Robert Diggs Deeper: Is Vivus Worth more than $0.24 Per Share?
What is new in the report?
- A prior art challenge I filed against a pending Qsymia patent in Europe (European Patent Application No: 07011472.3) on August 6, 2013.
- Public call to arms for Harvard Medical School and Endo Health Solutions, two parties each of which may be holding a potentially superior ownership claim to Vivus’ on the only issued US patents covering Qsymia.
- Written admissions by Vivus’ outside counsel – the only issued US patents to Qsymia fail to teach topiramate dosages below 50 mg and arguably below 200 mg, leaving vulnerable at least 2 and perhaps all 4 of Vivus’ marketed formulations of Qsymia.
- Context for the Qsymia business case – an analysis of the relatively meager commercial success usually experienced by pharmaceutical products that merely recombine or reformulate old drugs; these FDA approvals under section 505(b)2 don’t usually result in block busters nor do they tend to launch successful companies or lucrative partnership arrangements.
- Potential Antitrust Risk – Exposes the possibility of Vivus liability should the company attempt to enforce Qsymia patents in cases where the courts find that inequitable conduct has occurred during patent prosecution and Vivus’ patents were thereby fraudulently listed in the FDA’s Orange Book.
- Generic Competition – Detailed analysis of potential strategies and timelines; the case for Vivus’ exclusivity on Qsymia ending in 2 to 3 years.
- Valuation of Vivus Stock – Detailed financial analysis of the value of Vivus shares assuming a 2 to 3 year window of exclusivity on Qsymia.
- Recommendation – Sell with a target share price of $0.24.
The following report examines the patent-related challenges and uncertainties facing Qsymia, and what these mean for the near-term and long-term prospects for Vivus. These challenges present real and imminent risks to the commercial viability of Qsymia. Other “innovative” drugs, especially those considered to be potential blockbusters, simply do not face these challenges.
What does this mean to Vivus in the near to mid-term?
- Generic Qsymia could be available as early as 30-months from time of paragraph IV filing (if not sooner through other strategies discussed in this report).
- Nearly impossible to secure a buyout or a partnership that justifies the current market cap.
- Without a partner, I do not believe Vivus ever reaches profitability; even if sales increase dramatically, the company will have a short runway (2-3 years) for overcoming high costs and debt, hence my $0.24 price target.
Below is a snapshot for each of the risk factors listed above with a more detailed discussion of each in the body of the report.
Qsymia was approved as part of the FDA’s regulatory review under Section 505(b)2 because it is a new combination of two known drugs – topiramate and phentermine, which served as reference drugs during the regulatory process. New chemical entities (NCEs), on the other hand, are novel compounds that face greater regulatory scrutiny but in turn receive five years of non-patent exclusivity. New combinations, such as Qsymia, are only granted three years of non-patent exclusivity, and may face formal challenges from generics in the form of abbreviated new drug application (ANDA) submissions that include paragraph IV certifications immediately upon NDA approval. In other words, generics are eligible to file a paragraph IV ANDA now alleging patent invalidity, unenforceability or non-infringement. Assuming Vivus counters with an infringement suit against the ANDA filer(s), Vivus is eligible for a 30-month stay on final ANDA approval of new combinations, but in the meantime, ANDA litigation may proceed and an at-risk launch becomes an option upon the expiration of the three year non-patent exclusivity and the 30-month-stay – unless the patents are found to be invalid, unenforceable or not infringed before the expiration of the 30-month stay. New chemical entities (NCEs), on the other hand, are granted a four year grace period from ANDA filings and five years of non-patent exclusivity. Nuedexta, a new drug combination from Avanir Pharmaceuticals that was approved in October 2010, is an interesting case study because it came under ANDA attack shortly after its approval in October 2010. See the Thomson-Reuters analysis of the case here.
