VVUS: Hey, Wha’ Happened?
Vivus (VVUS) is a pharmaceutical company based in Mountain View, CA, that is focused on the development of treatments for obesity, diabetes, and sleep apnea. One of Vivus’ development programs afforded Qysmia (formerly Qnexa), which was approved by the FDA on July 17th, 2012, for chronic weight management, a potentially huge market. Various numbers are thrown around; it is estimated that sales for weight management therapeutics may reach $160 million by 2014, and some sources cite the market to top well over $1 billion in 2020. Regardless of actual market size, obesity is becoming a real threat to global health as it has been linked to both heart disease and type II diabetes.
Interestingly, Qysmia is a combination of two organic molecules: phentermine, an appetite suppressant with a somewhat checkered past (the non-harmful component to the drug combination “fen-phen.”), and topiramate, an anticonvulsant first approved by the FDA in 1996. Of course, Vivus’ advantage in their technology is the patented controlled release of the combination.
(As an aside, it’s an interesting state of affairs for the pharmaceutical industry when all therapeutics in a company’s pipeline are rehashes of an existing product. Indeed, it has become rather common to find new therapeutic uses for existing drugs.)
Vivus’ stock has seen large fluctuations in its price and I wanted to delve into how we should approach this potential investment. Is Vivus a good investment considering the potential market for weight management therapeutics?
In early 2012, Vivus’ stock price was hovering around $12. On February 22nd, 2012, an FDA Advisory Committee recommended for approval of Qsymia (then Qnexa) (yellow arrow). Subsequently, the next day the stock nearly doubled to $20.70. The stock gradually rose on anticipation for the official FDA announcement originally slated for April 17th, but delayed for July 17th (purple arrow). On July 17th, the FDA approved Qsymia for chronic weight management and on July 18th the stock hit a 15-year high at $31.21 (light blue arrow).
As is often typical with biotech stocks around the news of a drug approval (or rejection), there is a large amount of “buy the rumor, sell the news“. As such, the stock could not sustain the highs and dropped to its pre-approval ranges between $21 and $23 as investors took profits. They were hit with more bad news as the shares fell on initial concerns that Qsymia would fail EU approval (white arrow). Just last month, an EU committee rejected Vivus’s application to sell the weight loss drug in the European Union (red arrow). This was a big hit on a potential market for them and the chart reflects this bearish outlook as we may be heading for lower lows.
Most recently, Vivus announced Q4 earnings on Feb. 25th, and they came in lower than analysts were expecting. Wall St. analysts were expecting $3.1 million in revenue from scripts of Qsymia, however Vivus announced quarterly earnings of $2 million for the 3 month period and their selling and administrative costs jumped to $50 million. At this rate of cash burning, they will most likely need to raise capital within the next couple of months, despite the fact that they raised around $170 million by issuing a public offering a little over a year ago.
With such a potentially large market, one has to wonder what in the world is going on over at Vivus? The situation is similar to Dendreon’s botched rollout of Provenge, a cutting edge, personalized prostate cancer treatment. Here we have this promising new therapeutic waiting to benefit those that need it and then we have a management team that is unable to bridge the gap from clinic to market. Often overlooked, the drug launch is a critical step in establishing a market fit for the therapeutic and one that can set the tone for the company’s stock price for months, even years, after the initial FDA approval.
So what is Vivus, Inc, actually worth? What kind of top-line revenue can we expect in 1 year of Qysmia on the market? Or in 5 years? Valuing a company with no real profit margins is a difficult task, but one we can do by discounting future earnings and calculating the net present value. Bear with me on my crude discounted cash flow analysis excel model, but here’s my shot at it.
