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Tuesday, September 22, 1998
Vivus Inc.
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Phone: (650) 934-5200
Website: http://www.vivus.com
Price (9/21/98): $4 1/4
HOW DID IT FIND TROUBLE?
How this company found trouble can be summed up in one word: Viagra.
Since the release of Pfizer's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: PFE)") else Response.Write("(NYSE: PFE)") end if %> blockbuster anti-impotence drug, prescriptions of Vivus' own impotency medication, MUSE, have dropped to less than one-third the level seen before Viagra's release. Unsurprisingly, the stock followed the same direction of MUSE prescriptions -- down.
From a high of $41 7/8 last October, the stock deflated to the $11 range when Viagra first became available to the public and has continued its slide all the way to $4 1/4 as of today (Sept. 21). Forget Daily Trouble, this should be called "Daily Disaster."
BUSINESS DESCRIPTION
Vivus concentrates on developing and selling treatments for erectile dysfunction. The company essentially has only two products. Representing the lion's share of the company's business, MUSE is a drug used to stimulate increased blood flow to the penis. Unlike the orally taken Viagra, the erection-causing MUSE is administered through a pellet inserted in the urethra. The company's other product, ACTIS, is an elastic device for men who have a specific type of erectile dysfunction.
The company could barely keep up with demand for MUSE when it first came on the market in early 1997. However, the tide has dramatically turned for the worse as overhead costs have increased as demand for the company's main product has deflated.
FINANCIAL FACTS
Income Statement
12-month sales: $115.6 million
12-month income: ($9.5 million)*
12-month EPS: ($0.35)*
Profit Margin: N/A
Market Cap: $135 million
(*Includes charges)
Balance Sheet
Cash: $1.4 million
Current Assets: $37.7 million
Current Liabilities: $25.1 million
Long-Term Debt: None
Ratios
Price-to-earnings: N/A
Price-to-sales: 1.2
HOW COULD YOU HAVE SEEN IT COMING?
Unless you lived in an igloo in Alaska or have been in a coma, it would have been nearly impossible for you to miss the Viagra story. With everyone from Jay Leno to Dan Rather talking about the new drug, it should have been clear to investors many moons ago that Vivus had a significant competitor on its hands in Pfizer and Viagra.
While studies of the two drugs have shown roughly equal effectiveness, one fact is undeniable. Inserting anything into the urethra is quite uncomfortable, and popping a little blue pill is relatively painless. Given the two alternatives, it's quite obvious which route patients and doctors are going to choose.
While MUSE may have been a hit in its time, the fact that the drug never became a household name should have been another hint. The sheer amount of publicity Viagra has received was a tip that, yes, Pfizer had a smashing success on its hands. It should have been clear that many patients were going to be dropping MUSE to try Viagra.
Being first to market is a competitive advantage, but having a far superior product is much preferred. Vivus also represents the perfect case study as to why investors should look for companies with as many revenue streams as possible. Depending on only one product, no matter how successful, is rarely a good thing to bank on.
WHERE TO FROM HERE?
It's hard to imagine a company with no debt losing more than 90% of its market capitalization in less than a year. It's even harder to imagine that same company's market cap falling even further going forward, but it is nevertheless a distinct possibility with Vivus.
The company's income statements have taken a rather dramatic turn for the worse ever since Viagra's debut. Take a second to compare the company's recent income statement with those of a year ago:
(millions) Q2 1997 Q2 1998
Sales $33.5 $16.0
Gross Profit $23.9 $5.3
Op. Exp. $13.2 $29.5*
Net Inc. $10.0 ($24.2)
EPS $0.28 ($0.76)
*includes restructuring charge
The reduced sales and profits are due solely to the increased competitive environment. Meanwhile, the company recently opened up a new manufacturing facility for MUSE that is being woefully underutilized. When sales are trending down at the same time that overhead costs are rising, it normally spells trouble.
While the company has no debt at the moment, Vivus did waste a decent chunk of cash with an ill-timed share repurchase earlier in the year that drained the company of something it looks like it desperately needs -- liquidity. Furthermore, the company's CFO recently left, and watching folks from the executive suite jump ship is often a good indication that the ship is sinking.
Trying to prop the stock up, Vivus has hired a high-powered investment banker to attempt to find "strategic alternatives" for the company. In addition, Vivus has also recently decided to restructure its sales division in order to try to enhance its financial position. Regardless of any corporate maneuvering, the sales force for Vivus is going to have a tough time convincing patients and physicians to choose MUSE over Viagra. Likewise, it looks like it is going to be tough to persuade investors to buy Vivus stock down the road if the sales trends at the company continue in their current direction.
-- Paul Larson
([email protected])
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