Eight years ago this month, (yes Citron has been at it this long), we published an article on Nitromed (NASDAQ:NTMD). Nitromed received FDA approval to combine two generic pharmaceuticals and the stock catapulted to over $20 a share, with every covering analyst posting a "strong buy". Citron pointed out the problems in their business model in the face of Wall Street. The company ended up selling itself 3 years later for .80 cents a share. The moral of the story is FDA approval is not a short path to riches, and the importance of intellectual property cannot be discounted when valuing a pharma company. For a drug with purported "multi-billion dollar market potential", Citron is astounded by the weakness of Vivus' intellectual property protection, and the lack of due diligence on the Street, which allowed things to get so far without a warning flag being dropped.
Citron has been carving to the bone on the Vivus / Qsymia weight control pill story, and is convinced this is déjà vu all over again. Similarities include:
A "blockbuster" drug — which is just a combination of two readily available, inexpensive generics
A one-drug pharma company – with an abysmal track record long on hype and failed execution
Notable absence of a deep-pockets marketing partner, having to "go it alone" with its home-grown and risky marketing plan.
Vivus's intellectual property protection for its much publicized diet drug Qsymia appears riddled with flaws
The Drug Story Background
With FDA approval obtained for its weight loss drug Qsymia, VVUS stock price has tripled over the last year, fattening up its market cap close to $3 billion, all for a drug that we believe will never become commercially viable.
This report will identify major problems in the intellectual property foundation supporting VVUS's weight loss drug.
Considering Vivus had a favorable 20-2 advisory panel recommendation in hand in February, the company knew FDA approval this week was a certainty. They have had the last 5 months to sign a licensing / distribution / partnering / deal with a credible pharma marketing company. J&J — a likely rights-holder in at least one of the patents looming over Vivus' freedom to operate — would have obviously been the company’s first phone call in February. Instead, insiders sold virtually all their options-vested stock, and the company raised money from investors.
After all, Vivus, is a 38-person company with scant history of manufacturing or selling a drug. Why have they not been able to sign up a marketing partner or a strategic investor for Qsymia over the past 5 months ? Citron finds this odd … Like Kate Upton not being able to find a date. Possibly the problem here is no one wants to get in the middle of what seems to be an inevitable intellectual property battle with J&J and/or others that will likely delay and possibly threaten the production of Qsymia.
Because of this overhanging risk, any third parties supplying topiramate to Vivus might be liable for contributory infringement for supplying an Active Pharmaceutical Ingredient – a risk for any drug supplier who knowingly infringes a patent.
Vivus's Intellectual Property Story: Serious Doubts about its IP Protection
"You can avoid reality, but you cannot avoid the consequences of avoiding reality."
– Ayn Rand (1905-1982)
While the company has been busy furthering their FDA submission and selling stock, Vivus has simply avoided confronting the reality that they might not even be able to go to market.
The foundation stone of Vivus' IP protection is a patent licensing deal signed a decade ago with a Dr. Najarian, an obesity doctor and researcher who filed as sole inventor for Qsymia's two-drug combo. One question that has been hanging over the company for years is the possibility of patent infringement on one of Qsymia's two active ingredients, topiramate, a patent held by Johnson & Johnson, who used to sell the drug as an obesity treatment before it went generic. It affords patent protection until 2017. It originally was filed by a researcher named Shank on June 29, 1996 (US PTO No. 6,071,537)
You do not have to be a patent attorney to read the title of the abstract:
"Anticonvulsant Derivatives Useful in Treating Obesity"
There is no evidence of the validity of this patent ever being challenged, either at the USPTO or the corresponding EP patent (EP0915697) filed here. There are no mentions in Vivus' filings of the Shank patent, and therefore no clues as to how Vivus plans to deal with it. They do say in their 2011 10-K:
We are aware of issued patents for the use of topiramate alone or in combination with other specific agents (zonisamide and mirtazapine) for treatment of obesity and related indications e.g. prevention of weight gain. We have worked closely with our patent counsel to put together a cogent patent strategy and are building a strong patent portfolio in an attempt to obtain exclusivity over the life of the patents.
And??? You've worked on it? What is the answer?
How exactly does Vivus overcome the Shank patent to sell topiramate for weight loss? Citron rates this unresolved question a substantial risk factor.
Here is an answer given by Vivus head of corporate development, Tim Morris at a recent conference when asked about the Shank patent:
TIM MORRIS: … this refers back probably to the Shank patent which is owned by Ortho. And as you guys know, topiramate was marketed by J&J for several years, it's now generic. We've talked about this in the past.
