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VVUS: New Ideas for Established Portfolio

By John Vandermosten, CFA

NASDAQ:VVUS

READ THE FULL VVUS RESEARCH REPORT

We are initiating coverage of VIVUS, Inc. (VVUS) with a $10.00 price target based on our revenue forecasts for approved products. In addition to a portfolio of weight loss, exocrine pancreatic insufficiency (EPI) and erectile dysfunction (ED) solutions, Vivus maintains a development program for pulmonary arterial hypertension (PAH). Existing product Qsymia and recently acquired product Pancreaze are expected to be the main revenue drivers over the next several years. Qsymia has distinguished itself as the most effective approved product in a limited number of approved pharmaceutical options for weight loss and Pancreaze has a substantial opportunity to increase its low penetration levels into the billion dollar plus market for pancrelipase.

Vivus will implement a new strategy called the Vivus Health Platform which will combine technology, nutritional science and Amazon-era distribution to improve patient experience, penetration and loyalty. Following several pilot studies to measure elasticity, the company has found that selling Qsymia directly to patients at a flat price and passing on the associated savings increases sales volumes with limited impact on profit dollars. Additional exploration is advancing to measure the benefits of internet connected biometric readers, telemedicine, wearable health monitors and scales.

In June 2018, Vivus acquired U.S. and Canadian commercial rights to Pancreaze and its U.S. sales force began making calls on target physicians in February 2019. Under previous ownership, the product was only a small contributor to revenues and was not actively commercialized, resulting in a loss of market share as other competitors put more effort behind their own brands. We expect an improvement in market share as the sales force meets with payors and physicians and as the company implements a patient support program and expands the available dosages of the digestive enzyme.

Stendra/Spedra was originally approved in 2012 for erectile dysfunction and was a late comer to the market as Viagra and Cialis were approved years earlier. Now that generic versions of first movers are available, we anticipate licensing partners will focus on patient populations that are willing to pay for the faster action of the drug. Despite the competitive market, the product does offer a more rapid onset of action in the label, an improved side effect profile, and the ability to use with food and alcohol.

VI-0106 leverages an active pharmaceutical ingredient already approved in organ transplantation, ulcerative colitis and atopic dermatitis and has a well-understood safety profile. Early stage clinical work has shown a dramatic improvement on symptoms in Pulmonary Arterial Hypertension (PAH) patients with the use of VI-0106 and low doses of the drug are thought to remodel the pulmonary artery wall. Vivus plans to file an investigational new drug (IND) application with the FDA this year and is also seeking a partner to develop the product. Both the FDA and EMA have granted an orphan designation to VI-0106 for PAH and the company intends to design forthcoming trials to qualify for Fast Track or Breakthrough Therapy designations.

Debt stands at $291 million as of March 31, 2019, $181 million of which is convertible debt due May 2020. Vivus has a plan in place to pay down a portion of the convertible debt with cash on hand and use new funds raised through debt and/or equity financings to balance the difference. The company recently turned EBITDA positive and with the addition of topline growth and potentially new products, net debt leverage is expected to decline as the company advances the topline.

We see Vivus as an attractive investment as the current management team continues to progress in its ten quarter turnaround effort to improve sales, applying established techniques to marketing products, reorganizing debt and layering on new assets complementary to the company’s strategy. Management experience in turning companies around is extensive.

As of March 31, 2019, Vivus held approximately $105 million in cash on its balance sheet and $291 million of debt. 1Q:19 sales were $16.1 million and non-GAAP recurring EBITDA in 1Q:19 was $0.1 million. After a volatile second quarter as the new initiatives take hold, we expect 3Q:19 revenues and EBITDA to show the beneficial efforts of the Vivus sales team and its direct sales model followed by a rise in subsequent quarters.

Our thesis for Vivus is supported on three sides that support the turnaround. Improved performance with current products, a restructuring of the debt and the addition of new products which are expected to improve the cash flow generation capability of the company and development projects. Other drivers include regional expansion of existing products and further development of VI-0106.

INVESTMENT THESIS

Corporate strategy calls for a multilateral and direct sales approach for Qsymia and relaunch of recently acquired Pancreaze. Additional partners will be sought to license Stendra/ Spedra in unpenetrated geographies and an orphan designation in the US and EU will help advance VI-0106 through the clinic either alone or with a partner. The experienced management team, with numerous turnarounds and transactions under its belt will seek to layer on opportunities with available products focusing on attractive valuations and problems that can easily be fixed to yield growth.

One of the key assets for the company is Qsymia, which has differentiated itself as a class leader compared to other weight loss medicines with high efficacy and a favorable side effect profile. The new marketing approach will directly target physicians and patients and incorporate monitoring technology, diet and counseling to achieve weight loss goals. Pricing elasticity will also play a role and Vivus’ reduction in price is expected to markedly expand the addressable market. Due to a shift to direct marketing, there is expected to be a minimal impact on unit profits but a dramatic increase in units sold.