Essentially, new combinations can come under immediate attack from generics and are only guaranteed 3 years of exclusivity from the time of approval. Since new combinations are by definition a combination of known active pharmaceutical ingredients (API’s), generic development is simplified. More importantly for the purposes of this report, the lack of a novel compound or compounds generally makes it more difficult for the innovator to secure strong patents to new combinations as compared to NCE’s. The ability to file paragraph IV certifications upon launch, the shorter non-patent exclusivity period and the challenges associated with securing strong IP all make 505(b)2 new combination drugs more susceptible to ANDA attack. As seen in this table, “New Combination Approvals Since 2008”, new combinations nearly always face generic challenges (or are not the subject of new patent coverage) and are not generally part of lucrative partnerships or buyouts. There is not a blockbuster in the group. In the case of Qsymia, the first of three years of non-patent exclusivity expires in July 2013 and, as will be shown throughout this report, the patents face a myriad of risks that will likely make them invalid and unenforceable. This leaves Qsymia, and any potential partners, with two more years of non-patent exclusivity – an exclusivity that is far from exclusive since the generic components of Qsymia are available for a fraction of the price and have long been prescribed, alone and in combination, by obesity specialists.
Generic Phentermine and Topiramate Available for a Fraction of the Price
It is well documented that generic phentermine and topiramate are available for doctors to prescribe to their patients – albeit off-label in the case of topiramate. Vivus argues that generic substitutes are not available in the same doses as Qsymia, therefore its drug offers an added convenience to its users. However, based on National Average Retail Prices data and a price check at a leading US retailer (Costco), one quickly learns a 2-month supply of generic topiramate (60 pills @ 100 mg) and phentermine (30 pills @ 30 mg) can be bought for $20.67 and $13.16, respectively, at Costco. That works out to $16.92 per month (or about $0.56 per pill for a phentermine/topiramate combo of 15mg/100mg) versus $219.99 per month for Qsymia (or about $7.33 per pill for a phentermine/topiramate combo of 15mg/92mg Qsymia). That’s a 13x markup. And those dose differences between Qsymia and its generic components are not as great as Vivus would like you to think – suggesting the Qsymia doses were selected more for commercial purposes than any medical benefit.
Based on the reimbursement challenges seen thus far, it seems payers are not convinced Qsymia’s convenience warrants such a steep markup. As for doctor and patient preference, one only has to look at prescription data from IMS Health to get the answers. The data show prescription trends for phentermine and topiramate, alone and together, for the past 30 years (or more precisely since 1996 when topiramate was first approved). The more recent data is often cited by the company and shows quarterly numbers for Qsymia prescriptions. I was told access to the data costs $3500, which is too rich for me, but it offers a wealth of information to better understand the present threat from generics while also showing the early prescribing practices of obesity doctors who first experimented with anorexiant combinations, including combinations with topiramate before June 1999 (when the Najarian patents were originally filed). Such data may provide additional grounds for attacking the Qsymia patents – and I suspect may be part of a litigation strategy that shows public use of topiramate in combination with stimulants prior to the Najarian filing date. In the meantime, Vivus likely has the IMS data for the number of patients who are being simultaneously prescribed generic phentermine and generic topiramate. A comparison of the trends of this data versus trends in Qsymia prescriptions would provide some color on the generic situation. This might provide an interesting question for the next conference call, especially since one could argue this information is material and the company has an obligation to share it with investors.
Najarian Patents – Serious Validity and Enforceability Risks
The Qsymia patents are likely to be found invalid and unenforceable during ANDA litigation. Qsymia is the combination of two drugs – both with well-documented weight loss properties. Merely combining the two drugs for weight loss seems obvious, especially in light of an earlier-filed patent from Susan McElroy that discloses the same combination for weight loss. It is likely to be found that the Qsymia patents, filed by Dr. Thomas Najarian, lack the necessary written description and enabling disclosure to overcome this prima facie case of obviousness.
The early Qsymia experiments described in the Najarian patents (see US Provisional Application No. 60/139,022) lack any clinical credibility because of poor experimental design (e.g., there are no controls or inclusion criteria, and the experiments are not powered or analyzed to be statistically significant). In order to overcome an obviousness challenge of combining two known weight loss drugs, Dr. Najarian must show surprising and unexpected results from the combination of the two drugs. A colleague of Dr. Najarian’s at the time of the alleged invention would not have considered the results from his experiments to be meaningful because of the poor experimental design. Even if we assume that the combination of phentermine and topiramate results in surprising and unexpected levels of efficacy or improved side effects, how could Dr. Najarian be considered to be in possession of an invention that requires surprising and unexpected results if these results did not exist until years after the invention was allegedly made?