We don't believe there's any issues in terms of we've looked at the issue patents from Shank, we've looked at the issue patents for us, several patent counsels have opined on them. Both patents are issued and we think they're valid.
We don't believe there will be any concern there. Obviously topiramate is not approved for obesity. We don't believe J&J is making any money off topiramate for obesity. And so, no, we're not concerned at all about J&J. It's obviously a topic for the Street and people love to opine and write on it, but for us it's full steam ahead.
It doesn’t make a difference if you think your patents are valid…what does J&J think? Citron notes that …Tim Morris sold ALL of his Vivus common stock the same week in February that the company received its favorable vote from the FDA advisory panel …
We may be unable to in-license intellectual property rights or technology necessary to develop and commercialize our investigational drug candidates.
It is impossible to assess the market value of Qsymia to Vivus until this issue is fully disclosed and resolved.
Potential Problems in Vivus's product protection based on the Najarian patent.
As if the Stark patent issue was not enough, there are also unanswered questions about the main patent Vivus appears to be relying on behind Qsymia – the one licensed from Dr. Najarian. A condition was introduced to the assignment agreement between Vivus and Dr. Najarian that made future milestone payments contingent on the Najarian patents prevailing over another, earlier-filed third-party patent by inventor McElroy. The company found the McElroy patent important enough to make it a condition in the licensing agreement with Najarian.
Very soon after Dr. Najarian assigned his patent to Vivus in 2001, the McElroy patent issued, with claims related to methods for treating disorders that include obesity using sulfamates (including topiramate) in combination with psychostimulants (including phentermine).
This is a second threat to Vivus's freedom-to-operate and, it is referenced explicitly in the assignment agreement from Dr. Najarian on October 16,2001. (See 3.2.(ii) and 3.2.(ii) for specific references ). In fact, payments to Dr. Najarian are explicitly made contingent on "freedom to operate" with relation to the McElroy patent.
The Najarian patent has a huge problem with regard to dates. Simply, theMcElroypatent's provisional filing was earlier – Feb 24, 1999 – than the Najarian patent, which was June 14, 1999 (search for "provisional" to verify these dates). And note that McElroy's full filing appropriately references the June 2000 Shank patent. It includes studies in which Binge Eating Disorder patients were treated with open label topiramate in doses from 25 mg to 1200 mg. (The use of phentermine at varying doses to treat obesity was well known at the time.) Now, it remains possible that with the proper documentary evidence, the Najarian patent defense could "swear behind" the McElroy patent to get date precedent in the US – an uphill struggle for Vivus. But such a claim will not hold up in Europe, because outside US jurisdictions, the provisional patent filing date prevails.
Dr. Najarian's patent application doesn't reference McElroy until he files this Supplemental Information Disclosure dated December 13, 2001 without further description. Najarian and Vivus obviously had to know about the significance of the McElroy patent, because the entire Vivus assignment from Najarian in October 2001 is contingent on Vivus obtaining freedom to operate without interference from the McElroy patent specifically. But later patent filings state no reference to this important prior patent application. Whether an intentional oversight or impermissible intentional misstatement, it leaves open the door to a ruling nullifying the Najarian patent in its entirety — yet another door opened for patent litigation.
Obviousness is a problem for Vivus
In its simplest terms, US Patent Law requires that an invention be novel and non-obvious. For example, simply varying the dosing of a drug which shows side effects proportional to dosage is not sufficiently novel to qualify for a patent.
"The claimed combination has surprisingly fewer side effects than the individual drugs."
"…I surprisingly found that the addition of a sympathomimetic agent such as phentermine greatly diminished the side effects of the topiramate. Further, this allowed patients who, previously, could not tolerate topirate, to be able to take topiramate in combination with phentermine. … "
This is an extremely important statement to the patent.application's defense. Even if Dr. Najarian submitted this statement in good faith, he has a duty of candor with regard throughout the pendency of both the originally-filed and subsequently-filed applications to disclose all information known to the application that might impact patentability. The question is, in light of the sizable studies performed on Qsymia to gain FDA approval, and the copious commentary on its side effects, does Dr. Najarian still believe the above statement is accurate and defensible? No side effects observed with this drug combo ?
The huge body of clinical evidence, including Vivus' own studies submitted for FDA approval, indicate that side effects of Qsymia are essentiallyproportional to dosing. The very body of evidence that Vivus submits for safety adds to the same exact body of evidence a challenger would use to attack the Najarian patent for non-novelty and obviousness.
