Is Vivus a Buy with Obesity on the Rise?

With shares of Vivus (NASDAQ:VVUS) now trading just above $10, is VVUS a BUY, a WAIT and SEE, or a STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

At a glance, Vivus appears to be a well-situated pharmaceutical company. In late September, the company introduced its weight-loss drug Qsymia, ahead of Arena Pharmaceuticals’ (NASDAQ:ARNA) Belviq and Orexigen Therapeutics’ (NASDAQ:OREX) Contrave, into a market that has seen no new drugs developed in more than a decade. With approximately 69 percent of all Americans obese or overweight, according to the Food Research and Action Center, the potential market is huge. If the drug permeates even 1 percent of that potential market, the company could have 1.51 million customers, and if it achieves 20 percent saturation, as Pfizer’s (NYSE:PFE) Viagra did, the number could become 30 million. Bloomberg health-care analyst Andrew Berens predicted that the drug could generate as much as $1 billion per year by 2016.

But Qysmia is mired in problems.

In the most recent quarter, Vivus fell to its lowest value since February. As of Monday, the California based company had gained 5 percent this year. However, after reporting a larger third-quarter loss than analysts had expected, shares dropped 20 percent, closing at $11.82 following the report.

For the three-month period, the company’s net loss grew to $40.4 million, or 40 cents per share, an increase from $8.6 million in the year-ago quarter. In comparison, analysts had anticipated a loss of only 32 cents.

While bottom line results missed estimates due to higher Qsymia-related expenses, net revenue improved to $41,000. According to the company’s earnings conference call, the net revenue represented “the 656 Qsymia prescriptions shipped from certified network pharmacies to patients.”

Qysmia’s problems stem from both the company’s method of marketing and the unwillingness of health insurers to cover the drug.

Before the drug was released, Vivus had said that the company did not expect health plans to agree to pay for the medicine. Results were better than the company’s prediction, but not by much; in its first week on the market, Qsymia was covered approximately a third of the time it was prescribed. By the end of the quarter, that number had fallen to 1 in 5 prescriptions.

In the conference call, the company’s Chief Commercial Officer and Senior Vice President Michael Miller cited the lengthy gap between obesity treatments as the reason for the drug’s slow sales. “Given that the obesity market has not seen a branded introduction in 13 years, payer coverage is minimal, and there is prescription abandonment due to the cash outlay,” he said. The company’s pharmacy database showed that 30 percent of pending prescriptions were abandoned by patients due to the out-of-pocket costs, which amount to $160 for a 30 day supply without insurance and $62 with a co-pay.

Additional problems have come from the company’s strategy of targeting specialty doctors rather than primary-care physicians. According to Berens, these are the doctors most likely to prescribe the medication. However, Vivus believes that since Qsymia is positioned for the management of medical obesity, “clinicians are beginning to learn how to integrate Qsymia into the treatment of patients with other chronic diseases.”

The company stated that because the drug was launched only a short time before the end of the third quarter, the majority of targeted health care providers have had little chance to adopt the drug.

Berens disagreed. “The street expects the drug to be a blockbuster, but it looks like a very slow launch,” he said to Bloomberg. Investors “are not sure their strategy makes any sense.”

His advice to Vivus is two-fold. First, the company may need to offer coupons to patients to make the drug more affordable, and second, it may need to partner with a larger drugmaker that has an existing sales force aimed at primary care doctors, like GlaxoSmithKline (NYSE:GSK) or AstraZeneca (NYSE:AZN).

Based on the key metrics above, Vivus looks like a WAIT AND SEE in the near term.

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