Similarly for the patent to be enabled throughout the scope of its claims, a colleague of Dr. Najarian would not have been enabled to arrive at the specific titration, dosing and formulation requirements that the company later uses to differentiate Qsymia from its “generic substitutes.” (See Vivus 10-K, pages 39-40, filed February 26, 2013).] And Vivus’ current patent counsel agrees. It routinely discredits the original Najarian patents while pursuing later-filed patent applications to low dose Qsymia. Even more damaging for Vivus are the statements made by Dr. Najarian and his patent counsel during prosecution that overstate, in absolute terms, the improved side-effects from the combination. The Applicant’s former patent counsel also misinformed the patent examiner about the lack of prior art (McElroy) disclosing the combination of topiramate with phentermine to treat obesity – despite almost certainly being aware of McElroy’s existence and its materiality (see the Najarian Assignment). If it is found the Applicant or his patent counsel intentionally mislead the patent examiner on an issue material to the patentability of the invention, the entire patent family may be found unenforceable due to inequitable conduct.
In an effort to organize the most relevant documents that demonstrate the Najarian patents are invalid and unenforceable, I have listed the documents in a table that can be downloaded here. The table includes relevant passages and annotations that relate back to this report. The table also forms the basis for a third party-submission that was filed with the European Patent Office on August 6, 2013 and challenges the validity of European Application No. 07011472.3. The European submission contains arguments admissible under the third-party observation rules. Although these arguments by no means represent the totality of arguments likely to be used when the Najarian patents are challenged during ANDA litigation, it offers an early forum for challenging the validity of a pending Qsymia patent application in Europe.
No Clear Chain of Title to the Patents – Licenses Available?
Although the Qsymia patents are likely to be found invalid and unenforceable, they could prove valuable to alleged infringers or those entering “business discussions” with Vivus because ownership of said patents would effectively neutralize Vivus’ only likely patent-related barrier to entry. It is an interesting story because the rights to the patents were originally assigned to Vivus by a lone inventor, Dr. Thomas Najarian, who “discovered” the topiramate/phentermine combination while serving as the Vice President of Medical Affairs and Medical Director at Interneuron Pharmaceuticals (now part Endo Health Solutions) – a company that was focused on the discovery of weight loss drugs. At the same time, according to his resume, Dr. Najarian was also serving as a Staff Physician at Mount Auburn Hospital (which has a weight management center) and as a Clinical Instructor in Medicine at Harvard Medical School. As described in his originally filed patent applications and a subsequently filed declaration, Dr. Najarian administered topiramate (off-label) and phentermine to his patients for weight loss as part of his medical practice – presumably while teaching at Harvard and practicing medicine at Mount Auburn. If any of the work that led to the “discovery” of Qsymia was performed at any one of these institutions or otherwise used their equipment or resources, one or all of them may be entitled to rights to the invention. These could be valuable rights – a fact that is pointed out in pair of emails sent earlier this week to both Endo Health Solutions and Harvard Medical School (who handles intellectual property and licensing matters for Mount Auburn). Both emails can be viewed here (Endo) and here (Harvard).
Vivus’ Freedom-to-Operate Problem
Not to be forgotten is Vivus’ precarious freedom-to-operate (FTO) situation. There are issued patents for using topiramate to treat obesity (Shank patent assigned to Johnson & Johnson – expires 2017) and the combination of topiramate with psychostimulants, including phentermine, for the treatment of impulse control disorders (McElroy patent licensed to Johnson & Johnson – expires 2020). While it will be difficult for J&J to argue Vivus infringes the McElroy patent, the Shank patent presents a serious problem. Whether Johnson & Johnson asserts the patents against Vivus, or licenses them to someone else, it is hard to imagine a scenario going forward where the patents are not a part of Vivus’ commercial journey.