Referring to Vivus' own FDA Advisory Briefing Document (linked below):
"As such, the side effects of QNEXA [now Qsymia –ed.] therapy are expected to be consistent with those described in the approved labeling for phentermine and topiramate, albeit at a severity consistent with lower doses."
Any party challenging the Najarian patent will find they have been handed extremely strong legal grounds to attack its validity on the above comments.
Patent Ownership Uncertainties
There is further a question as to whether Dr. Najarian actually owned the patent personally, as he filed. Or did he have an obligation to assign his invention to one or more of his employers?
At the time his assignment to Vivus was executed, Dr. Najarian was the VP of Medical Affairs and Medical director at Interneuron Pharmaceuticals. Typically, work-related inventions such as this fall under an employee's duties under employment agreements to be assigned to the employer. Interneuron changed its name to Indevus, and was later bought by Endo Pharmaceuticals.
Interneuron had some track record with weight loss drugs. In fact, it was the producer of the widely prescribe Redux, recalled in September 1997, due to correlation with heart valve problems. Redux was a correlate of one half of the infamous "fen-phen" combination. Clearly Dr. Najarian was deeply involved in weight loss treatments. However Dr. Najarian lists himself as the sole applicant. Vivus entered into its Assignment Agreement with Najarian solely and personally. No further evidence of Najarian's relationship was documented.
Further, records indicate Dr. Najarian was a staff physician at two hospitals during the same timespan he cites administering this drug combination to patients in what appear to be small informal trials referred to in his patent application. Employment agreements both at drug companies and medical centers routinely claim intellectual property rights from trials conducted by employees in their facilities, unless specifically excepted, such carve-outs never having been placed on the record in this case. Not to mention, he appears to have been conducting drug trials without legal oversight, and citing these to his own apparent benefit in his patent application. If he argues they weren't "really" drug trials, but just ordinary course doctoring, he undermines his own "non-obviousness" and "novelty" arguments. It's quite a pickle once you think about it.
Did Dr. Najarian have full rights to assign this patent to Vivus? Do investors really think nobody will challenge this patent? Do they really think the best strategy for maximum economic leverage for a patent challenger has been anything other than to wait quietly until the FDA approved Qsymia, rendering the patent more relevant, on Vivus's dime? If the patent's original applicant assigned the rights to it improperly, is the patent still valid? Who really owns those rights ?
Vivus has had not just the last 5 months, but 5 years since questions about the Najarian, Shank and McElroy patents were posed by analysts, to create enough clarity to go to market. Yet to this day, all we hear from the company is assurances that they have legal opinions in hand stating "they are OK". No joint ventures, no counterparty agreements, no releases.
Quite a cloud of uncertainty for a "multi-billion dollar opportunity" resting on the combination of two common generic drugs, don't you think? If this were a solid pharma with high management credibility, maybe investors could give them the benefit of the doubt. But this management? Read on.
Competitive Landscape: Generic Drug Competition
In its most recent 10-K, Vivus's disclosure speaks for itself:
"Our investigational drug candidate, Qsymia, is a combination of drugs approved individually by the FDA that are commercially available and marketed by other companies. As a result, our drug may be the subject to substitution with individual drugs contained in the Qsymia formulation and immediate competition. "
Beyond the above uncertainties surrounding Vivus' Intellectual Property rights to this drug combination, the company faces tough market challenges trying to enforce its territory in the marketplace. Because the generic components of Qsymia are widely available, some doctors are likely to continue to prescribe phentermine and topiramate (millions of prescriptions of each were written last year, see FDA Advisory Briefing Document excerpt below). The clinical trials of record provide plenty of protection from liability for doctors making such choices. This places Vivus in the unenviable position of trying to enforce non-patent exclusivity against prescribing physicians.
In the words of Vivus' own FDA Advisory Briefing Document:
Phentermine hydrochloride at a labeled dose up to 37.5 mg/part is the most prescribed weight-loss drug in the US with approximately 6.5 million prescriptions written in 2011 [ IMS data]. A more recently approved formulation of phentermine, Suprenza Tm, was approved in 2011. ….. More than 10 million prescriptions were written in 2011 for topiramate [ IMS data ]. The majority of current topiramate use is in migraine prophylaxis.
While these citations lend credibility to Vivus claims about the drug's safety, the fact that both ingredients are available and in wide use as generics makes enforcing the company's patents far more challenging (and perhaps raises hurdles to negotiating reimbursement).
