The Deal: Vivus Could Get a Bitter Dose at Shareholder Meeting

NEW YORK ( The Deal) -- Come Monday, July 15, shareholders of drugmaker Vivus ( VVUS) should know who is in charge at the Mountain View, Calif.-based company. But the question that remains today is whether that leadership will include current management or a new slate of directors nominated by activist investor First Manhattan Corp. and led by industry veteran Tony Zook.

All this over a weight-loss drug.

New York-based FMC owns 9.9% of outstanding shares in Vivus, an investment FMC pegs at $139 million. The investment management company has been calling for change since March, nine months after Vivus got the Food and Drug Administration's nod to market its weight-loss drug Qsymia in the U.S.

Vivus' management and FMC both have compelling arguments. The FDA approval in July 2012 came after years of trouble with diet drugs either never gaining approval or turning out to have safety problems post-market. Both drugs in Qsymia's fixed-dose combination -- phentermine and topiramate -- have been used individually for years without major safety issues.

Investors and analysts rejoiced and Qsymia was projected to quickly hit the $1 billion blockbuster mark.

That didn't happen. The FDA had put a fly in the ointment, a restriction on sales suggested by its advisory panel to reduce risk. "No one realized how severe that restriction was, but we certainly do now," Vivus CEO Leland Wilson said Wednesday at the JMP Securities Healthcare Conference in New York City.

Because of restrictions from risk evaluation and mitigation strategies, or REMS, the drug was available from only four mail-order pharmacy outlets.

"It was the first time that system had ever been implemented in the pharmaceutical industry," Wilson said. "Doctors weren't familiar with it. Patients weren't familiar with it. And the mail-order houses themselves were not familiar with this process. So it created many, many problems."

FMC said the results of those problems is that Vivus stock lost $1.9 billion in value in the roughly eight months between the time Qsymia was approved and March, when FMC began calling for a complete change in the board.

FMC's problem with Vivus management is that it let too much time pass while Qsymia struggled. "Qsymia is by far the most effective weight loss agent ever developed," the investment firm claimed.

Yet Vivus' management decided not to tie up with a major pharmaceutical company prior to the drug's approval. "FMC's nominees have a plan to carefully select a partner with a large sales force that can sell Qsymia in the primary detail position, not in a secondary position as planned by Vivus," FMC said in a June 25 SEC filing.

Vivus also needs to fix its "unsustainable expense structure," FMC said, stating that its nominees will reduce spending and cash burn, reallocate resources and substantially decrease spending on unbranded disease awareness programs.

And Vivus' approach to gaining approval in Europe needs correcting, FMC said. It should get Qsymia approved through the European Union, not state by state, as Wilson and his board plans to do.

Whatever the outcome Monday, no one can say Vivus hasn't put up a good fight. As Qsymia sales failed to meet expectations, Vivus management worked with the FDA staff and officials to convince the agency to modify the REMS restrictions. The agency finally relented on April 16.

And Vivus has also worked out the access problem. At the JMP Securities conference, Wilson pulled up a MapQuest-like screen shot showing dozens of drug stores in New York City that now carry the drug. Express Scripts ( ESRX), the largest pharmacy benefits manager in the country, has agreed to cover the drug on its preferred formulary and with a favorable co-pay.

Indeed, Vivus' successes keep coming on other fronts as well. The EU approved its novel erectile dysfunction drug, Stendra on June 26. Within a matter of days, the company announced that Italian drugs giant Menarini Group agreed to commercialize the product in Europe, Australia and New Zealand.

What Vivus hasn't pulled off yet is an agreement with a major pharmaceutical company that can offer a sales and commercial organization to market Qsymia to primary care doctors across the U.S. At the JMP meeting, Wilson said the company began talking with contenders for that role in April after the FDA loosened its restrictions. "We are engaged with discussions with major pharma ... largely centered around partnering at this time. Those discussions are ongoing and, I think, going well," he said.

As the fight for control of the board escalated in recent months, Vivus shareholders have been inundated with messages making each party's case to garner votes. On July 2, FMC upped the ante by getting Zook, a former AstraZeneca ( AZN) executive, to agree to head up the company should FMC gain a majority on the Vivus board.

Zook, who was executive vice president for global commercial operations at the U.K.-based pharmaceutical company, spent many years there and played major roles in the launch of several blockbuster drugs including Nexium, Seroquel and Symbicort. He also was president of MedImmune Ventures, AstraZeneca's largest biotech acquisition.

Zook left AstraZeneca in February, one of a handful of executives who exited within the past year after Pascal Soriot took the helm of the company.

Some news outlets quoting unnamed sources reported Wednesday evening that QVT Financial, Vivus' third-largest shareholder with an 8.3% stake, had decided to vote its shares in favor of FMC. However, QVT did not confirm that report and a spokesman for FMC told The Deal that FMC's most recent letter to Vivus shareholders makes no mention of QVT.

"Our discussions with Vivus shareholders over these past several months have been very encouraging," Sam Colin, senior managing director at FMC, said in a Thursday letter to shareholders. "We have received support from large and small shareholders alike."

FMC is an owner-operated investment advisory firm, founded in 1964. It manages in excess of $14 billion.

Deutsche Bank ( DB) is Vivus' financial advisor, while Hogan Lovells US is the company's legal adviser and Morrow & Co. is its proxy solicitor.

Written by Pamela Taulbee

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