Microsoft word - vvus update report 07.11.08.doc

R U T H A N N E W I L L I A M S R O U S S E L r r o u s s e l @ t h e r o b i n s g r o u p . c o m
Vivus Inc. (NasdaqGS: VVUS)
RATING: BUY
INDUSTRY: HEALTH SCIENCES
DISCLOSURES: 6A,9
RISK: HIGH
CLOSING PRICE
TRAILING P/E
SHARES OUT
MARKET CAP
3 YEAR EPS
PRICE TARGET
07/10/08
ANNUAL DATA – DECEMBER FISCAL YEAR
EARNINGS
REVENUE (MILS.)
VVUS: Raising Price Target To $12

In a pleasant surprise, on July 10 an FDA panel recommended that “black box” warnings not be added to the
labels of anticonvulsants such as topiramate, a component of Qnexa. We would buy VVUS on any weakness, and
raise our price target to $12.

Don’t Fear The Black Box

In a pleasant surprise, on July 10 an FDA panel recommended that “black box” warnings not be added to the
labels of anticonvulsants such as topiramate, a component of Qnexa.

We considered concerns about this overblown anyway. Even if Qnexa had ended up with a black box required on
its label, it would not have been alone. Competitor Orexigen’s (Nasdaq: OREX: $8.44 – Not Rated) Empatic
contains zonisimide, which is in the same group of anticonvulsants, and OREX’s Contrave contains bupropion, an
antidepressant that already has a black box in that indication.
In any event, obesity is also not without risks, and at 92 mg of topiramate, the highest dose of topirimate tested in
Qnexa is at the low end of the dose range commonly prescribed for seizure, which goes up to 400 mg. No
suicides have been observed in Qnexa clinical trials.
In the seizure trial data the FDA reviewed, suicidality occurred in 0.43% of patients on the anticonvulsants, versus
0.22% of patients on placebo.
Diabetes Market An Attractive One For VVUS