Generics Can File Paragraph IV Challenges Now – ANDA Litigation Coming
Armed with the knowledge that Qsymia only has two years of non-patent exclusivity remaining and is protected by weak, vulnerable patents – the rights to which may be available to license from Harvard or Endo – generic competitors are likely lined up for a crack at the first commercially available obesity drug in more than ten years. Litigators will have a war chest of ammunition to attack the Qsymia franchise. And since Qsymia is a 505(b)2 drug, ANDA submissions can be filed now with time to trial less than two years in many jurisdictions and judges increasingly resolving trials with the expiration of the 30-month stay in mind. If the outcome of ANDA litigation or assignment litigation is not yet resolved after the 30-month stay, competitors can launch generic versions of Qsymia at-risk – a proposition that, given the facts around Qsymia, does not seem to carry much risk.
Alternatively, those wanting to have a product in the obesity space may opt to get a license to the Najarian patents from Harvard or Endo and possibly couple it with a license to the Shank patent as part of their “partnership discussions” with Vivus. In this scenario, it seems quite plausible that a paragraph IV filing stating the filer does not fringe any of the Qsymia patents since it rightfully shares ownership of the Najarian patents could result in a quick ruling and the filer only waiting for the expiration of the 505(b)2 expiration in July 2015 to launch its generic version of Qsymia.
Vivus may also be susceptible to antitrust actions alleging that the patents were procured by fraud or that the underlying patent litigation was a sham, particularly since there is a strong possibility the Qsymia patents will be found unenforceable for inequitable conduct. In other words, one could argue that the Qsymia patents listed in the Orange Book were done so improperly; therefore the company should not be entitled to any patent-related exclusivity, including the 30-month stay awarded under Hatch-Waxman. In an interesting twist, these types of allegations could be raised as part of a qui tam lawsuit (see Amphastar v. Aventis), in which case, let it be noted that the allegations of inequitable conduct were first raised by the originator Robert Diggs in July 2012 in the earliest post on this site.
All of this leaves Vivus with a single commercial product in the US, Qsymia, that is riddled with fatal flaws – and another drug, Stendra, that sat on the shelf for over a year before landing a commercial partner in Europe where it enters a crowded market that includes generic Viagra. The success of Qsymia has always been dependent on its exclusivity. Given the regulatory scrutiny and marketing requirements, Qsymia was never the typical “new combination” life cycle management play that sometimes yields $100-400 million in sales for a handful of years. Typically new combinations are employed by large pharmaceutical companies to complement well established drug portfolios, or by generic companies looking to benefit from three years of exclusivity, but seldom is an entire company built around (and solely dependent on) a combination of old drugs. Somehow Vivus has convinced its investors it is the exception to the rule. Its former management misrepresented or misinterpreted Qsymia’s true potential, while watching the company’s market capitalization soar to $3 billion, and cashed in. This proxy letter from First Manhattan lays it all out pretty well.
Now the company stands with mounting debt (on horrible terms), dismal sales and a future where the only guarantee seems to be litigation. Perhaps by the time sales do begin to get somewhat interesting in a year or two and the company approaches some measure of profitability (analyst do not predict positive EBIDTA until sometime in late 2015 or 2016), the generics are likely to come in and commoditize the market – leaving patients with cheaper options for mixing a stimulant with an anticonvulsant in an attempt to lose weight and a company that, according to my calculations, should be trading at about $0.24. It is a story as old as snake oil salesmen: build a house of cards around the promise of easy weight loss, cash-in and flee the scene – in this case leaving investors in the wake, a new management team trying to overcome past mistakes and an easy path for generics to enter the market.
It has been said that investing is about defining risk – not best case scenarios. When it comes to Qsymia – the first new obesity drug available in thirteen years – it’s easy to focus solely on the best case scenarios. After all obesity is an epidemic, and safe therapeutic options for treating the disease are in short supply. For the overweight, or even those just looking to lose a few extra pounds, the idea of taking a pill once or twice a day rather than implementing significant lifestyle changes related to diet and exercise is very appealing. And the medical community finally agrees obesity is a serious health threat that requires pharmaceutical intervention as evidenced by the American Medical Association’s (AMA) recently declaring obesity as a disease. For drugmakers and their investors this is a billion dollar plus opportunity. However, in the case Vivus, I believe it will be the risks, or more correctly the outcome from these risks, that ultimately define the company and the commercial failure of Qsymia.
