VIVUS: UPGRADE TO BUY FROM NEUTRAL
7/7/98 7:52
CHARLES OLSZIEWSKI (612)371-4157
Rating=1 (VVUS)
Closing Price=$6 7/8
Current FY EPS EST=$-0.55
Next FY EPS EST=$1.00
FY End=December
7/7/98
NEW PLANT APPROVED; SCRIPS STARTING TO TURN AND
LOWER COST STRUCTURE COMING
KEY POINTS
1. We are raising our rating on the shares of Vivus* to buy from
neutral, reflecting what we believe to be the beginnings of a turn in
new prescriptions and recent FDA approval for domestic shipments from
its new 90,000 square-foot manufacturing facility.
2. Moreover, we sense that the company may be on the verge of announcing
plans to dramatically reduce costs and even restructure its sales
organization.
3. If domestic demand rebounds as we are forecasting and costs trend
lower, we believe that Vivus can deliver earnings per share of $1.00
next year. Were this dramatic a turnaround to occur, VVUS could, we
think, reach $20 within a year.
SUMMARY AND INVESTMENT RECOMMENDATION
We are raising our rating on the shares of Vivus to buy from
neutral, recognizing that the stock is best suited for aggressive
accounts willing to speculate that a fundamental turnaround may finally
be at hand. The company manufactures the MUSE for the treatment of
erectile dysfunction. We have suggested that we would become more
bullish on the stock if prescription trends started to improve and the
company's new manufacturing facility received FDA clearance. Domestic
prescriptions have, we believe, clearly bottomed and in two of the last
three weeks, new prescriptions have increased. The company's new
manufacturing facility in Lakewood, New Jersey was granted FDA clearance
late last month. Not only will the new plant allow Vivus to reduce its
unit manufacturing costs by an estimated 50% within the next several
quarters, but the company will now be able to ramp up production to meet
global demand, especially in new, emerging international markets. The
MUSE is approved in the U.S., U.K., Mexico, Argentina, Brazil, South
Africa, Sweden, Switzerland and South Korea. We expect Canadian approval
in the third quarter, which carries with it a $2 million milestone
payment from Janssen Pharmaceutica. Additional approvals in China and
four major European countries trigger another $10 million in milestone
payments from marketing partners Astra and Janssen, which are estimated
to occur by the end of 1998 and early 1999.
We believe that Vivus may also be on the verge of announcing some
significant changes to its cost structure, reflecting comments made by
the company's CEO at a recent investor conference. The tremendous market
reception for Viagra, Pfizer's oral medication for impotence, and the
publicity surrounding its launch have undoubtedly heightened awareness
about this condition within the marketplace. In fact, since Viagra
became available in April, more patients have sought treatment than in
all of last year. Because Pfizer has done such a fantastic job of
increasing the market's awareness of erectile dysfunction and its
treatment, Vivus may be able to reduce the size of its sales and
marketing organization. Moreover, we can not rule out a more aggressive
move to join forces with one of its international partners in the United
States. We remain of the opinion that MUSE will have a place in the
market, particularly given rising concerns about Viagra's safety and our
belief that the product will not be effective in many impotent patients
seeking treatment. Any new strategic or restructuring initiatives may be
discussed in conjunction with the release of its second-quarter results
on July 9. If domestic demand rebounds as we suspect it will and costs
trend lower, we believe that Vivus can deliver earnings per share of
$1.00 in 1999. Were this dramatic a turnaround to occur, VVUS could
reach $20 within the next 12 months, particularly in light of the
current short position (more than 40% of the 32 million shares
outstanding).
THE MUSE
Erectile dysfunction, or impotence, is by definition the inability
to achieve and maintain an erection of sufficient rigidity for sexual
intercourse. Psychological factors were traditionally thought to be
responsible for the majority of instances of erectile dysfunction. It is
now widely understood and accepted, however, that the source is
physiological including vascular and neurological diseases; diabetes;
prescription drugs; spinal injuries; pelvic surgery; and other causes.
The potential market is huge--an estimated 10 to 20 million men in the
United States suffer from erectile dysfunction and it is projected that
approximately 50 million men worldwide are affected. In response to a
large, relatively unpenetrated, market and the drawbacks of existing
therapies, Vivus developed the Medicated Urethral System for Erection,
or MUSE. Launched in January 1997, more than one million prescriptions
have been filled since the product's introduction. The MUSE represents
an entirely new and advanced approach to the treatment of erectile
dysfunction, based on the discovery that the urethra, although an
excretory duct, can absorb certain pharmacologic agents into the
surrounding erectile tissues, resulting in enhanced blood flow to the
penis.
The delivery system consists of a single-use disposable plastic
reservoir and applicator. In order to use the MUSE, a patient urinates,
shakes the penis to remove excess urine, inserts the MUSE into the
urethra, releases the medication, and then rolls the penis between the
hands for 10 seconds to distribute the medication. The application
process takes less than a minute. Once administered, the pharmacologic
agent, which is contained in a hydrophilic suppository, dissolves in the
small amount of urine that remains in the urethra. After absorption, the
pharmacologic agent moves across the adjacent tissues and into the
erectile bodies. When successful, an erection is produced within 15
minutes--its duration is 30-60 minutes. First licensed as a
pharmaceutical in 1981, alprostadil is the MUSE's active ingredient and
has a safety and efficacy profile that is well established. It is the
generic name for the synthetic version of prostaglandin E, a naturally
occurring vasodilator present throughout the body and at high levels in
seminal fluid. Alprostadil originally received FDA marketing clearance
for the management of congenital heart defects in newborn babies. It was
reapproved in July 1995 by the FDA for the treatment of erectile
dysfunction using needle injection into the penis (Upjohn's Caverject).
Vivus is also engaged in the evaluation and development of additional
pharmacologic agents to treat erectile dysfunction.
RISKS
Our main concerns continue to relate to whether Vivus can
manufacture the product in sufficient commercial quantities at a much
lower cost and market it successfully to its customer base. We also
continue to monitor the regulatory progress of competitive products that
may reach the market in 6-18 months.
*PaineWebber Incorporated makes a market in this security. PaineWebber
Incorporated has acted in an investment banking capacity for this
company.
The information contained herein is based on sources we believe to be
reliable, but its accuracy is not guaranteed. PaineWebber Incorporated
and/or Mitchell Hutchins Asset Management Inc., affiliated companies
and/or their officers, directors, employees or stockholders may at times
have a position, including an arbitrage or option position, in the
securities described herein and may sell or buy them to or from
customers. These companies may from time to time act as a consultant to
a company being reported upon. Copyright ( 1998 by PaineWebber
Incorporated, all rights reserved
More information available upon request
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