Why VIVUS Inc. Is Falling Today

VIVUS Inc. is falling to multi-year lows in premarket today. Find out why.

Feb 25, 2014 at 9:32AM

VIVUS (NASDAQ:VVUS) reported earnings after the bell yesterday and its shares have been on a roller coaster ride ever since. Immediately following the release, shares rose over 4%, but have now fallen close to 13% in premarket trading this morning.

So, what's up?

Conference call takeaways
First the positive news. CEO Seth Fischer started off by announcing that the company has modified the design of Qsymia's postmarketing study in the U.S. to create a potential pathway to approval in Europe. As a refresher, Qsymia's application in Europe was rejected last year primarily due to a lack of long-term safety data. Per Mr. Fischer's comments, he said that they have received helpful feedback from EU officials regarding the kinds of safety data needed to move forward, and have submitted an amended protocol to the U.S. Food and Drug Administration, or FDA.

He also reminded investors that the commercialization of the company's erectile dysfunction drug Stendra is well under way, with multiple licensing deals in place with AuxiliumMenarini and Sanofi. These deals are worth up to $460 million in potential milestone payments, of which VIVUS has already received around $61 million.

Turning to the bad news, Qsymia revenues were negatively affected by the company's marketing efforts, namely free trial offers for the initial dose and the pay no more than $75 per month for up to three months offer. And even with these hefty promotional efforts in place, Qsymia prescriptions for 2013 still only came in around 124k. A quick look at the data made publicly available by Arena Pharmaceuticals (NASDAQ:ARNA) suggests that Belviq should easily beat Qsymia in terms of prescriptions written during the first year on the market. In short, Qsymia appears to be losing out against Belviq, despite having better efficacy. 

Getting down to actual earnings, VIVUS lost $17.2 million, or $0.17 net loss per share, in the fourth quarter of 2014. On the bright side, VIVUS was able to cut its net loss per share by 70% due to the licensing revenue from Stendra.

VIVUS also greatly improved its cash position, ending the year with $343.3 million in cash and cash equivalents as of Dec. 31, 2013. This is an increase of $128.7 million compared to a year ago, giving VIVUS a nice financial cushion for the time being. 

So, why are VIVUS shares so volatile post-earnings?

My view is that the Mr. Market first saw the 70% improvement in net losses as a positive. Indeed, this is a substantial improvement, but it's important to understand that this is solely the result of one-time charges, i.e., milestone payments. And future milestone payments for Stendra are not guaranteed, but rather tied to the drug's commercial performance.

By contrast, I think what bummed investors out is a question by Lee Kalowski, an analyst from Credit Suisse. Specifically, he asked why Qsymia prescription numbers have yet to rebound from the holiday season. To provide some context, VIVUS's management blamed Qsymia's flagging prescription numbers in the fourth quarter, earlier in the call, on the holiday season. Unfortunately, Mr. Fischer was unable to provide much insight into the issue, simply stating that numbers should pick up late in the quarter. 

Foolish final thoughts
Investors are clearly unhappy with VIVUS's earnings report yesterday, pushing the stock down to multi-year lows in premarket. That said, you need to understand that VIVUS is getting close to trading at a mere 2.5 times its cash position, a rare event in the biopharma space. And while the potential launch of two new obesity medications from Orexigen Therapeutics (NASDAQ:OREX) and Novo Nordisk could be yet another problem facing VIVUS, I have to wonder if this company is becoming so cheap that it might be an interesting acquisition target.

With Sarissa Capital intimately involved in VIVUS's dealings and their history of putting companies on the auction block, you shouldn't be surprised if an exit strategy is being mulled over by upper management. Indeed, a licensing deal for Qsymia would probably cost more than a buyout at this point for a larger pharma, especially if Arena and Orexigen's partnerships are any guide. However, trying to simply guess which companies big pharmas will acquire isn't a solid investment strategy for investors to follow.

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