CEO Wilson's stated strategy, that a combination of patent protection, establishing a dosage regimen that is between strengths of generically available competition (compare 46mg Qsymia to 50 mg generic topiramate), and adding in time release features, create a barrier to entry for Qsymia generic competitors. However, his own cited example for this strategy (during a 2006 conference call) met quite an unfortunate end. Ditropan from Alza Corporation, which was a controlled-release formulation of oxybutinin, had its own patent ruled invalid just a month later — for obviousness. [LINK] The company's sales fell from $380 million prior to the ruling, to $15 million within a few years. He stopped citing Ditropan after that.
Vivus might be granted three years of non-patent exclusivity due to providing a new clinical study and/or formulation, which is far less than the 20 years from first filing that strong patent protection might afford. But in the face of freedom-to-operate challenges above, Qsymia might experience outcomes ranging from zero exclusivity to three years, or partial three year exclusivity, shared with generics.
Translation: Severe pricing and competition headwinds ahead.
Just for grins we looked up some prices on the Costco pharmacy site. We found phentermine 15 mg at about 44c per pill, and topiramate 100 mg is about 23c per pill in Costco-sized bottles of 100. So that would be about $20 a month for generic treatment at the top-level dosage of Qsymia (at 15mg/92mg). And the generic approach leaves doctor and patient free to adjust or taper the proportion of the two drugs, flexibility they wouldn't have with Qsymia … and, at no extra charge.
Vivus's Corporate History: Failure to Execute
Vivus is not just any startup biopharma company. It has been operating for over 20 years with the same CEO, Leland Wilson. Vivus began its life as a publicly traded company pursuing a treatment for erectile dysfunction for males. In the mid-1990's, iIt actually produced and brought to market a treatment involving inserting a suppository into the male urethra. Despite approval by the FDA and in Europe, a firestorm of hype, an initial sales bubble, and a brief stock run to over $1 billion valuation, the product failed to gain market share and was sold in 2010 to a 3rd party for just $23.5 million.
While Vivus's stock has languished in junk stock (sub $5) land for most of the last 20 years, the company has pursued a variety of highly promoted "stories", mostly concerning various attempts to introduce products to treat so-called "feminine sexual dysfunction", including testosterone spray and vasodilators.
Despite the company's hype-marked history, the following table is relevant to investors because Vivus's 20 year history illustrates one of the most consistent records of failure in the history of publicly traded companies in America.
Regular readers of Citron know that we like to follow the dollars. There's only only thing more disturbing than the hole where a marketing or strategic partner should be — the amount of insider selling. Insider sales in Vivus over the last twelve months are 1.7 million shares between $9 and mid $20's, and current insider ownership is down to 0.29% according to Bloomberg. Do we have to belabor the point that this is incredibly small for a company with zero revenues that holds the license on "the next big thing"?
Despite years of lead time, Vivus' executives have failed to provide strong patent protection for Qsymia. Taken together, these points provide the best explanation yet why Vivus hasn't been able to recruit a high-profile deep-pocketed pharma partner to leverage its expertise while taking some of the risk of marketing its newly approved diet combo drug. Instead of selling a stake to a credible pharma marketer, they sold stock – over $230 million to …. you guessed it. The hope that a big pharma company is going to ride in pay $3 billion for Vivus is ludicrous – the strategy of trying to pierce its patent protection for a few million in legal fees is a far lower risk.
The more marketing hype about the FDA approval of this combination of two well-known and inexpensive legacy generic drugs, the more Vivus sets up its own ambush – by legal challenges to its patent, and generic drug competition starting before they can even get to market.
There is long track record in the US of diet drugs being horrible investments, due to having a very short half-life. Consumers seem to move from one fad to the next, only to discover there is little that substitutes for exercise plus lowering caloric intake…. and we don’t even think this one gets that far.
To conclude, Citron offers a two part generic prescription
For your health:
Eat a diet rich in nutrition, and exercise. Eliminate junk food from your diet.
For your prosperity:
Invest in high-quality companies run by management with a strong track record of success. Eliminate junk stocks from your portfolio.
Citron believes that in 1 year, Vivus's Qsymia revenues will be exactly what they are today: 0.
Cautious (and healthy) Investing to all
* Note: No one at Citron is a patent attorney. We did our best to compile accurate information, and we ask the company or any analyst to email us with any discrepancies found in this report.
/wp-content/uploads/2017/05/CitronLogo2017-350x65-1.png00Citron Research/wp-content/uploads/2017/05/CitronLogo2017-350x65-1.pngCitron Research2012-07-19 08:45:432017-05-30 04:00:17Vivus (NASDAQ:VVUS): Why FDA Approval Is Not the Prescription