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VVUS: First Quarter 2020 Results

By John Vandermosten, CFA

NASDAQ:VVUS

Vivus, Inc. (NASDAQ:VVUS) released first quarter 2020 results on May 6, 2020 and provided an update of financial and operational results for the period. During the first quarter of the year, total revenues were up 22% to $19.6 million on a year over year basis and up 14% sequentially. First quarter earnings were ($0.49) per share and adjusted earnings ($0.15) per share (1). Better gross margin was offset by higher than expected operating costs. During the first quarter and year to date, Vivus has demonstrated broader effectiveness of Qsymia, launched Qsymia in Korea through a partner and completed enrollment in the safety and efficacy study for its use in adolescents. The company has also received approval for an improved formulation of Pancreaze from the FDA and advanced its Vivus Health Platform on a number of fronts.

An agreement with the undisclosed national pharmacy benefit manager (PBM) remains on track to begin in July 2020. It is anticipated to provide Pancreaze favorable formulary placement. Additionally, competitor Eisai (JPX: 4523.T) was asked by the FDA to withdraw weight loss drug Belviq in mid-February due to cancer risk which has resulted in requests from providers for supply of Qsymia as an alternative.

The most important event in process is the refinancing of the company’s convertible debt, which came due May 1, 2020. Due to disruptions caused by the coronavirus, the term was extended for a month. On May 1, Vivus repaid minority debtholders and continued with negotiations regarding the $170.1 of convertible debt that remains outstanding with IEH Biopharma. Both Congress and Federal Reserve have launched programs to help companies weather the global shutdown and we believe that Vivus will pursue these avenues if they become available. We believe that the capital structure question will be answered in the next month or so with the current convertible debt outstanding split into additional equity and senior debt. However, until we are able to determine how the capital structure will be balanced between debt and equity, we are withholding our equity valuation target.

Qsymia sales were up 5.8% compared to 1Q:19 and Pancreaze revenues were up 14%; however, for the latter, this reflects a change in revenue recognition as license revenues for Canada were shifted to product revenues after 2Q:19. For the United States, Pancreaze first quarter revenues are essentially flat for the year over year period. Pancreaze script volume was down 1% sequentially. Supply revenues were $1.8 million, up 14% and Spedra/ Stendra royalty revenues were $547,000 in the quarter, up 15%. With the launch of Qsymia in South Korea, Vivus recognized a $2 million milestone and $564,000 in license revenue from this product in 1Q:20.

Cost of goods sold was $4.6 million, an increase from the prior year. Qsymia gross margins were up by 140 basis points to 85.0% while Pancreaze increased by 110 basis points to 72.3% compared to the prior year period. First quarter SG&A of $11.0 million was up 12% over the prior year reflecting additional professional fee expenses related to the debt refinancing. Research and development expenditures were $2.4 million, down 1% as declines in Pancreaze R&D and overhead were mostly offset by an increase in Qsymia R&D related to the Phase IV adolescent study. VI-0106 spending was up on a year over year basis as stability questions were answered and the company prepares an investigational new drug (IND) for submission later this year.

Vivus reported EBITDA of $1.969 million in the first quarter. The calculation removes interest and other expense, D&A, share based compensation and taxes. To provide debtholders a sense of the cash generating ability of the company, EBITDAR of $3.195 million is also computed. For first quarter 2020, cash from operations was a positive $114,000 compared to a use of cash in 1Q:19 of ($6.9) million.

Cash and equivalents on the balance sheet as of March 31st totaled $32.8 million, up fractionally from totals at the end of 2019. Debt, as carried on the balance sheet, stands at $240.7 million as of quarter end. Following the end of the quarter, the convertible notes came due and $11.6 million was paid to minority debtholders. Vivus raised additional equity capital of $11.55 million gross in April.

We were impressed by all of the positive catalysts surrounding Qsymia over the past months. Several new studies were published highlighting the safety and efficacy of the drug in a number of settings. Enrollment was completed in the adolescent study and partner Alvogen launched Qsymia in the Republic of Korea.

Vivus announced the results of a clinical study evaluating the benefits of Qsymia on patients with binge-eating disorder or bulimia nervosa. The study found that there was a significant reduction in binge day frequency for Qsymia compared to placebo. The data published in the Journal of Eating Disorders found a 75% decrease in binge day frequency for Qsymia compared to a 19% decrease for placebo in the 22 patient study.

In January, the Toolbox Trial was published in the Journal of General Internal Medicine and found that a greater percentage of patients that used Qsymia achieved at least a 5% weight loss compared to those who did not use the drug. The trial, further explained in a Vivus press release, found that using a weight loss medication provides a benefit in combination with meal replacement and gym membership.

A pharmacokinetic (PK) and pharmacodynamic (PD) study was conducted in obese adolescents to determine dosing levels for an ongoing Phase IV study. The results were published and demonstrated that adolescents taking Qsymia had comparable results as observed in adults. The mid (PHEN/TPM 7.5 mg/46 mg) and top (PHEN/TPM 15 mg/92 mg) doses were determined to be appropriate for longer term safety and efficacy. Vivus is also running a Phase IV post-marketing study in the same population which enrolled 200 patients in 26 clinical sites. The primary endpoint is the average change in body-mass index between a Qsymia group and a placebo group. As of March 2nd, the trial was fully enrolled. The study will compare patients over 56 weeks of treatment suggesting the trial will be completed in mid-2020. A successful outcome could expand the addressable population into younger populations.

