 billion.  The company also has issued $250 million of 4.5% convertible notes (which convert into ~16.8 mm shares at a per share price of $14.86) and $358 million of cash and investments, as of June 30, 2013.  Vivus’s primary product is Qsymia, which will be the principlesubject of this write-up.  The company also has an approved erectile dysfunction drug and other medicines in development stages, though we will set those aside for purposes of this discussion.  

Vivus’ drug Qsymia addresses what may be the largest (no pun intended) target market in all of medicine – obesity.  According to various health research estimates, there are over 500 million obese people globally and more than 100 million people in the US are medically obese.  More specifically, there are approximately 70 million men and women between ages 18-64 in the US that suffer from obesity, according to the CDC estimates.  Historically, there has been a question of whether obesity should be treated as a disease and the effectiveness of most pharmacological treatments was questionable at best.  This has limited the potential anti-obesity pharmaceuticals to date, but these circumstances are changing.  Two new drugs have been approved by the FDA in the past year to treat obesity:Vivus’ Qsymia and Arena’s Belviq.  Also, as health-care costs and health complications related to the societal prevalence of obesity have grown, the potential for treating obesity in medical settings has also gained more attention.  In June 2013, the American Medical Association recognized obesity as a disease. Just as important, the insurance and reimbursement landscape for these medicines is also evolving dramatically, with Qsymia now on lower-tier copayment plans and available in retail pharmacies only as of July 2013.

Qsymia is the most effective weight loss drug ever developed.  In case it might be of interest, one can review the brief article that was actually written by the FDA’s own investigators entitled “The FDA’s Assessment of Two Drugs for Chronic Weight Management” published on October 25, 2012 in the New England Journal of Medicine (NEJM).  The FDA presented a summary of trials showing Qsymia’s efficacy in helping the average patient achieve 10%+ weight loss at 1-year, with 60-70% of patients losing more than 5% of their body weight.  By comparison, Qsymia’s results were almost twice as effective asBelviq, though both drugs received FDA approval.  The primary safety concern for Qsymia involves complications for pregnant women (it’s another question as to why a pregnant womanwould be taking an obesity drug), and the FDA addressed this through the medicine’s label and a prescribed risk evaluation and mitigation strategy.  Both Vivus and Arena are also required to conduct long-term post-approval cardio safety studies for their medicines.  

It was notable that the FDA authored the NEJM article on the approval of Qsymia and Belviq, and the authors note in the assessment that “…obesity has reached epidemic proportions in the United States.  The adverse health consequences of obesity are manifold, potentially involving all major organ systems and contributing to reduced quality of life.”  After describing the littered history of “once-promising weight loss drugs [that] have been abandoned because of serious toxic effects,” the authors proceed, “It was with this troubled history and the undeniable need for effective, safe weight-loss drugs in mind that we at the Food and Drug Administration recently approved two new drugs…for chronic weight management in adults who are obese…”

As a reference point, large pharmaceutical companies have previously discussed the large market potential for effective anti-obesity agents.  For instance, in 2005, Sanofi’s former CEO mused about the $3 billion+ market potential for their potential obesity drug Acomplia, which failed to achieve/retain regulatory approval in the US and EU.

While many of the ingredients seem to be present for a future blockbuster medicine, Qsymia has struggled to gain significant traction in the marketplace so far.  The drug has suffered from a poor launch, with Vivus reporting only $5.5 million of Qsymia sales during the second quarter of 2013.  Even though the market for pharmaceutical obesity treatments requires development, it appears that there may have been some significant execution mis-steps in the first few months following Qsymia’s launch.  With a new management team and board in place as of July, the company is now approaching an inflection point where it can re-energize the launch effort and broaden the drug’s distribution.