The pharmaceutical business is not easy. The realization of a single risk can wipe out all of the “best case scenarios”. Examples are plentiful: the wrong compound selected in the research phase, a poorly designed clinical trial, a change in regulatory policy, an unexpected adverse event. Near perfect execution during the entire development process and later during commercialization is required for a drug to be considered a success. In the case of Qsymia, it’s a collection of missteps, miscalculations, uncoordinated actions and fateful circumstances that I believe will ultimately prevent the drug from achieving any measure of long-term commercial success. And for Vivus, a company relying almost entirely on the success of Qsymia to drive revenues, this means past mistakes and aggressive competition from generics could prevent the company from ever generating a profit.
The risks facing Vivus, first discussed in detail here, are all related to Qsymia’s intellectual property (IP). In the pharmaceutical industry, intellectual property is a requirement to take each breath – particularly for a company like Vivus that considers itself an “innovator” but lacks the scale and expertise to execute a sales and marketing strategy without the help of a partner. Any other discussion related to the commercial viability of Qsymia (e.g., partnerships, marketing strategies, reimbursement) is moot in light of the IP risks facing the company.
- Reimbursement – generics substitutes are available for 7.6% of the cost; doctors can continue to prescribe Qsymia’s generic components with little recourse for Vivus;
- Buyout and Partnership – FTO threats, no clear chain of title to patents, likely invalid and unenforceable patents, and near-term generic competition (2015 or 2016) all make a buyout from a major pharmaceutical company unlikely; and a partnership that justifies Vivus’ current market cap also seems equally unlikely;
- Marketing and Sales – Without a true partnership, Vivus must go it alone; and the company is ill-equipped to execute on and finance the direct-to-consumer and primary-care-physician marketing initiative required to successfully drive sales of Qsymia (based on the August 6th conference call, it appears new CEO Zook is relying solely on a partner to incur the costs of the DTC campaign required to drive meaningful sales – a risky move given all of Qsymia’s patent problems);
- Financial Health – Add in the post approval studies (the completion of which is increasingly being enforced by the FDA), and the operating expenses are likely to exceed the slower than expected sales growth leaving the company in the red until sometime in 2015 or 2016 – right about the time generic Qsymia is likely to enter the market; in the meantime, additional financing will likely only be available on unfavorable terms because of IP risk (no real collateral).
So when and how are these risks going to be manifested?
It is the aim of this report to show how each of these risk factors is likely to play out in the near-term and long-term, and what the likely ramifications are for the commercial viability of Qsymia. Thus far these risk factors have largely been a silent drag on the company – with the company’s management trying to hide or otherwise duck their effects on the company’s financing, sales and partnership discussions. In other words, they have not directly affected the commercialization of Qsymia, for example, in the form of a patent infringement suit from J&J or an ANDA filing by a generic. But I believe the uncertainty around the company’s IP is having a major impact on the company’s alleged discussions with potential pharmaceutical partners. For example, it would be interesting to know how many of these discussions have reached the term sheet stage? How many of these discussions have even passed the first stage of due diligence that requires someone on the other side to check the IP box? I’m guessing no IP boxes checked and no term sheets. This would make a great question for a conference call or other corporate presentation.
Simply put, with weak IP, potential freedom-to-operate challenges and the immediate threat from generic competition, Vivus is unlikely to be bought or to secure the commercial partner it is so badly needs (at least not at terms that justify anything near its present value). And if the last six months are any indication, this spells trouble for future Qsymia sales, which have thus far been dismal. Also, it seems extremely likely that generics are going to challenge Qsymia’s exclusivity. The patents are too shaky and the market potential for obesity treatments is too large for generic competition to sit on the sidelines. Blood is in the water, and, as I will discuss in greater detail throughout, there are multiple strategies for generics to aggressively attack Vivus that include options that limit the risk to the ANDA filers.
