Authors: Hsiou-Chi Liou, Jason Hsu
VIVUS Inc.
(VVUS) and Arena Pharmaceutical (ARNA) are front runners in the development of
weight-loss drugs. The rollercoaster
rides for both stocks over the past two years demonstrate the volatility of
small cap biotech stocks without commercial products. The FDA finally approved ARNA’s Belviq
(lorcaserin) on June 27, 2012. This
makes Belviq the first weight-loss drug approved by the FDA in 13 years and reignites
the enthusiasm for such drugs. With the
upcoming FDA decision on VVUS’s Qnexa on July 17, 2012, there are a number of
issues investors should consider: Will Qnexa
receive FDA approval? What’s the fair value for VVUS? What strategies can investors
use to gain on the upside and protect against the downside?
Here we
analyze Qnexa clinical trial data, the probability that Qnexa will receive FDA
approval for treating obesity, market opportunities, and risk factors for Vivus.
Our discounted cash flow model suggests
a weighted target price for VVUS at $33-$34.
Clinical Trial Data
First,
let’s look at the phase 3 clinical trial data and benchmark Qnexa against the
already-approved Belviq.
Arena
conducted three phase 3 trials for Belviq (locaserin). The studies showed that,
in both 1-year and 2-year studies, about 65% and 35% study subjects treated
with Belviq achieved weight loss of >5% and >10%, respectively. The percentage is lower for people with type
2 diabetes. By comparison, the three
phase 3 trials conducted by Vivus showed that in 1-year studies, 84% of
patients taking Qnexa achieved weight loss >5%. In 2-year studies, 79% of study subjects
receiving Qnexa had weight loss >5%, whereas about 54% and 30% of patients
achieved weight loss of >10% and >15%, respectively. Moreover, obese people taking high dose Qnexa
showed average weight loss of 11-15%.
Therefore, from an efficacy point of view, Qnexa appears to have greater
and more sustainable weight loss benefits than Belviq.
The
reason that the FDA held back approval for these two drugs in 2010 was primarily
over safety concerns. Both drugs have
their own issues. Belviq’s most common adverse
effects include headache, nausea, hypoglycemia, and upper respiratory tract
infection. Qnexa’s common adverse
effects include skin sensation, nausea,
dry mouth, constipation, dizziness, and insomnia. While these adverse effects are not serious, the
FDA had concerns about other serious adverse effects, even though they were rare
in these studies.
For Belviq, a major issue has been an association with
increased incidences of mammary adenocarcinoma.
Arena was able to address these issues by providing animal data showing
that only high-dose locaserin increased mammary adenocarcinoma due to increased prolactin production
(Arena Pharma 2011 10K). Thereafter,
the FDA Advisory committee voted 18 to 4 to recommend Belviq for the treatment
of obesity, which was subsequently approved by the FDA on June 27, 2012.
For Qnexa, the FDA requested a comprehensive
assessment of topiramate's (one of the two components in Qnexa) and Qnexa's
teratogenic potential, including a detailed plan and strategy to evaluate and
mitigate the potential teratogenic risks in women with childbearing potential
taking the drug for the treatment of obesity. In addition, the FDA asked Vivus
to provide evidence that the elevation in heart rate associated with Qnexa does
not increase the risk for major adverse cardiovascular events. From Vivus’ 2011 10K filing, it appears that
the company has engaged in discussions with the FDA and has provided the data
that the FDA requested.
Over the past year, the company has provided more data
that shows that Qnexa does not increase the risk for major cardiovascular
events or the observed increases in heart rate. In addition, the prevalence
rate for teratogenic defects is very low (0.29%), which is comparable with the
rates for infants of women who have previously taken antiepileptic drugs. On February 22, 2012, the FDA Endocrinologic
and Metabolic Drugs Advisory Committee voted 20 to 2, recommending that Qnexa
be granted marketing approval by the FDA for the treatment of obesity in
adults.
In conclusion, based on a favorable weight loss
efficacy of Qnexa over Belviq and that Vivus may have addressed the serious
adverse effects raised by FDA, we believe that it is highly probable (>90%)
that FDA will approve Qnexa for obesity treatment.
Market size information
According to the National Health and Nutrition
Examination Survey conducted for 2007-2008, 68% of adults in the U.S. were
classified as overweight, defined as a body mass index (BMI) greater than 25.
The survey also found that 33.8% of adults were obese (BMI > 30). The percentage of American adults that are
obese could climb as high as 43% over the next 10 years. Americans spend more than $30 billion annually
on weight-loss products and services.
Assuming 20-25% could be spent on weight loss prescription drugs, the
market size is roughly $6B to $7.5B.
Currently approved anti-obesity drugs include Xenical
(orlistat), marketed by Roche, its over-the-counter counterpart, alli, marketed
by GlaxoSmithKline, and phentermine, in several dosage forms and strengths that
are available from several generic manufacturers. Thus, Belviq
and Qnexa will compete with existing products as well as new products in the
future. These numbers are incorporated
into the valuation of the VVUS stock price (see below).
We have not
overlooked another revenue generating drug from Vivus, Stendra (avanafil), which
was approved by the FDA in April 2012 for the treatment of erectile dysfunction, or ED. ED was reported in 52% of men between the
ages of 40 to 70 in the Massachusetts Male Aging Study, with the incidence
increasing with age. Currently marketed
drugs such as Viagra, Levitra, and Cialis all belong to the same class of inhibitors
for phosphodiesterase type 5 (PDE5), which inhibit the breakdown of cyclic
guanosine monophosphate. Vivus’ Stendra
is also a PDE5 inhibitor and thus will compete with such existing drugs.
