Friday, October 29, 2010

Vivus (NASDAQ:VVUS): Upgraded to Overweight at JPM

Vivus (NASDAQ:VVUS) is going to hurt the shorts today after receiving a CRL in Qnexa, its weight loss drug.

- J.P. Morgan is upgrading VVUS to Overweight from Neutral with a $13 target (prev. $6) saying all things considered they believe this is a relatively benign CRL, although perhaps not as good as it could have been. The letter’s language around cardiovascular (CV) risk is the one component in particular that gives us some pause and will likely be what the bears try to hang their hats on. Nevertheless, their interpretation of the letter is that it provides a manageable path to approval in 2011, which should be enough to drive meaningful appreciation in VVUS shares over the next several quarters. As such, they are upgrading VVUS to OW and raising our 2011 PT to $13. Importantly, with the worst case scenario (significant new pre-approval trials) off the table—at least temporarily—we suspect downside could potentially be limited from current levels.

CRL overview: 5 issues in focus. According to the company’s press release, the CRL touches on five issues, including 1) clinical, 2) labeling, 3) REMS, 4) a safety update, and 5) drug scheduling. In our view, the clinical component—focusing on teratogenic (birth defect) and CV (heart rate) risk—is the only one that matters as far as getting Qnexa over the goal line. While the FDA apparently left the letter somewhat vague and open-ended (at least that’s how the PR reads), firm is encouraged that no new clinical trials are required at this time and that Vivus believes it can submit its response in ~6 wks. They await more detail on Friday morning’s call, but in the meantime, they work through the key issues below.

CV risk is still a hurdle, but JPM thinks Qnexa can clear it. As indicated, their most significant concern in the CRL is the language around the implications of increased heart rate and the need for evidence that it “does not increase the risk of major adverse CV events. Vivus intends to provide several new analyses exonerating Qnexa. JPM suspects these have to do with the recent disclosure that across the entire 4,323 pt development program for Qnexa (incl 2-year SEQUEL data), serious CV and neurovascular AE rates in pts taking the drug were similar to placebo with a relative risk of 0.59 (95% CI: 0.33-1.06). That’s a 41% relative risk reduction in favor of Qnexa. Moreover, firm's comfort with Qnexa’s CV profile is reinforced by the product’s demonstrated favorable effects across a range of key cardiometabolic risk factors including waist circumference, systolic and diastolic blood pressure, total cholesterol, LDL, HDL, triglycerides, HbA1c, fasting plasma glucose, and fasting insulin. These benefits are also accompanied by statistically significant improvements in inflammatory biomarkers such as CRP, adiponectin, and fibrinogen.

- Canaccord reits Buy rating on VVUs and raises its target to $15 (from $10). Firm views the letter as benign; it asks for more data and analyses but no new studies. They believe that VVUS’ resubmission in about six weeks will pave the way for approval around mid-year 2011.

Investment highlights
The CRL asks for more information on birth defect risk, cardiovascular effects, and the full data from the two-year SEQUEL study. There will also be more discussion about labeling and REMS.

Firm thinks FDA is showing that it listened to the July ad com’s concerns and providing a path to approval for VVUS.

VVUS believes that it can assemble the necessary preclinical and clinical data (including a final study report of SEQUEL) to enable resubmission in approximately six weeks. Assuming a Class 2 designation, this should set up approval in mid-2011.

They will be listening for more color from VVUS’ 8:30 am EDT conference call.

Notablecalls: My only question is - this' going to $8.00 today? or higher?

- Arena (ARNA) didn't go down on way more negative CRL. Also, ARNA's news came out ahead of Vivus', which probably lowered the expectations even more.

- VVUS has a 20% short interest & a tight float.

- Vivus believes they can submit their responds in 6 weeks, which is a surprise. Given this ultra-short time frame it seems (seems!) they have the CV/birth defect data to assuage FDA.

Again, only question is - this' going to $8.00 today? or higher?


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