Bloomberg News

Obesity Prompts Vivus Takeover Talk With 88% Windfall: Real M&A

February 29, 2012

Vivus Inc. (VVUS)’s shareholders are poised to reap an 88 percent windfall in a takeover after the company’s weight-loss drug moved one step closer to winning approval to treat America’s 78 million obese adults.

A panel of U.S. Food and Drug Administration advisers voted 20-2 last week that the benefits of Vivus’s Qnexa pill outweigh its risks, a recommendation that could lead to the first new FDA-approved weight-loss drug since 1999. An approval would make the company worth as much as $40 a share to potential acquirers, said Cowen & Co., valuing Mountain View, California-based Vivus at $3.6 billion. The 88 percent premium would be four times the industry average and the second-highest for a drug takeover over $1 billion, according to data compiled by Bloomberg.

Vivus could now lure interest from Johnson & Johnson (JNJ), Merck & Co. and Bristol-Myers Squibb Co. (BMY), with annual sales of the Qnexa pill projected to reach $5 billion by 2020, according to Rodman & Renshaw LLC. After more than a decade of weight-loss treatments presented risks from heart disease to brain tumors, the FDA’s receptivity to Qnexa may also put rival obesity-drug developers Orexigen Therapeutics Inc. (OREX) and Arena Pharmaceuticals Inc. (ARNA) in play as more than one-third of U.S. adults suffer from obesity, JMP Securities said.

“The FDA has clearly crossed the Rubicon of balancing risk and benefit, understanding that the obesity problem is a pandemic,” Michael King, a New York-based analyst at Rodman & Renshaw, said in a telephone interview. “There are not a lot of products around in the pharmaceutical industry that address such large market opportunities. Vivus is not going to give this up cheap.”

Losing Weight

If Qnexa is approved, Vivus plans to market the drug in the U.S. on its own, and to seek a marketing partner for outside the U.S., Ashley Buford, an outside spokeswoman for Vivus, said in an e-mail. She declined to comment further.

Vivus rose 5.8 percent to $22.50 today after earlier climbing as much as 10 percent.

Carol Goodrich, a spokeswoman for New Brunswick, New Jersey-based J&J, and Jennifer Fron Mauer of Bristol-Myers in New York said the companies don’t comment on takeover speculation. Ron Rogers, a spokesman for Whitehouse Station, New Jersey-based Merck (MRK), didn’t return phone and e-mail requests for comment.

Qnexa, which Vivus says helps patients lose 10 percent of their body weight, is ahead of rival obesity drugs including Orexigen’s Contrave and Arena’s lorcaserin, with a decision from regulators due by April 17.

‘Nothing’s Ever Guaranteed’

While the FDA isn’t obligated to follow the panel’s Feb. 22 recommendation, the advisers signaled the regulator’s receptivity to Qnexa and other obesity drugs, said Ken Kam, who owns Vivus shares as chief executive officer of Los Altos, California-based Marketocracy Inc.

“Nothing’s ever guaranteed until the FDA issues the letter, but this is as strong an indication it’s going to get approved as I’ve ever seen,” Kam said in a phone interview.

Worldwide obesity has more than doubled since 1980, according to the World Health Organization, and the Centers for Disease Control and Prevention calls it an epidemic. A person is considered obese if his or her body mass index, a measure of fat that divides weight by the square of one’s height, is higher than 30.

“There is pressure to get something on the market, given everyone talking about the obesity epidemic and needing another tool for dealing with obesity,” Simos Simeonidis, a New York- based analyst at Cowen, said in a phone interview.

Heart Attacks

The last prescription weight-loss drug approved by the FDA was Roche Holding AG (ROG)’s Xenical in 1999. New therapies have all stumbled over safety hurdles at the FDA, including Abbott Laboratories (ABT)’ diet pill Meridia, which was removed from U.S. shelves in October 2010 on concern about its links to heart attacks and strokes.

Safety issues also prompted the withdrawal of Wyeth’s fen- phen diet-drug combination in 1997. More than 6 million prescriptions were written for fen-phen before it was pulled from the market for links to heart damage and primary pulmonary hypertension, a lung disease.

“Think of all the crazy things people do to lose weight,” said King of Rodman & Renshaw. “If they hear about something that now has the imprimatur of the FDA to be shown safe and effective, why wouldn’t they at least try it?”

The promise of Qnexa -- a combination of topiramate, used for seizures and migraines, and the appetite suppressant phentermine -- means Vivus may now be an acquisition target, said Simeonidis.

Takeover Premium

“I expect Qnexa to be approved, and I would not be surprised to see a takeout,” he said. “This is a potentially large drug, and it’s going to be utilized best in the hands of a large pharmaceutical company that has a primary-care sales force in place and can make the most of its commercialization potential.”

Vivus may fetch more than $40 a share in a takeover if Qnexa is approved, according to Simeonidis, based on his estimate that the medicine could pull in $2.2 billion in annual revenue by 2019.

At 88 percent more than yesterday’s closing price, that would be four times the average 22 percent premium paid in takeovers greater than $1 billion in the medical drug industry, a sector of pharmaceuticals that excludes generic drugs and biomedical companies, data compiled by Bloomberg show. It would be the industry’s second-highest on record after the 94 percent premium Gilead Sciences Inc. offered for Pharmasset Inc. in November, the data show.