The worldwide
sales in 2011 of PDE5 inhibitor products for the treatment of ED were approximately
$4.2 billion. Viagra ad Cialis each have
about 45% market share ($2.0 billion for Viagra, $1.9 billion for Cialis),
whereas Levitra has about 7% market share ($300 million). While the market for PDE5 inhibitors will
continue to represent a sizable market opportunity for Vivus, we shall factor
in the competition the company will face as well as how fast and aggressive
Vivus is able to market its product.
Finally, another important point to make is that most
of Vivus’ patent portfolios for Qnexa and Stendra (disclosed in 10K) only cover
the U.S. and Canada. This suggests that
the major sales and revenue source for Vivus products will be from North
America. This was factored into our
stock valuation.
Risk
A number of risk factors
could affect VVUS’ stock price estimate.
(1)
FDA approval status. A delayed approval or even a rejection (a
remote possibility) could make the stock price decline.
(2)
Marketing and commercialization strategy. With 38 employees, Vivus must seek
pharmaceutical partners for commercialization and marketing of its
products. It has not disclosed any
partnership agreement with any pharmaceutical companies yet in its annual report;
however this could change in the next few months after the FDA decision on
Qnexa.
(3)
Patent position and barrier to
entry. Vivus is the exclusive licensee
of 31 patents and 13 published patent applications, all in the U.S. and Canada. Thus, the marketing rights are primarily in
North America. Unless Vivus also applies
for patent protection in other developed or emerging markets, it will not be
able to defend its products worldwide.
(4)
Competition: As described in the market information
section, the anti-obesity and erectile dysfunction markets have multiple
competing products. The opportunities
for Vivus to expand market share depends on its products’ superior features or
competitive advantages as well as its marketing strategies. Qnexa appears to have better efficacy than
Belviq and other anti-obesity products.
Once approved, it should have a better value proposition than other
products.
(5)
Business risks: At present, Vivus has secured the
commercialization right for Stendra.
However, it has limited revenue potential due to competition in the ED
market. Thus, the company’s valuation is largely hinged on Qnexa approval. Furthermore, with few staff, Vivus must seek
commercialization partners to expedite its sales. Alternatively, Vivus may strategically seek acquisition
and merger partners.
Valuation
We
used the FCFE valuation as the primary model for estimating VVUS stock
price. We used median gross profit
margin and net profit margin from comparable companies (e.g. HGSI, SGEN, DNDN,
VRTX, RGEN, or BMY) as a guide to estimate revenue growth, gross profit, net
income, and free cash to equity for a five-year period (2013 to 2017). Based on FEFE model with 15% discount rate, the
estimated stock price is $33.5, $42.5, and $9, respectively, for three
scenarios (baseline, optimistic, pessimistic). The weighted fair value of the stock is $33-$34,
after assigning probabilities to each scenario.
Baseline Scenario:
This assumes that FDA approves Qnexa for obesity treatment in July 2012 and the
company is able to launch the product in Q4 2012 with a pharmaceutical
partner(s). Our estimate of Qnexa
revenue is the following.
The
estimated market for weight loss
prescription drugs is ~$7B, as described above.
We can also derive the market size by other method. Assuming the cost for weight loss drug is $2-4/day
and each person is on the regime for average 150 days, it amounts to average
$450/yr/person. Assuming 20% of obese
people (16M Americans) use prescription drugs, the total market size for weight
loss drugs is $7.2B.
Due to
competition from Belviq and other existing anti-obesity drugs (Xenical, alli,
phentermine), our assumption for maximal market share of Qnexa (if approved by
FDA) is 20% ($1.44B) over next few years.
Thus, our estimate for Qnexa sales is $25M (2012), $100M (2013), $220M
(2014), $440M (2015), $750M (2016), and $1.12B (2017). This represents a gradual increasing in
market penetration rate of ~1.4%, 3.1%, 6.1%, 10.4%, and 15.6%,
respectively from 2013 to 2017.
As for
Stendra, due to keen competition, we assume the lowest estimate of maximal
sales of $380M by 2017, equivalent of ~9% market share of $4.2B. Our
estimate for Stendra sales is $20M (2012), $40M (2013), $70M (2014), $130M
(2015), $230M (2016), and $380M (2017).
Combined
both revenue numbers and assume a linear decline of revenue
growth from high growth stage to a normalized 8% over a 4-year time after 2017,
our estimated stock price for VVUS is $33.5 by the end of 2012.
Optimistic Scenario: Build upon the baseline scenario assumption,
the company could potentially grab larger market share for both products. Assuming an extra 10% increase in sales, this
will boost company valuation to an estimated stock price of $42.5.
Alternatively,
the company
may be acquired by other pharmaceutical company. This may represent the best scenario as the
merger and acquisition will expedite the commercialization of its products and
maximize shareholder value.
Pessimistic Scenario:
This represents the worst outcome if FDA rejects Qnexa approval or issues
another CRL. Under this scenario, the revenue is mainly from Stendra. An estimated stock price is $9.
If we assign probability for each scenario, 60% for
Baseline, 30% for Optimistic, and 10% for Pessimistic, then the weighted stock
price is ~$33-$34.
Disclosure
We have no position in the
stocks mentioned, but may initiate a long position on VVUS over the next 72
hours. We are independent analysts. We receive no compensation to write about any
specific stock.
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