Another study (2) which was announced last August examined the use of Qsymia in combination with sleeve gastrectomy in patients with a BMI of 50 or above. For super obese patients, surgery alone may be insufficient to reduce weight sufficiently and combination therapy with a weight loss drug may result in improved outcomes. The research in the study demonstrated that patients receiving Qsymia before and after laparoscopic sleeve gastrectomy (LSG) surgery lost more weight and had a greater likelihood of achieving a BMI of less than 40 when compared with patients undergoing surgery alone without anti-obesity medicine. Additional summary of data is included in the press release.

Qsymia was approved by the South Korean Ministry of Food and Drug Safety (MFDS) in August 2019 and partner Alvogen began its commercial launch in February 2020. Milestone revenues of $2 million were recognized in the first quarter of 2020, triggered by the sales launch. In other overseas efforts, Vivus submitted the Marketing Authorisation Application (MAA) in Europe last October and seeks decentralized approval in six countries with Sweden and Poland being the primary targets. A decision by the regulatory agencies is expected in 2H:20.

Vivus solved its shelf-life chemistry issue with VI-0106 and is continuing to develop an IND to submit in the second half of 2020. If it is cleared by the FDA, Vivus will launch a Phase II clinical study for Group 1 pulmonary arterial hypertension (PAH) patients early next year.

A surprise announcement from the FDA on February 13th asked Eisai to voluntarily withdraw its weight loss drug Belviq and Belviq XR from the market due to increased cancer risk. Eisai agreed to withdraw the medicine but believes the drug has a “positive benefit-risk profile.” Analysis of data from patients taking the drug in a trial found that 7.7% of Belviq patients had cancer diagnoses compared to 7.1% of placebo patients. Based on data provided by EvaluatePharma, global sales of Belviq were $51 million in 2018 and an estimated $47 million in 2019. While it is still too early to tell how Qsymia may be able to fill the hole left by the exit of Belviq, management reported that several obesity clinics had reached out to them to make up for the loss of this market player. In our opinion, Vivus should aggressively fight to take this market share up for grabs.

We also saw a transaction take place for Allergan’s Zenpep which competes against Pancreaze. In an estimated ~$1+ billion deal, Nestlé announced the planned purchase of the asset with the goal of complementing their current portfolio of nutrition products. We discuss the details in a note found here.

Corporate Progress

Vivus has completed the seventh quarter of its ten quarter turnaround and has had a slow start in growing Pancreaze and Qsymia. Disruptions due to the coronavirus have slowed progress and prevented the refinancing of the debt. The company has made progress with its telehealth initiative and is an important differentiator as we believe it can provide access to many patients who may not want to discuss weight loss face to face with their provider and also provides incentive for physicians to participate. On March 31st, Vivus announced the launch of its telemedicine and remote monitoring modules for the Vivus Health Platform. The platform will be available to all participating physicians to conduct virtual office visits even if the physician is not prescribing a Vivus product. The timing of the launch was fortuitous as it coincided with the state-mandated self-quarantine. Remote monitoring is made possible through the Apple Health Kit, Apple Watch and other Bluetooth enabled devices. These devices include weight scales, pulse oximeters, spirometers and blood pressure cuffs. During the conference call, CEO John Amos provided additional color on the Vivus Health Platform with respect to cystic fibrosis patients, many of whom are some distance from the centers of excellence that serve them. Remote monitoring allows this susceptible patient population to conveniently share their vital statistics for lung function, oxygen levels, blood pressure and weight without leaving home. Additionally, there are many positives that should support revenue improvement including data supportive of Qsymia safety and efficacy, first sales in Korea, the withdrawal of a dominant competitor and anticipated MAA approval in select European countries. We anticipate continued improvement as the changes in marketing for Qsymia have more time to take hold and as Pancreaze sales efforts yield results.

Below we list the key items related to the turnaround effort and to the development of VI-0106.

‣ MAA submitted for Qsymia in Europe – October 2019

‣ Launch of telemedicine – 4Q:19 & 1Q:20

‣ Reduce, refinance and repay debt - 2020

‣ Launch of Qsymia in South Korea – March 2020

‣ Increase licensing agreements for avanafil – 2020

‣ Introduce Qsymia Health Platform to managed care and large self-insured employers – 2020

‣ Begin contract with large national PBM for Pancreaze – July 2020

‣ Response from EMA for Qsymia – 2020

‣ Submit IND for VI-0106 – 2H:20

‣ Launch Phase II study for VI-0106 – 1Q:21

Summary

We are in the seventh quarter of the ten quarter turnaround effort and have seen evidence of improvement and opportunity that can convert Vivus into a profitable enterprise. Our forecasts had anticipated that the debt issue would be resolved by now; however, disruptions to the credit market from the shutdown related to the coronavirus have extended the refinancing for at least another month. We are withholding our target price for Vivus until the completion of the debt refinancing due to the uncertainty over the ultimate capital structure of the company. The company has a solid portfolio of products and an innovative platform that we expect will expand penetration and improve patient loyalty. It has the knowledge and experience to execute on its identified priorities and has provided detailed specifics on necessary steps to drive topline sales and improve its position. While the improvement in sales has lagged our forecasts, the company has increased its revenues and we are optimistic that management efforts will turn Vivus into a positive free cash flow generator.

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1. Our calculation of adjusted earnings removes quarterly amortization of $3,638.

2. Ard, Jamy D. et al. Use of phentermine-topiramate extended release in combination with sleeve gastrectomy in patients with BMI 50 kg/m2 or more. Surgery for Obesity and Related Diseases. 15 (2019) 1039–1043.