VIVUS Is A Viable Long Term Investment
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
(Note: The original version of this post incorrectly identified Arena Pharmaceuticals’ market cap as $380 million. The correct market cap for Arena is $1.12 billion, and the post has been changed to reflect this.)
Within the next year, VIVUS (NASDAQ: VVUS) may make the transition from a development stage start-up with no product revenue to a full-fledged pharmaceutical company with two approved drugs in large markets.
Vivus is on the verge of marketing drugs for some of the most common chronic conditions affecting world populations, including obesity, diabetes, sleep apnea and male erectile dysfunction (ED). The company is developing Qnexa for the first three indications. It has tested avanafil for ED.
The company’s lead drug Qnexa is actually a combination of two drugs, phentermine and topiramate, each of which has been approved for treatment separately. Phentermine is an amphetamine that suppresses appetite, and is already used to treat obesity. Topiramate is an anti-convulsive agent used to treat epilepsy. As an obesity drug, topiramate probably promotes a feeling of satiety.
Weight loss is such a difficult problem because of the way that physiology works. The body runs basically on carbohydrates taken in by the diet or in short term storage as glycogen in the muscles or liver. Excess calories consumed in the diet are converted to triglycerides and stored as fat. But the fat is not used as fuel until the available glycogen has been depleted, which means that if people want to lose fat, they must be willing to function while hungry. Most people aren’t prepared to endure this discomfort.
Phentermine has a long history; it was part of the infamous fenfluramine/phentermine (fen-phen) combination used to treat obesity back in the 1990’s. As the combo was quite successful in promoting weight loss, it became spectacularly popular, spawning weight-loss clinics that prescribed little else. Unfortunately, fenfluramine was shown to cause heart valve problems and pulmonary hypertension and so was withdrawn from the market by the FDA in 1997. At one point, Wyeth (now merged into Pfizer (NYSE: PFE) had set aside $21 billion to cover potential liability.
In December, 2011, Vivus reported the results of its SEQUEL trial of Qnexa, which showed that patients had an average 10% sustained weight loss compared to 1.8% for the placebo group. Earlier EQUIP and CONQUER studies had shown an average 14.7% weight loss.
In February of this year, an FDA panel voted 20-2 to recommend approval of Qnexa for the treatment of obesity in adults. On April 9, the FDA notified Vivus of an extended Prescription Drug User Fee Act (PDUFA) date of July 17, 2012 for its review of the Qnexa New Drug Application. This extension gives time for a full evaluation of the risks of Qnexa. It seems likely that the FDA will approve Qnexa sometime later this year.
The FDA has only approved one drug—Xenical, marketed by Roche Holding AG (RHHBY.PK) -- for long term weight loss. The agency has not approved a new drug for short term weight loss since 1999. Qnexa has potential competition in Arena Pharmaceutical’s (NASDAQ: ARNA) lorcaserin and Contrave, from Orexigen Therapeutics (NASDAQ: OREX).
Vivus is still in early trials of Qnexa for diabetes and sleep apnea.
Vivus’s other near term drug, avanafil, is an inhibitor of phosphodiesterase 5, an enzyme that degrades cyclic GMP in the corpora cavernosa, erectile tissues of the penis. As such, it is similar to such drugs as sildenafil, named Viagra, and marketed by Pfizer, tadalafil, named Cialis, and marketed by Eli Lilly (LLY), and vardenafil, named Levitra, and marketed by Bayer (BAYN). It is something of a “me too” drug, but it appears to have some advantage in the rapidity of which it works. In the REVIVE study published in the Journal of Sexual Medicine, up to 71% of patients treated with avanifil reported success in intercourse within 15 minutes of dosing. The safety profile also seems superior, with no adverse events being reported in trials, with the most common side effects being minor, like flushing, nasal congestion, nasopharyngitis, and headache.
The FDA approved avanafil on April 27th. The European Medicines Agency accepted a Marketing Authorization Application for avanafil for the treatment of ED in March 26th of this year.
For a company with no income and essentially no revenue, Vivus has a healthy market cap of almost $2 billion, about 14 times its book value, reflecting market optimism over the prospects for Qnexa and avanafil. By comparison, Arena has a market cap of $1.12 billion whereas Orexigen is valued at $265 million. Thus the market delivers its opinion about the likelihood of approval for their various drugs.
Pfizer, which markets Viagra, is huge, with a market cap of almost $170 billion. There has been speculation that Pfizer would buy out Vivus rather than let the upstart challenge its dominance of the ED market.
Investing in biotech companies often has a binary outcome. If the drug is approved, you win. If the drug is not approved, you lose. Investing in Vivus is a better prospect than most, since the company has two drugs on the verge of making it to market. Of course, it is possible that Qnexa may not be approved for any indication, in which case the company would have to survive on its ED drug. It is possible that both get approved, but since the company has no marketing experience, it may never achieve significant market penetration. The old saw that if you build a better mousetrap, the world will beat a path to your door turns out not to be true in a world dominated by Madison Avenue. The stock price had only a brief bump in response to the avanafil approval, indicating that the market had already discounted it. But the long-term prospects look good for Vivus and its stock price.
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