The other key asset, Pancreaze, was acquired from Johnson & Johnson (JNJ) subsidiary Janssen in mid-2018. The pancrelipase product intended for exocrine pancreatic insufficiency (EPI) patients maintains only three percentage points of market share in the US. With additional sales focus and direct work with KOL’s and patient groups, the company will work to increase market share to six or nine percentage points over the next two to three years.

Stendra/Spedra provides faster action, an ability to be used with food and alcohol, and lesser side effects compared with competitors. While these features can target an attractive niche, there are also generic versions available in the PDE-5 inhibitor class which may limit growth. Vivus will only license rights to this drug, but does have opportunities in various global geographies where it is not being sold.

A new management team was hired in 2018, and is headed by CEO John Amos to convert Vivus into a cash flow positive enterprise. One of the largest hurdles the company must overcome is the debt and debt service. The company carries $291 million of debt which will be partially paid down and refinanced in the next year. The company shifted to generating positive EBITDA in the latter half of 2018 and we expect the magnitude of cash generation to improve as new strategies are implemented, expenses are rationalized and revenues are grown.

We anticipate management’s disciplined focus on cash flow and commercialization fundamentals will allow for both an improvement in leverage statistics and profitability over the next few years. We are also optimistic regarding development success for VI-0106 in PAH, a condition that lacks an effective disease modifying therapy. While our target price is generated based on current approved products, we will add a component to reflect success of the development portfolio following a successful IND and enrollment in clinical trials for VI-0106.

Key reasons to own Vivus’ shares:

‣ Current portfolio of revenue generating products
‣ Disciplined focus on cash flow and debt refinancing
‣ Implementing proven sales strategies to improve Pancreaze market share
‣ Direct sales approach and rationalized pricing to drive Qsymia revenue growth
‣ Additional regions available for Stendra/Spedra penetration
‣ Rights to development asset for PAH
‣ M&A efforts prioritize valuation and turnaround opportunities


VIVUS Portfolio and Indications

VIVUS holds three approved and one in-development asset in their portfolio. All three approved products are currently generating revenues and include Qsymia, which is a combination of phentermine and topiramate extended-release indicated for chronic weight management, Stendra, a phosphodiesterase 5 (PDE5) inhibitor indicated for the treatment of erectile dysfunction and Pancreaze, a recently acquired asset intended for the treatment of exocrine pancreatic insufficiency (EPI). Vivus is developing a product for pulmonary arterial hypertension (PAH) designated VI-0106 that is currently in Phase II development.

Qsymia and Pancreaze both have an identified growth strategy that the company is executing. In our full report we discuss each of the portfolio members, their historical background, mechanism of action, commercialization strategy and other relevant factors that will drive their performance.


View Exhibit I – Vivus’ Product Pipeline

Debt

Vivus carries $291 million of borrowings on its balance sheet, consisting of senior debt and convertible bonds. $110 million of the total is senior debt held by affiliates of Athyrium Capital Management due in 2024. Interest on the securities is 10.375%. The remaining $184 million is 4.5% interest convertible notes due on May 1st, 2020. The conversion price is substantially out of the money and it is expected that the notes will be settled in cash. Vivus’ strategy is to grow topline and EBITDA over the next year sufficient to materially reduce the leverage ratio. The company will also use cash on its balance sheet to repay $30 million of the convertible notes and raise additional funds in debt and/or equity financings to satisfy the remainder on similar terms as the senior secured debt. An alternative may arise if Vivus pursues an acquisition, which will provide additional borrowing capacity and cash flow. Management believes that a deal generating $40 million in EBITDA could provide sufficient capacity to refinance the entire convertible note amount. Total cash interest expense is currently $19.6 million. Based on the anticipated pathway presented by the company, cash interest will increase to $23.48 million under the proposed debt bridge, despite overall lower debt levels due to the refinancing of the 4.5% interest convertible bonds for an anticipated 10.375% interest senior notes.


View Exhibit II – Debt Bridge: Latest Quarter to May 2020

Corporate Milestones

Below are key items related to the corporate turnaround effort and portfolio development.

‣ 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
‣ Launch of telemedicine – 2H:19
‣ MAA for Qsymia in Europe – 2H:19
‣ Increase licensing agreements for avanafil – 2019/2020
‣ Submit IND for VI-0106 – 2H:19
‣ Improvement of analytics and profits for Qsymia and Pancreaze – 2019/2020
‣ Introduce Qsymia Health Platform to managed care and large self-insured employers – 1H:20
‣ Reduce and repay debt - 2020

Summary

In Vivus, we see a defined strategy to solve the primary difficulties that the company faces. The management team has the knowledge and experience to execute on these priorities and has provided detailed specifics on necessary steps to drive topline sales and improve the leverage position. Progress will be easy to monitor in the coming quarters as a relatively quick ramp up in revenues is expected from the improved sales strategy the company has announced. While our valution only accounts for the performance of Qsymia, Pancreaze and Stendra/Spedra, the company also has an attractive development asset VI-0106 which could enter the clinic next year. Management also has extensive experience with M&A which could layer on a new asset to existing infrastructure to provide additional growth opportunities. We initiate Vivus with a $10 price target.

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