Diabetes is over a $20 billion market in the U.S., and growing. Over 167 million prescriptions were written for
diabetes treatments in the U.S. in 2007. In late June, the CDC announced that there are now 24 million diabetics
in the U.S., or 8% of the population, an increase of about 3 million over two years. The global diabetes treatment
market is $23 million.
This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 200, 3220 SW 1st Ave. Portland, Or. 97239; (877)-276-2467 Although at first glance it might seem that the diabetes market is well-served with products, in practice doctors and patients agree that there is unmet need: Many existing products have side effects, including weight gain’ Medications often lose their effectiveness after several years and must be added to or changed
The major classes of type 2 diabetes medications, besides insulin, are metformin, thiazolidenediones, and
sulfonylureas.
Diabetes Landscape At A Glance
As an appendix to this report we have provided an updated comparison chart of diabetes treatments, both
currently on the market and in late-stage development/preapproval.
From published reports and from conversations with investigators, we understand that the average weight of
obese patients in both obesity and diabetes trials is typically 90-100 kilograms, or roughly 200 pounds.
We compare improvement in HbA1c from baseline rather than against placebo, because a change in the
guidelines has made some results of past trials non-comparable.
Well-Positioned For Diabetes Drugs Rule Change
As previously reported, the FDA’s Endocrine and Metabolic Drugs Advisory Committee has recommended that
cardiovascular outcomes data be required for all type 2 diabetes drug candidates, whether or not clinical trials had
shown any evidence of cardiovascular risk.
VVUS has positioned itself ahead of this development by working with David Orloff, M.D., the Executive
Director of Medical and Regulatory Affairs at VVUS’s CRO Medpace, Inc. (privately held) and former Director
of the Division of Metabolism and Endocrinology Products at the FDA.
We understand from Dr. Orloff that in discussions with the FDA, VVUS is proposing a new “third way” roadmap
for trials of weight loss drugs for diabetes, as distinct from weight loss drugs for obesity or non-weight loss
diabetes drugs. This means there is a good chance that these onerous new rules won’t apply to VVUS.
Vigorous VVUS
VVUS has demonstrated that it can execute. Its development team took Evamist from in-licensing to
approval and sale in just over three years, and all the Qnexa pivotal studies have completed enrollment
well ahead of schedule.
So far, Qnexa has shown encouraging results for safety and efficacy, and seen greater retention in early
trials than did competitors.
A potential diabetes indication is underappreciated. Data from the Phase II Qnexa diabetes trial
presented on June 10 at the American Diabetes Association annual meeting exceeded the expectations of
the researchers and this analyst alike.
The rest of VVUS’s pipeline – Luramist and avanafil -- is also underappreciated.
With cash and securities on hand of $179.5 million, plus a likely $30 million milestone payment on the
way for Evamist, and $28 million coming in for avanafil development,
________________________________________________________________________________________________________________________________________________________________________ This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 201, 3220 SW 1st Ave. Portland, Or. 97239; (877) 276-2467 VVUS has more than enough cash to fund Qnexa (which the company estimates will take about another
$90 million), without making a significantly dilutive stock offering.
Based on the potential for two blockbuster indications for Qnexa, and over 7% annual growth in the U.S. diabetic
population alone, we raise our price target from $9.00 to $12.00 and recommend VVUS as a BUY.
________________________________________________________________________________________________________________________________________________________________________ This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 201, 3220 SW 1st Ave. Portland, Or. 97239; (877) 276-2467 Trade Name
Compound
Marketer
Drawbacks, potential side effects
increase LDL cholesterol; rarely, may cause liver problems promotes satiety. Like insulin, amylin is as a version of a hormone in the saliva of Dipeptidyl peptidase-4 (DPP-4) inhibitor Considered similarly effective to earlier medications, but with a better side effect submitted to the FDA, who have requested further data on skin lesions and kidney impairment that appeared during primate trials. Sources: Mayo Clinic, The Robins Group ________________________________________________________________________________________________________________________________________________________________________ This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 200, 3220 SW 1st Ave. Portland, Or. 97239; (877) 276-2467. Current Diabetes Drug Landscape Summary - Continued Trade Name
Compound
Marketer
Drawbacks, potential side effects
Glucotrol
Glucophage
particularly in the overweight and obese and patients with normal kidney function. Nearly 35 million prescriptions filled in 2006 for generic metformin alone. to or worsens heart failure; may increase LDL cholesterol and triglycerides; rarely, may cause liver problems Sources: Mayo Clinic, The Robins Group ________________________________________________________________________________________________________________________________________________________________________ This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 200, 3220 SW 1st Ave. Portland, Or. 97239; (877) 276-2467. Selected Late-Stage Diabetes Drugs In Development Trade Name
Compound
Developer
Mechanism of
Sample Clinical Trial Results
Alogliptin
Phase III: Tested as monotherapy and with other major treatments. At 26 weeks, both doses showed significant reductions from baseline in HbA1c. At highest dose as monotherapy, -0.59% reduction and 44% achieved target, vs. 23% in placebo arm. Liraglutide
Phase III: 747 patients, randomized to either liraglutide or glimepiride. Liraglutide reduced Hb1Ac by over 1% from baseline, and over 50% reached target 2008; PDUFA date March of 7% or less. Transient, mild to moderate nausea. Loss of about 6-8 lbs. Sustainable benefit after 1 year. incretin and a modification of human GLP-1. Saxagliptin
Phase III: 401 treatment-naïve patients, 24 weeks. At highest dose HbA1c dropped from baseline 0.5% and 41% of patients reached target at or below 7%, compared to 24% of placebo arm. Adverse effects Glinsuna
Mitiglinide
Phase II: 16 patients. Mitiglinide lowered HbA1C. 7.5 Oral. Phase III trials Vildagliptin
Phase III: 8,500 patients; Vildagliptin showed HbA1c reductions from 1% to 1.8% and not associated with received February 2007, resubmission planned mid-2009. Approved by EU in September 2007. ________________________________________________________________________________________________________________________________________________________________________ This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 201, 3220 SW 1st Ave. Portland, Or. 97239; (877) 276-2467 Selected Late-Stage Diabetes Drugs In Development Trade Name
Compound
Developer
Mechanism of
Sample Clinical Trial Results
Ranolazine
Study of 2,200 patients for angina. At four months HbA1c had declined approximately 0.7 percentage acid oxidation. points, from a starting mean baseline of 7.5 to 6. 8%. Patients taking Ranexa were significantly more likely to achieve the HbA1c treatment target of less than 7.0%, with 59% of diabetic patients on Ranexa achieving this target at four months. Dapagliflozin
Phase III trials underway. Phase II:, 40 subjects, 14 days. Dapagliflozin was safe and well tolerated, with cotransporter-2 rash the most common adverse event. Maximal inhibition of renal glucose resorption was seen with doses of 20-100 mg. Single dapagliflozin doses of 2.5- 500 mg or placebo were given to 64 fasted subjects in a second study, and the dapagliflozin doses were well Phase II: Lowered HbA1c levels. Some transient nausea. Modest weight loss of 4.4 to 7.7 pounds, vs. Taspoglutide
Phase II: 306 patients, 8 weeks. At highest dose, 81% of patients achieved target HbA1c at or below 7%., vs. 17% on placebo. “Significant” drop in body weight. Some mild, transient nausea. Second study: 129 patients, escalating doses, 8 weeks. At highest dose, 72% reached target HbA1c, vs. 19% on placebo.

