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VVUS: Qsymia Responds to New Approach

By John Vandermosten, CFA

NASDAQ:VVUS

READ THE FULL VVUS RESEARCH REPORT

Second Quarter 2019 Results

Vivus, Inc. (VVUS) released second quarter results on August 6, 2019 and provided an update of financial and operational results for the April to June period. During the three month interval the company achieved topline growth of 23%, launched online payments for Qsymia, assumed full responsibility for Pancreaze in Canada from Janssen and launched its Phase IV Qsymia study in adolescents. Following the end of the quarter, Vivus announced the approval of Qsymia in South Korea and disseminated results of a study illustrating the weight loss benefits of Qsymia used in conjunction with gastric sleeve surgery.

Revenues and earnings exceeded our expectations in the second quarter. Sales of $18.4 million compared to our forecast of $16.9 million due to better Qsymia product revenue and Pancreaze royalty revenue partially offset by lower than expected Pancreaze product revenue. Adjusted net loss of ($0.22) compares to our estimate of ($0.47) with the difference attributable to better revenues, better gross margin and lower than anticipated R&D.

Total cost of goods sold was $4.4 million. When broken down by product, this represents a gross margin of 91% for Qsymia, 65% for Pancreaze and 6% for Stendra/Spedra supply revenue. The sequential improvement in Qsymia gross margin was attributable to improved revenues for the product and timing of inventory in allocation of overhead. Pancreaze margin of 65% was as expected given the assumption of responsibility by Vivus from Janssen. SG&A of $10.1 million was down 14% over the prior year as expenses related to the Pancreaze acquisition were not repeated.

Research and development expenditures were $2.4 million and while lower than our estimate, represented a 15% increase over prior year levels. Contributors to the increase include the launch of the adolescent trial for Qsymia and spending related to post-marketing requirements for Pancreaze.

Vivus reported adjusted EBITDA of $2.1 million in the second quarter, up from $0.1 million in the prior quarter. Despite the positive EBITDA, cash used in operations in the second quarter was ($10.5) million, predominantly due to an inventory build related to required minimums for avanafil purchase. Partners Menarini and Metuchen also have minimum purchase requirements which are expected to reverse this inventory build as the year progresses.

Cash and equivalents on the balance sheet totaled $94.4 million, down from $104.7 million at the end of the first quarter and $111.2 million at the end of 2018. While adjusted EBITDA has been positive year to date, inventory builds, which we expect to reverse, and interest payments have consumed cash, reducing the quarter to quarter balance. We anticipate that if current trends hold, improved revenues and product margin contribution combined with favorable cash flow items will add to the cash balance in the second half. Debt is carried at $292.4 million on the balance sheet

The key driver for performance was the advance in the Qsymia Advantage Program which was launched early in the year. This was followed by the June start of the e-medicine platform which enables patients to purchase the medication online and receive home delivery. The program has flattened the pricing structure for the drug and lowered total cost which is expected to improve penetration and extend the duration of use for Qsymia. A third component of the program will add telemedicine before year end. As we discussed in our initiation, the new approach is able to eliminate substantial costs from distribution, allowing for a similar gross margin in terms of dollars per prescription, but with a more attractive $98 price for patients. Initial results show that more patients are moving to the higher dose and the number of 90-day scripts has improved markedly. We anticipate continued improvement in metrics in 3Q as the program has more time to take hold and the program is fully implemented.

Qsymia is also advancing on other fronts including the launch of a Phase IV study in adolescents, which was started in May. The study is expected to enroll 200 patients at 20 US clinical sites. The duration of treatment is 56 weeks and will be combined with a reduced-calorie diet, increased physical activity and support. A successful outcome could expand the addressable population into adolescents.

The weight-loss medication was also approved by the South Korean Ministry of Food and Drug Safety (MFDS) in early August. The approval will result in a $2.5 million milestone payment by Alvogen to Vivus, which is expected to be received in the third quarter. We discuss the approval in our recent note. In other overseas efforts, Vivus expects to submit a Marketing Authorisation Application (MAA) in Europe and seek decentralized approval in six countries.

The results of study examining the use of Qsymia in combination with sleeve gastrectomy in patients with a BMI of 50 or above were recently presented in the journal Surgery for Obesity and Related Diseases. 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. The results of the study and the use of the combination approach suggest that the use of Qsymia along with a low calorie diet can reduce surgical risk and use of Qsymia after the procedure may help obese patients avoid a second surgery. Patients in the combination arm lost more than twice the weight with an average of 28.1 kg during the pre-operative period compared with an average of 12.3 kg for those in the control group. Two years after surgery, the experimental group lost 11.2% more body weight than the control group, with a p-value of 0.007. Additional summary of data is included in the press release.

Pancreaze distribution in Canada was shifted from Janssen to Vivus in the second quarter which led to a 10-week transition period from approximately mid-June to mid-August. There was a build in distribution prior to the transition to ensure sufficient product was available, which also positively impacted 2Q royalty revenues by an estimated $400,000. Management anticipates shipments under Vivus to begin in the second half of August. The change in distribution will be accompanied by a change in reporting for the product where revenues will be presented as part of product sales and product costs will appear in cost of goods sold.

VI-0106 remains on track for a 2H:19 investigational new drug (IND) application. Vivus’ IND is in process and generating necessary stability data for the once-daily extended release formulation. The science team anticipates that the formulation will provide therapeutic drug levels while minimizing immunosuppressive effects for pulmonary arterial hypertension (PAH) patients.

Corporate Milestones

Vivus is in the fourth quarter of its ten quarter turnaround and is demonstrating early success, especially in its Qsymia efforts. We anticipate continued improvement as the changes in marketing for Qsymia have more time to take hold and as Pancreaze sales efforts yield results. One of the dominant issues facing Vivus is the debt overhang related to its convertible debt. Management does not want to assume new debt prior to the expiration of active debt in order to avoid concurrent interest expense. The team’s objective is to improve the company’s profile with respect to revenues and earnings sufficiently to justify better debt deal terms by 2Q:20. Second quarter results have shown evidence of execution on the corporate turnaround which will help with this goal. 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
‣ 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

We are in the fourth quarter of the ten quarter turnaround effort and see evidence of improvement 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. 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 will add a valuation component for these eventualities when they occur. We increase our target price on Vivus following second quarter results due to anticipated sales in South Korea in 2020 and better than expected Qsymia revenue.

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