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VVUS: Fourth Quarter and Full Year 2019 Results

By John Vandermosten, CFA

NASDAQ:VVUS

Vivus, Inc. (NASDAQ:VVUS) released fourth quarter and full year 2019 results on March 3, 2020 and provided an update of financial and operational results for the periods. During the final quarter of the year, total revenues were down 14% to $17.3 million on a year over year basis; however, for the full year, they increased 7% to $69.8 million. This compares to our estimates of $19.3 and $71.8 million respectively. Fourth quarter adjusted earnings, excluding severance payments, were ($0.12) per share compared to our ($0.25) per share expectation. Better gross margin, lower adjusted SG&A and lower interest expense contributed to the difference. For the full year, adjusted earnings excluding severance payments were ($0.84) compared to our ($0.97) per share1. During the fourth quarter and first quarter 2020 to date, Vivus has announced new data for Qsymia for reducing binge eating, for the safety and efficacy of its use in adolescents and real world data on improved ability to reduce weight compared to placebo.

Other news included the FDA’s approval of the sNDA for an improved formulation of Pancreaze, the launch of Qsymia in South Korea by Alvogen and completion of enrollment in the Phase IV adolescent study. An agreement with a large, but unidentified, national pharmacy benefit manager (PBM) was announced by the company and will 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.

In the fourth quarter, Vivus hired investment bank Piper Sandler to help navigate the upcoming debt refinancing. We believe that management is deeply involved in this process now and expect to hear details in the next few weeks given the May first deadline. The company will refinance $181 million of convertible senior notes.

Management provided additional historical detail for scripts and shipments which illustrate the increasing importance of the Qsymia Advantage program and a year over year increase in Qsymia prescriptions. Qsymia sales were down 3% compared to 4Q:18. Pancreaze script volume was down 16% compared to the fourth quarter of 2018 and revenues for the product were down 21%. The declines reflect the changeover from Janssen’s to Vivus’ control and the shift in responsibility for distribution. Supply revenues fell to $1.1 million and royalty revenues were $469,000 in the quarter.

Fourth quarter cost of goods sold was $4.0 million, a decline from the prior year providing an increase in gross margin to 77% of total revenues and 75% of product revenues. 4Q:18 gross margins were 74% and 70% respectively. By product, gross margin was 80% for Qsymia and 69% for Pancreaze.

Fourth quarter SG&A of $10.9 million was up 42% over the prior year reflecting the recognition of $1.6 million in severance expense due to the departure of two officers. Research and development expenditures were $2.4 million, up 32% due to additional expense from the Qsymia adolescent trial, spending related to post-marketing requirements for Pancreaze and a jump in VI-0106 in preparation to file an investigational new drug (IND) application in the second half of this year.

Vivus reported adjusted EBITDA of $608,000 in the fourth quarter. After adding back severance expense, non-GAAP recurring EBITDA, as calculated by Vivus, was $2.3 million. Despite this result, operating burn was ($7.4) million.

Cash and equivalents on the balance sheet totaled $32.6 million, down from $40.1 million at the end of the prior quarter and $111.2 million at the end of 2018. Debt, as carried on the balance sheet, stands at $241.7 million as of December 31, 2019. This is comprised of $181 million of convertible senior notes due in May 2020 and $61 million of notes due 2024.

We were impressed by all of the positive catalysts surrounding Qsymia since our last report. 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 completion of the trial will be in mid-2020. A successful outcome could expand the addressable population into younger populations.

Another study2 which was announced last August and we have previously mentioned 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 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. Royalty revenues will likely be recognized by Vivus in either the first or second quarter of this year. Alvogen paid one milestone of $2.5 million in the third quarter of 2019 and will pay another $2.0 million milestone 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 this year.

Based on management commentary, we expect to see an investigational new drug (IND) submission for VI-0106 and management will provide additional detail in the near term regarding the generation of necessary stability data for the once-daily extended release formulation. The IND has largely been compiled and we do not see any other hurdles that might hold it up.

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 did mention 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 anticipated goal of complementing their current portfolio of nutrition products. We discuss the details in a note found here.

Corporate Milestones

Vivus is in the sixth quarter of its ten quarter turnaround and has had a slow start in growing Pancreaze and Qsymia. As any seasoned investor knows, turnarounds do not move in a linear fashion and hard work sometimes takes time to generate results. We have confidence in Vivus’ strategy and see the push into the Vivus Health Platform and Qsymia Advantage as innovative ways to respond to the changing environment and the specific setting for the way in which weight loss drugs are addressed. The telehealth program is especially interesting to us 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. 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.

‣ Addition of new management team and CEO – mid-2018

‣ Relaunch of Pancreaze – February 2019

‣ Marketing approval of avanafil in United Arab Emirates – February 2019

‣ Conversion of Qsymia to direct to patient model – 2019

‣ Marketing approval of avanafil in Russian Federation – March 2019

‣ Launch of online payment system for Qsymia – June 2019

‣ Approval of Qsymia by South Korea Ministry of Food and Drug Safety – August 2019

‣ $48.6 million of senior secured debt repaid – October 2019

‣ MAA for Qsymia in Europe – October 2019

‣ Launch of telemedicine – 4Q:19

‣ 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 – 1H:20

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

‣ Response from EMA for Qsymia – 2020

‣ Submit IND for VI-0106 – 2H:20

‣ Reduce, refinance and repay debt - 2020

Summary

We are in the sixth quarter of the ten quarter turnaround effort and have seen evidence of improvement and opportunity that can convert Vivus into a profitable enterprise. The management team 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 leverage position. While we did not see the improvement in sales following the transition to full control of Pancreaze and the shift to the Qsymia Advantage program that we originally expected, there are numerious positive catalysts that will support revenue growth.

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1. Our calculation of adjusted earnings removes quarterly amortization of $3,638 and annual amortization of $14,552.

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.