And if the readership of my earlier blog posts is any indication, there seems to be particular interest in the Qsymia patent situation among readers in India, Israel and Taiwan – all countries with a significant generic presence. Their viewing patterns generally include a detailed read of every blog post and the download of key documents – making it hard to dismiss their interest as merely casual or benign.
Even a favorable outcome for Vivus leaves the company bloodied and battered if it somehow survives the onslaught of litigation. In the worst case scenario, and in my opinion the most likely outcome, low cost generic phentermine and topiramate continue to be prescribed during the remaining two years of Vivus’ non-patent exclusivity, after which generic Qsymia could enter the market as early as July 2015 and the company fails to ever make a profit.
As mentioned above, regardless of the ANDA litigation outcome, generic topiramate and phentermine will continue to be prescribed off-label for a fraction of the price in an increasingly cost-sensitive healthcare environment. While Vivus charges up to $220-$230 for a month’s supply of the drug’s highest dose (see CVS pricing information here and below), the most recent data (May 2013) from the Centers for Medicare & Medicaid Services shows the National Drug Acquisition Cost (NADAC) for generic 50 mg topiramate and 15 mg phentermine is $.07 and $.25 per pill, respectively; while the National Average Retail Prices (NARP) for a 60 pill supply of 100 mg generic topiramate is as low as $17.73. Qsymia’s other component, phentermine, does not have NARP data available; however, a 30 pill supply of 30 mg generic phentermine can be bought for $13.16 at Costco. If you also take the Costco price for generic topiramate ($20.67 for a 60 pill supply of 100 mg topiramate), a patient can get a two month supply of the two generic components found in the highest dose of Qsymia for a total of $33.83 (or about $0.56 per pill). Now compare that to these Qsymia prices from CVS:
Filling Your Qsymia™ (phentermine and topiramate extended-release) capsules CIV Prescription (May 2013 – CVS Pharmacy)
Please be advised that most insurance plans currently do not cover Qsymia. If you provide your insurance information when you order your prescription, we’ll be sure to check with your insurance plan.
If you don’t have insurance or Qsymia is not covered, the pricing is as follows (plus applicable shipping fees):
#30 30-day supply $139.99* $4.67 per pill
#30 30-day supply $159.99* $5.33 per pill
#30 30-day supply $194.99* $6.50 per pill
15mg/92mg #30 30-day supply $219.99* $7.33 per pill
* These prices have since gone up to $145.59, $166.39, $202.79 and $228.79, respectively for the corresponding doses. For the sake of the below analysis, I will use the May prices.
On a per pill basis for the highest dose Qsymia, there is a 13x difference from the equivalent generic components ($0.56 versus $7.33 daily dosage). The economics do not line up for patients or payers – and despite weak arguments from Vivus supporters to the contrary, doctors can legally prescribe medicine off-label at their discretion and in the interest of their patients. BiDil™, a combination of Isosorbide dinitrate and hydralazine approved in 2005 specifically indicated for African Americans with congestive heart failure, is an example of a new combination that failed on the market partially because its generic components were available for a quarter of the price. Compared to Qsymia’s 13x markup, BiDil was a bargain yet it fell to generic competition – much like I believe Qsymia will.
More definitive data from IMS Health is available that could help clarify the present threat from generic topiramate and phentermine. This 2009 paper from Hendricks et al. offers insights into the prescribing habits of physicians specializing in the treatment of obesity. A physician survey cited throughout the paper shows obesity specialists have a long history of prescribing drugs off-label. For example, 97% of the physicians surveyed reported prescribing phentermine, and 50% reported prescribing topiramate. More current data is available from IMS Health which provides phentermine and topiramate prescription data for both drugs alone and in combination (i.e., when the drugs are prescribed together). Unfortunately I cannot afford access to the data, but it still seems quite likely that the company has this data, knows that it is significant, and, in my opinion, should share it with its investors. This would make another interesting conference call question.
