Vivus Proxy Battle Continues, Stock Weakens

Vivus (VVUS) is a pharmaceutical company that received FDA approval for their drug Qsymia (phentermine topiramate ER) in July 2012. Although there are long term cardiovascular risk and birth defect concerns associated with prolonged use of Qsymia, clinical trial data suggest that this is the most efficacious FDA-approved weight loss drug ever made. Despite this, sales have been far below expectations up to this point.

Part of this can be attributed to the initially restrictive REMS that Qsymia was approved under. Recall that after a September 2012 launch, Qsymia was a much less attractive option (since the drug had be largely “untested” outside of clinical trials) and had to be delivered through mail orders. This has changed, although Qsymia sales have only continued their old rate of growth in recent weeks. Also worth noting is the launch of competing weight loss drug Belviq, which is being marketed by Arena Pharmaceuticals’ (ARNA) partner Eisai.

As many Vivus shareholders may already know, there has been a concentrated effort by shareholder activist groups led by 10% VVUS stakeholder First Manhattan Co. (FMC) – led by Sam Colin, to take control of the company due to claims that current management is incompetent, overcompensated, and unable to successfully launch Qsymia to maximize the value of this asset.

The letter itself, which was issued recently and released through Business Wire, explained that the 2013 Vivus Annual Meeting was fast approaching and that shareholders ought to support FMC in their efforts to replace company management. The grievances against current management were quite extensive, and included particularly notable points about the execution of the Qsymia launch:

“Vivus’ Board and management damaged shareholders with a failed launch of Qsymia:

No small company has ever successfully addressed the primary care physician market because such a huge challenge requires the vast resources of a large pharma partner. Vivus’ two obesity therapy competitors got this fundamental decision right by partnering with larger companies in 2010. Vivus’ management and Board got it wrong.

In the absence of the required human and capital resources provided by a large pharma partner, Vivus shareholders are footing a massive bill for operating expenses—over $2.20 per share annualized—while generating insignificant revenue. You are paying dearly for the unforced errors of the sitting Vivus Board.

The primary determinant of drug use is the out-of-pocket cost to the patient. Due to the lack of adequate market research on this most basic metric—consumer price sensitivity— the launch failed.

Vivus fails to grasp why the patients continue on Qsymia for only three months when medically they should continue for much longer. Inexplicably, Vivus’ CEO recently proclaimed on a conference call that three months of persistence is a great accomplishment that will underpin Qsymia becoming a blockbuster. In reality, the low persistence on Qsymia is a sign of trouble ahead for Vivus shareholders.”

Vivus stock has seen slightly better performance since it became public knowledge the FMC was interested in turning the company around, although short interest seems to be rising along with VVUS. Possibly dangerous to these bears is increased involvement of ~2% shareholder Sarissa Capital Management – led by Carl Icahn’s former head of healthcare investments Alex Denner.

Making the story more complicated (and far more interesting) was Vivus management’s response to FMC’s proxy letter, which can be found on the company’s website.

Vivus did not directly address claims regarding the execution of Qsymia’s launch as mentioned above, although the track record of CEO Leland Wilson was discussed:

“FMC’s Incorrect Claim: Leland Wilson, VIVUS’s CEO, “…has zero experience in launching blockbuster drugs into the US market…”

The truth is: Leland Wilson has extensive experience in new drug commercialization, including:

Top ranked Sales Director in the U.S. for Naprosyn® (Syntex Laboratories, Inc.), which was one of the largest selling drugs in the U.S. at the time;

Director of Marketing at Lifescan® when OneTouch® became one of the largest selling blood glucose monitors in the U.S.; and

CEO of VIVUS during the launch of MUSE® in 1997, which was then considered to be one of the most successful drug launches in the U.S, achieving $130M in first year sales.”

Update: I’ve included a graph prepared by FMR, demonstrating the financial deterioration of VVUS since Q1 2011