‘The Driver’s Seat’

Vivus had already increased 102 percent through yesterday to $21.26 since the panel’s decision was announced, adding $957 million to the company’s market value. A takeover at $40 a share would boost stockholder value by another $1.7 billion.

“I would expect the price to be very high,” Kam said. “If there is an interest, Vivus is in the driver’s seat because they don’t need to sell.”

Competition to buy Vivus for the chance to mass-market the new drug will drive up the takeover price, Simeonidis said.

J&J, Merck and Bristol-Myers may all be interested buyers because of the prevalence of obesity and the cost efficiency of using their own sales teams, said Rodman’s King. Qnexa has a net present value of $2.8 billion, based on estimated penetration rates, length of therapy and price for the drug, if it’s approved, King said. An acquirer would need to pay at least that much for the whole company, he said.

J&J already sells one ingredient in Qnexa called topiramate, which it markets as Topamax for seizures and migraines. The drug was one of the company’s top sellers before it lost patent protection in 2009. Merck and Bristol-Myers are also logical buyers because they already have metabolic-disease franchises through diabetes medicines, King said.

Clinical Trial

The FDA could still require a clinical trial assessing the cardiovascular safety of Vivus’s drug before allowing it on the market, Charles Duncan, a New York-based analyst at JMP Securities, said in a phone interview last week. It may approve the drug by the April due date, or issue additional requirements that could be satisfied by year-end such as finishing details on a post-market study.

Qnexa was rejected by regulators in October 2010 over concern the medicine may cause birth defects and increased heart rate. Even if the drug gets approved, pharmaceutical companies may hold off on an acquisition to be sure of the potential side effects, said Les Funtleyder, a health strategist and portfolio manager at Miller Tabak & Co. in New York, where he helps oversee $500 million in assets.

‘Radical Transformation’

“Down the road, if some of these drugs succeeded and there weren’t any unfavorable off-target impacts, then perhaps” the makers of weight-loss drugs could be acquired, Funtleyder said in a phone interview. Success, particularly FDA approval, “breeds deal activity,” he said.

While La Jolla, California-based Orexigen and Arena of San Diego are trailing Vivus, the panel’s vote on Qnexa was “a little bit of a tide that lifted all boats,” Duncan said.

Orexigen makes Contrave, which is a closer competitor to Vivus’s Qnexa than Arena’s lorcaserin based on safety and efficacy, Duncan said. Lorcaserin is a “totally novel agent” with less-understood risks, he said.

Orexigen shares had climbed 143 percent this year through yesterday for the second-biggest gain among 286 stocks in the Russell 2000 Health Care Index (RGUSHS), giving the company a market value of $210 million. Vivus had posted the third-biggest increase at 118 percent. Arena, valued at $287 million, was down 1.6 percent.

Brain Tumors

“All three are takeout candidates,” Duncan said. “The problem with obesity-drug development is there are so many questions. In the next 12 months we’re going to see a radical transformation of the field.”

In September Orexigen agreed with the FDA to run a two-year clinical trial on heart risks for Contrave, reviving stalled development of the medicine in the U.S. The company is partnered with Osaka, Japan-based drugmaker Takeda Pharmaceutical Co. (4502), a likely buyer if the drug shows success, Duncan said.

A phone call and e-mail to Takeda’s North American media department weren’t returned.

While Orexigen now aims to obtain FDA approval in 2014, Arena’s drug lorcaserin is due to receive a regulatory verdict in June 2012. Arena was rejected by the FDA in October 2010 after lorcaserin was shown to have a potential link to brain tumors. The company said in August that concentrations of the pill were lower in human brains than rat models, suggesting humans are less likely to develop the slow-growing tumors.

Race for Approval

Jay Hagan, chief business officer of Orexigen, declined to comment on mergers and acquisitions. The company is partnered with Takeda in North America, and will run a process to find a partner to market the drug in the rest of the world, he said. Orexigen hasn’t indicated when it will apply for approval in Europe.

“Arena is focused on preparing for its FDA advisory committee meeting in the second quarter,” David Schull, an outside spokesman for the company, said in an e-mail. He declined to comment further.

Closely held drugmaker Zafgen Inc., which is wrapping up phase 1b trials of its obesity drug beloranib that affects the way the body metabolizes fat, has received acquisition interest from large pharmaceutical companies, CEO Tom Hughes said in a phone interview. Zafgen aims to file an application with the FDA in 2016.

“There is new interest in the renewed belief that obesity products might be approved,” Hughes said.

Despite the race for regulatory approval from the developers of other obesity drugs, Vivus has the highest probability of being acquired, said Cowen’s Simeonidis.

“From a purely financial perspective, the potential cash flows and the size of the opportunity makes them very attractive,” said Kam of Marketocracy. “Just think what percentage of people would want to lose 10 percent of their weight without having to change their diet or exercise habits. It could be huge.”

To contact the reporters on this story: Meg Tirrell in New York at mtirrell@bloomberg.net; Tara Lachapelle in New York at tlachapelle@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net; Reg Gale at rgale5@bloomberg.net.


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