Earlier this year, frustration with the Company’s prior management (led by former long-time CEO Leland Wilson)prompted Vivus’ largest shareholder, First Manhattan, to initiate a proxy battle to change the board and management.  First Manhattan set up a portal that has links to their presentation and various materials supporting their case at:

http://www.ourmaterials.com/VVUS/ 

In summary, First Manhattan argued that the commercial launch of Qsymia was mis-managed by Vivus’ prior management team.  Specifically, First Manhattan contended that Vivus should seek a partnership with a major pharmaceutical company that could support Qsymia with the combination of a strong sales force with a primary care presence and cardio-metabolic expertise.  They also believed that Vivus would benefit from such a partner that could assist with managed care access through a larger scale effort.  Even though Vivus would have to relinquishrevenue share to establish this sort of relationship, the merits of a partnership with a big pharmaceutical company with large US and EU presences are substantial.  Much like statins and hypertension medications, Qsymia’s potential requires broad reach into primary care physicians and expertise in managing patient access/reimbursement. Vivus was essentially trying to launch Qsymia with a 150-person contract sales force, while burning through $50-60 million of cash per quarter.    On that point, First Manhattan also persuasively argued that new management was needed to fix this unsustainable expense structure and to find the right pharma partner that will help the company shoulder the costs of developing the market for this drug.  The details of their recommendations are outlined in the presentation “Realizing the Value of Vivus,” which you will find at the web portal above.

Sarissa Capital joined First Manhattan’s campaign in May.  (Sarissa is an investment firm founded by Alex Denner, the successful biotech activist who led Icahn’s efforts in the biopharma industry.)  As a result of the shareholder activist campaign, the Company, First Manhattan and Sarissa reached a settlement on July 19, 2013, to reconfigure the board of directors with a majority of the activists’ slate and to appoint Tony Zook as the new CEO.  Tony Zook was previously a senior executive at Astrazeneca, where he was most recently the EVP of Global Commercial Operations.  First Manhattan cited his experience launching several $1 billion+ blockbuster drugs, includingNexium, Crestor, Pulmicort Respules, Seroquel, Toprol and Symbicort.  The newly elected chairman of Vivus is Michael Astrue who has a track record of successfully turning around biotech companies and also recently served as Commissioner of the Social Security Administration and a trustee of the Medicare and Social Security Trust Funds.  (Perhaps he might help with access through Medicare.)  

Even though he had just been on the job for a few days, Tony Zook joined the Vivus’ most recent earnings call on August 6, and he reiterated his commitment to expanding the market for Qsymia through improved patient access and physician education, finding a larger pharmaceutical partner, creating a better pathway for European approval, and eliminating expenses.

To frame the upside, consider that there are ~70 mm people aged 18-64 who are obese (~35% of that population).  If the company could penetrate ~15% of that population with 70% compliance and a net price of $120 per month, that would suggest a revenue opportunity of ~$10 billion.  This would beUS-only and would not include Medicare.  Assuming Vivus could retain about 1/3 of the revenue through a pharmapartnership that would provide for ~$3.5 billion of revenue; the margins could be exceptionally high due to a partner sharing sales, marketing and post-approval development expenses.   As a reference point, this would suggest about 10 million patients treated with Qsymia annually (and that patients stay on the medication longer-term).  As a reference point, Crestor (in a more crowded but much more developed market for statins) has about 4.1 million patients in the US, according to IMS.  As another point, various studies suggest 11-30 million Americans take statins.    While these assumptions for Qsymia would be optimistic and require significant execution, the penetration and pricing of other primary care drugs to treat cardio-metabolic conditions suggest that there is an enormous potential for Qsymia in the right hands.  It would seem that it should capture the interest of a large pharmaceutical partner considering the excess capacity many of these companies currently have in their primary care sales forces and the high incremental margin they could earn on this product.  

We believe Vivus presents an exciting opportunity because:

(a) of the under-realized but enormous potential of its main product Qsymia and the undeniable need for such a medicine.   
(b) Qsymia is already approved by the FDA; the failures to date are commercial launch problems that might be corrected.  We think it is rare to find an approved drug with this kind of latent market potential at such a value;
(c) there is a new, highly motivated board and CEO that have been installed by the company’s largest shareholders.  The new CEO brings vast experience commercializing blockbuster primary care medicines.

Risks:

While the upside could be significant, the investment is very risky.  Some of the risks include:

Note: We may or may not own the securities of this Company, and we may buy or sell the securities of this Company at any time.

No reliance, no update and use of information.  You may not rely on the information set forth in the above write-up as the basis upon which you make an investment decision.  To the extent that you rely on such information, you do so at your own risk.  The write-up does not purport to be complete on the topic addressed, and we do not intend to update the information contained therein, even in the event that the information becomes materially inaccurate.  Certain information contained in the write-up includes calculations or projections that been prepared internally; use of a different method for preparing such calculations or projections may lead to different results and such differences may be material.   

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