When it comes to the investing world, the ultimate compliment you or your company can get is being compared to the likes of visionaries like Warren Buffett or iconic companies likes Apple or Coca-Cola.
If there's an antithesis to the iconic companies noted above, it might be biotech stock Dendreon. Dendreon is now trading for mere pennies ($0.16 to be exact) after it filed for chapter 11 bankruptcy protection earlier this month. What's so incredible about the fall of Dendreon is that there was so much initial promise for the company after the Food and Drug Administration approved its revolutionary advanced-stage prostate cancer vaccine Provenge in 2010. But as you can tell, promise doesn't always translate into results.
The unfortunate fall of Dendreon
Provenge was originally expected to be a game-changer for metastatic castration-resistant prostate cancer patients when it was approved, with initial peak annual sales estimates of over $4 billion. The clinical data that led to its approval showed a median overall survival of 25.8 months, compared to just 21.7 months for the control group.
Yet a number of miscues along the way doomed Provenge's annual sales potential to less than 10% of Wall Street's original sales expectations. Heading Dendreon's list of problems was a disorganized launch coupled with its astronomical $93,000 treatment price tag. Yes, patients and insurers expected a higher price tag than traditional treatments considering that it was an immunotherapy designed to heighten the body's immune system to recognize and attack cancer, but $93,000 was far and away higher than anyone was expecting, and it tended to scare physicians away from prescribing the vaccine for fear of not being reimbursed.
Competition was another major problem for Dendreon. Being able to make it to market quicker than a number of other advanced prostate cancer therapies, such as Medivation's and Astellas' Xtandi, should have given it some level of competitive advantage. Instead, Provenge sales never took off, and it wound up taking a back seat to a handful of its peers.
Lastly, Dendreon's ongoing losses and crippling debt, despite two major restructurings, put it in a poor position to properly advertise Provenge and compete against the likes of Xtandi and other core prostate cancer medicines.
To sum up, no company wants to end up as the next Dendreon, but it's quite possible another once-hyped biotech stock could be following its path.
Could this company follow in Dendreon's footsteps?
If you thought there was a lot of excitement surrounding Provenge, then I would argue that VIVUS' (NASDAQ:VVUS) weight control management drug Qsymia had investors bursting at the seams when it was approved two years ago.
On paper, an anti-obesity drug approved by the FDA looked like gold. It had been more than a decade since a new weight control management drug had been approved, and the number of obese adults in the U.S. has surpassed one in three according to the Centers for Disease Control and Prevention, giving VIVUS an enormous number of possible patients. Further, the FDA's approval of Qsymia came after it delivered an average weight loss of 6.7% and 8.9% at the recommended and highest doses.
Initial peak annual sales estimates for VIVUS had pegged the drug as a possible $1 billion blockbuster. Yet after two years we're seeing an annual sales run rate of $50 million based on what the company brought in during its recently released third-quarter report.
What's gone wrong for VIVUS?
What's gone wrong you ask? How about everything!
First, VIVUS is facing a mountain of competition all of a sudden. Arena Pharmaceuticals had its anti-obesity drug Belviq approved by the FDA within a few weeks of VIVUS' Qsymia, and Orexigen Therapeutics recently had its weight control management drug Contrave given the thumbs-up by the FDA as well. All told, VIVUS no longer has the anti-obesity market to itself (which didn't seem to really matter much when it did for a full year anyway!).
Secondly, safety has played a key role in pushing Qsymia to the background. To be clear, the FDA would not have approved Qsymia in the first place if it didn't consider the drug safe. However, physicians clearly prefer Belviq and Contrave from a long-term use standpoint. Orexigen's Contrave is particularly intriguing because an interim analysis of its 8,900 person cardiovascular outcomes study, known as the Light Study, demonstrated no notable adverse event differences between Contrave and the current standard of treatment. In other words, Qsymia's safety profile simply isn't favorable next to Contrave or even Belviq.
Third, VIVUS has struggled to get Qsymia covered by health-benefits providers. With each passing quarter the language of its earnings reports rarely seems to change as it discusses progress with getting Qsymia added to insurers' approved medications list; it's pretty obvious that coverage is still spotty at best. This isn't to say that Belviq has done remarkably better, but the proof is in the pudding, with Arena and its licensing partner Eisai logging $16.8 million in product revenue in the third quarter, while VIVUS notched just $12.5 million in Qsymia sales despite having a full year head start on Belviq.
Finally, VIVUS' "go-it-alone" attitude might be crushing Qsymia's sales potential. Arena, for example, chose to license out Belviq to Eisai. In exchange for only 31.5% of net Belviq sales to start (Arena's net royalties can actually go up to 37.5% based on Belviq's annual sales totals), Arena received a bounty of upfront milestone cash. VIVUS, on the other hand, gets to keep all of its net Qsymia sales, but it's also working with a far less experienced marketing staff.
Dendreon rolls out the red carpet
What's really concerning to me is that VIVUS' cash position, which stood at $306.9 million as of the end of the third quarter, may not last too long when paired up next to its $224 million in debt. With hefty losses projected through 2016, it's possible that VIVUS' total cash could be sitting around $100 million by then (at least according to my math).
The company's debt situation could be even sketchier. According to an 8-K (page 6, if you're curious) released in March 2013, VIVUS took out two separate debt tranches: one for $50 million, less fees, and one for $60 million, less fees. The repayment schedule for these loans began in the second quarter of 2014 and ends during the first quarter of 2018 (i.e., repayment is expected in an expedited manner). More so, the total expected repayment for the $50 million tranche is a minimum of $70.7 million (it could be higher if Qsymia's sales soar). The second tranche is a minimum of $75.6 million, and that's not even counting the variable Q1 2018 payment. For you math-o-phobes out there, that's a greater than 40% return for the lender through 2018 on the first tranche, and possibly more than 25% on the second tranche. These are horrible lending terms, plain and simple!
Even with VIVUS licensing out Stendra and Spedra, I don't see the company having a shot at profitability anytime soon. If VIVUS struggles to repay its debt and/or continues to burn through its cash due to ongoing quarterly losses, it's possible that Dendreon could be rolling out the red carpet in a few years to welcome VIVUS to the bankruptcy column.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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