________________________________________________________________________________________________________________________________________________________________________
This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this
report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 201, 3220 SW 1st Ave.
Portland, Or. 97239; (877) 276-2467
DISCLOSURES:
Key to disclosures – see front page of this report or individual securities for applicable disclosures from the following list: (1) The Robins Group, LLC (TRG) makes a market in this security. (2) TRG has managed or co-managed a public offering of securities for the Subject Company within the past 12 months. (3) TRG received compensation for investment banking services from the Subject Company within the past 12 months. (4) TRG intends to seek compensation for investment banking services from the Subject Company within the next 3 months. (5) The analyst or a member of the analyst’s household has a financial interest in the securities of the Subject Company in the form of a (a) long position (b) short position (c) right (d) warrant (e) future or (f) call option in such securities. (6) TRG and/or its officers or affiliates has a financial interest in the securities of the Subject Company in the form of a (a) long position (b) short position (c) right (d) warrant (e) future or (f) call option in such securities. (7) The research analyst or a member of the analyst’s household serves as an officer, director, or advisory board member of the subject (8) TRG and/or its affiliates beneficially own, or hold options/warrants to purchase, 1% or more of the subject company. (9) The Subject Company currently is, or during the preceding year was, a client of TRG or one of its Affiliates. TRG or its Affiliates received compensation from the company for non-investment banking, non-securities related services. (10) During the preceding year, TRG received compensation for non-investment banking, securities-related services. The analyst hereby certifies that the research conclusions and recommendation contained herein accurately reflects his/her personal views about the industry, company and shares and also certifies that no part of his/her research compensation was or will be directly or indirectly related to the earnings estimates, target price or recommendation about the security. The research analyst principally responsible for preparing this research report received compensation based upon various factors, including TRG total revenue, a portion of which was generated by TRG’s investment banking services. The research provided herein should not be considered a complete analysis of every material fact regarding the companies, industries or securities named above. The opinions expressed herein reflect the analysis and judgment of the author on the date of publication and are subject to change without notice. Facts have been obtained from sources considered reliable but should not be construed as complete and are not guaranteed to be accurate. The Robins Group, LLC; its members; employees and their families may have positions in the securities covered within the research material above and may make purchases or sales while this report is in circulation. Additional information on the subject companies is available upon request. THE ROBINS GROUP, LLC INVESTMENT PHILOSOPHY
Our goal is to identify well-managed small and micro-cap companies that provide above average returns. We prefer under-followed companies that can dominate their particular niches through superior service, products, technology and management. We employ fundamental analysis to arrive at a measure of value. Earnings power, cash flow, revenue growth, book value, financial strength and management effectiveness are among the factors evaluated to determine investment potential. We aim to cover an array of companies within each sector so that our clients can benefit from our industry expertise and so that we can distinguish between the under-priced and over-priced stocks. This approach leads us to both growth and value ideas that may offer the institutional investor meaningful participation in the small and micro-cap asset classes, which historically have generated the highest long-term returns. EQUITY RATING SYSTEM AND DISTRIBUTION OF RATINGS
The Robins Group, LLC provides research on 21 companies. The distribution of recommendations follows: Strong Buy
Immediate purchase is recommended. We anticipate at least 35%annual, risk-adjusted appreciation potential. Purchase is recommended. The security is expected to outperformthe general market over the next 12-18 months.
The share price has moved above the specific 'Buy' range andappreciation potential is less than or equal to the market.
The stock has reached the target price and/or conditions have changedsufficiently to alter the outlook for the stock.
No investment rating has been assigned at the present time.
NOTE: TRG changed its institutional ratings scale on 10/4/04. Previously, TRG used Buy, Hold, Sell EQUITY RISK SYSTEM:
The security is more volatile than the market and/or the company is more leveraged than its peer group. Moderate
The security has about the same volatility as the market and/or the company carries a level of leverage in line with its peer group. The security is less volatile than the market and/or the company is less leveraged than its peer group. ________________________________________________________________________________________________________________________________________________________________________ This report was prepared from data and information believed reliable but not guaranteed by us as to its accuracy and does not purport to be complete. It is not to be considered as an offer to sell or a solicitation of an offer to buy the securities of the companies covered by this report. Opinions expressed are subject to change without notice. The Robins Group, LLC, its affiliates and other associates may have positions and may effect transactions in securities of companies mentioned herein. The Robins Group, LLC. Suite 200, 3220 SW 1st Ave. Portland, Or. 97239; (877) 276-2467.

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