In our most unrealistic bullish example, let’s assume an aggressive 30% yearly growth, a 0% tax rate, and zero costs (numbers shown are in millions). Unlikely, but let’s just see how it plays out when they reported revenue of $2 million over the 3 month period with a reasonable quarterly growth rate of about 7%. Taking a look at the Total Equity Value box, in order for a market capitalization of over $2 billion to be justified, the EBITDA multiple would have to be 100x. Consider the average EV/EBITDA multiples by industry here and here. The total market average multiple is around 8.0x, but biotech companies have a higher multiple because of their growth potential, so the average EV/EBITDA multiple for the biotech industry is 22.46x. At 22.5x, projecting $10 million in revenue for 2013 would justify a market cap of $600 million.
At a current price of $11/share and 100.66 million shares, the market cap is $1.1 billion. At this price level, one can consider VVUS to be overvalued. It can also be said that perhaps Wall St. overestimated the market size (or market interest) in weight management therapeutics.
Now let’s assume Vivus was able to generate $100 million in top line revenue, and this time let’s tax the revenue at 35%. This kind of revenue could justify a $5 billion valuation.
The questions, then, are just how big is the market for weight management therapeutics and how big of a slice can Vivus carve out? Vivus gets first mover advantage when considering the competition in the space. Arena’s Belviq is scheduled to launch this year, however there is uncertainty in an exact date. Regardless, competitors are nipping at Vivus’ heels as Piper Jaffray has forecast sales of Belviq to approach $3 billion in 2015. It may seem as though Doctors are holding out on writing prescriptions for Qysmia until they can get a read on Belviq and its advantages and disadvantages per patient over Qsymia. Other competitors are readying their pipelines, including Orexigen (with Contrave and Emptic) and Zafgen (with Beloranib), so the space will get crowded fairly quickly. Vivus’ best bet is to carve out a healthy market share before this happens.
Moving forward, I would like to see the Q1 2013 earnings to be over $5 million. To me, this would justify its current price above $10/share. Ideally, I would prefer to see earnings above $10 million for Q1. If this happens, and guidance is strong (that is, if we will see $20 million in quarterly revenue soon), I could see a pop back above $20/share.
In terms of where we’re heading now, technically it looks rather bearish. In the 5 days it took for me to conceive of, write, and finalize this blog post, VVUS has dropped almost 10% in price and shed nearly $100 million in value. We’ll see some support at $10.00, but the next earnings report will be an important one.
As for me? I can no longer endorse VVUS as a solid investment until we see better prescription numbers and a more solid earnings report. I’m also skeptical that VVUS can use their first mover advantage and obtain a large portion of the market before competitors begin to enter.
Additionally, I’m more intrigued by their competitor’s chemistry, particularly Zafgen’s ZGN-433, than that of Qsymia. ZGN-433, or Beloranib, has been extensively written about on The Haystack, C&EN’s blog. Interestingly, Beloranib is an analog of fumagillin, which has been investigated as an angiogenesis inhibitor for the treatment of cancer. Beloranib is structurally interesting to me in particular as I have had a working relationship to a number of fumagillin analogs. The two epoxide rings seem to be critical for MetAP2 inhibition, and the (N,N-dimethylamino) ethyl ether moiety seems to be a popular functional group that may improve potency and resist metabolic oxidation. (I’ll concede the two epoxides may make one cautious when considering toxicity. It has been hypothesized that the two epoxides are the cause, at least partially, to the toxicity of fumagillin – would this make FDA approval more difficult? It will be interesting to see how Zafgen’s ZGN-433 performs in clinical trials.)
It’s a fascinating space, and one that should get more interesting once a few more players enter the market. VVUS and ARNA are companies to keep an eye in the near future, but I’d like to get a clearer view of the actual weight management market.
So, readers, what do you think? Is VVUS a buy at $10? At $5? Or is ARNA the better buy? And, maybe more importantly to my science-leaning readers, whose chemistry is more intriguing to you?
It should be noted that I have no positions in any stocks mentioned (or unmentioned) and no intention on initiating any positions in any stocks mentioned (or unmentioned) in the next 6 months. Furthermore, the information on this blog should not be considered financial advice; I am not an investment professional nor do I have any credentials designating myself as such. The main purpose of the blog is to educate its readership, myself included, about concepts and ideas that were previously unknown to me.