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VVUS: Hey, Wha’ Happened?

March 15, 2013 3 comments

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).

VVUS, Daily chart, freestockcharts.com

VVUS, Daily chart, freestockcharts.com

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.

VVUS, DCF Analysis, $10M annual revenue in 2013, 30% growth

VVUS, DCF Analysis, $10M annual revenue in 2013, 30% growth

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.

VVUS, DCF Analysis, $100M revenue, 30% growth

VVUS, DCF Analysis, $100M revenue, 30% growth

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?

Of course, I shouldn’t leave you hanging like that, so here is my favorite Fred Willard scene in A Mighty Wind.

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.

2013: A look ahead

December 20, 2012 Leave a comment

2012 was a roller-coaster year.  The S&P Index for the year to date has gained almost 15% (as of Dec. 19th).  Some stocks have hit all time highs, notably AAPL, AMZN, IBM, and GOOG.  While some tech IPOs, such as GRPN and ZNGA, have tanked.  And of course there’s the botched FB IPO.  Now, with the austerity crisis looming, it’s tough to say where the market is heading for 2013.  It might be safe to say much of the uncertainty is already priced into equities as there has been a substantial pullback from these yearly highs, so fiscal deal permitting, we may see a decent bounce.

S&P 500 Daily Chart courtesy of Freestockcharts.com

We saw a Fibonacci retracement from the highs at $1474 on September 14th to the low at $1443 November 16th.  We’re also seeing a short-term top from the descending trendline resulting from the triple-top highs of 9/14, 10/5, and 10/17.  If we do, in fact, see a deal come out of Washington, we’ll most likely see a breakout, however, I give an agreement between Obama and Boehner a 20% chance of occurring this week before the holidays.  The more likely scenario is no deal is made and we hit resistance and start the trek back down to find support at a very major ascending trendline as well as support at $1350.

For 2013, the upside for the markets is certainly there.  Clearly, the markets want to breakout.  We just need to see the macroeconomic environment become more favorable.

Looking ahead, I’d like to offer some predictions for some publicly-traded companies.  I see great things coming out of Alnylam (ALNY).  Their 5×15 program, in which they’re aiming for 5 products on the market by 2015, looks to be on track.  RNA interference is an extremely promising approach for treating diseases and Alnylam’s GalNac-siRNA delivery platform is unmatched.  The RNAi Therapeutics Blog has some great insights about their GalNac-siRNA conjugates on knocking gene expression down.

Next up is Achillion Pharmaceuticals.  The race for an HCV treatment is extremely crowded and also incredibly risky.  Bristol-Myers Squibb effectively dropped out of the race after the failure of BMS-986094, which happened to be a $2.5 billion purchase of Inhibitex’s INX-189.  That’s one heck of an expensive bet that landed on red and not black.  But that just exemplifies how hot the competition is for an HCV treatment.  It is estimated by the US Centers for Disease Control that HCV affects some 3.2 million people in the US.  By the end of the decade, it is estimated that the market for HCV drugs could reach $20 billion (!!).  Companies are willing to pay a hefty premium (see: Pharmasett) for a slice of that and therein lies why I’m bullish on Achillion.  The profile for ACH-1625, now Sovaprevir, looks really good, and, in my view, it’s only a matter of time for major pharma to come knocking. Of course, Gilead’s GS-7977 is the furthest along currently with multiple Phase III studies underway, however, I can’t see all that much upside to the stock as it’s up almost 100% since the beginning of 2012.  I think most of the good news is already priced in.  If I were to get into GILD, I’d wait for a healthy pullback for a reasonable entry point.

Also having a large market are obesity drugs.  According to the CDC, 35.7% of adults are considered obese.  Obesity has been linked to a number of other diseases, notably heart disease and type II Diabetes.  Because of this, weight loss drugs have been gaining a lot of attention both on the long and short side.  Vivus (VVUS) and Arena Pharmaceuticals (ARNA) currently have two of the most promising drugs on the market, Qsymia and Belviq, respectively.  Both drugs were approved this year and both companies saw their respective stock prices ride a roller coaster around the news.  I think the market is undervaluing both stocks and I think now is a great time to ride the increase in sales for either drug once they gain traction.

I’d  also like to highlight a few privately held companies from which I think you’ll hear great things in 2013.

Warp Drive Bio, based in Cambridge, MA, focuses on natural products for discovering therapeutics.  It was founded by world-renowned scientists, including Dr. Gregory Verdine, Dr. George Church and Dr. James Wells.  With backing from funding powerhouses such as Third Rock and Greylock Partners, and a key strategic partnership with Sanofi, Warp Drive Bio’s impact will be difficult to ignore in the near future.

Global Blood Therapeutics, also backed by Third Rock, leverages their team’s blood-based disease expertise to revolutionize treatments for chronic blood disease.  Their approach combines the hot areas of computational biology and ligand modeling with traditional medicinal chemistry to treat certain blood diseases for which there are currently very limited options.

Epigenetics is an emerging field and Constellation Pharmaceuticals looks to be on the forefront of the technology.  Adding another dimension to typical gene expression control, Constellation seeks to develop therapeutics that alter the function of proteins that recognize chemical modifications on DNA and chromasomal proteins.

In August of 2012, Quanterix obtained a key patent for their Small Molecule Array technology (Simoa).  As small molecule microarrays are near and dear to my heart, I am particularly interested in Quanterix’s microarray platform and their ultra-sensitive detection (sub-femtomolar – !) of biomarkers for blood-screening, diagnostics, and biothreat detection.

23andme is an extremely fascinating company out of Mountain View, CA.  23andme gives you access to your own genetic information at an absurdly reasonable price.  They also claim they will update you with information relevant to you based on your genetic makeup.  With access to such a large amount of genetic data, they are also very well-positioned to leverage their platform for personalized medicine, a topic rapidly gaining speed among the scientific community.  One of the major bottlenecks for achieving success with personalized medicine is obtaining and interpreting such large data sets of individual genotypes.  23andme looks to be in a unique position to take advantage of this push for individualized treaments.  You may hear more from this company in the next year.

Last but certainly not least, one company that you will hear more about in 2013 is Cambridge-based, Living Proof.  From the lab of prolific scientist/engineer/serial entrepreneurs Dr. Robert Langer and Dr Daniel Anderson, Living Proof is turning the cosmetics and beauty industry on its head by actually basing their products on real science (!) and not folklore/myths/wives’ tales as is typical with common cosmetic products.  After an endorsement by Jennifer Aniston herself, Living Proof will continue to grow exponentially, and I would not be surprised to see them get some real traction in 2013.

A few other notable mentions I bet you’ll hear partnerships, funding rounds, and overall good news from in 2013 (my version of the Fierce 15):

Kala Pharmaceuticals, InVivo Therapeutics, Bind Biosciences, Selecta Biosciences, Seventh Sense, T2 Biosystems, Zafgen, BlueBirdBio, Hydra Biosciences, and Epizyme.

Also, I’d like to take this time to promise you, my readers, that, in 2013, I will provide updates more often than I have.  Since beginning a new position in June, things have been busy on my end.  But consider this my new years resolution to update Pi-Shaped much more often in the coming year.  So expect great things!

That is all for now.  Wishing you the best this holiday season and looking forward to a bullish and prosperous 2013!

Guy Kawasaki

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