Barriers to Entry and a 13x Markup
As I discussed in more detail in my earlier blog posts, the half-life of topiramate is 21 hours after a single dose and steady state is reached in about four days, so the notion that extended-release topiramate offers some kind of therapeutic advantage is hard to imagine (or at least quantify in terms of improved efficacy or side effects). As a reminder, Dr. Najarian first described administering phentermine in the morning and topiramate at night to achieve his “surprising and unexpected” results, so it seems patients should be able to do the same with generic components – just as he did. This leaves Vivus with the availability of pill-splitters as the company’s sole barrier to entry to its coveted Qsymia franchise. In the meantime, the company is left trying to convince patients, doctors and payers that Qsymia offers a convenience factor that justifies a 1,300% markup ($16.92 per month versus $219.99 per month) over the available generics.
The Najarian Patents – Likely Invalid and Unenforceable
The next section is an overview of the patentability and enforceability issues that will make it difficult for Vivus to block others (e.g., generics) from making, using or selling Qsymia after its 3-years of non-patent exclusivity expires in July 2015.
First, a quick review of the Qsymia patent estate: Vivus has four issued US patents that all fall under the Najarian patent family. (See Schedule I on B-6 of the Pharmakon purchase and sale agreement for a complete list of all Qsymia-related patents and pending applications in the US and abroad). There are four issued US patents in the Najarian patent portfolio that stem from three provisional patent applications the first of which was filed in June 1999. Dr. Najarian is named the sole inventor on these issued patents – the rights to which were assigned by the doctor to Vivus in October 2001. The patents are scheduled to expire in 2020.
Vivus faces the very real possibility that the Najarian patents will be found invalid and/or unenforceable when they are challenged in court during ANDA litigation.
* The Qsymia patents are likely anticipated – On Feb 24, 1999, The University of Cincinnati filed a provisional patent application, naming Dr. Susan McElroy as inventor, that discloses the use of topiramate in combination with a short list of other pharmaceutical agents that includes phentermine for the treatment of overweight/obesity condition. This reference appears to anticipate the alleged Najarian invention under pre-AIA 35 USC 102(e) because it was filed 3 months and 20 days earlier than the earliest Najarian provisional filing date of June 14, 1999 and was the subject of a priority claim by a later application that subsequently issued as US Patent No. 6,323,236. While Vivus and Dr. Najarian could overcome this reference (for the US only) by demonstrating Dr. Najarian’s invention occurred prior to the first filing of the McElroy patent application, they have never done so.
* The Qsymia patents are likely to be found obvious – The Qsymia patents will face (minimally) an obviousness challenge based on earlier publications that describe the use of topiramate and phentermine, alone and in combination, for the treatment of obesity.
* The Qsymia patents are likely not enabled and lack written description – There is no evidence that Dr. Najarian was in possession of the alleged invention as it is claimed. According to Vivus’ own patent counsel, the company’s only issued patents covering Qsymia do not teach the dosages in three of the four formulations that are on the market. The alleged invention simply is not enabled through the scope of the claims. The patent’s specification does not provide the required detail (e.g., the specific titration, dosing and formulation required to yield surprising and unexpected results) so one of ordinary skill in the art would know how to practice the broadest issued claims (e.g., administering topiramate and phentermine together for the treatment of weight loss); while the elements of the narrowest claims (e.g., relating to specific dosing, titration and formulation) are not adequately described in the specification. Again, Vivus’ own patent counsel admits to these shortcomings during its recent patent prosecution arguments.
* Vivus’ defense is weak – The ability to overcome earlier obviousness challenges during patent prosecution relied on a precarious declaration from the Applicant that mischaracterizes the patent application’s disclosure and contradicts later disclosures made by the company in its FDA Advisory Committee (AdCom) document and other corporate disclosures. The company fails to update the USPTO with these contradictory results and conclusions despite their ongoing duty of candor under 35 USC 1.56.
* There is evidence inequitable conduct likely occurred during patent prosecution – Statements made by the patent practitioner during prosecution of the Najarian applications opens Vivus up to enforceability challenges by third parties. It is also possible that the company failed to meet its duty of candor with the USPTO in light of Qsymia’s clinical trial results and later statements to the FDA, which appear to conflict with the arguments and declarations filed during patent prosecution.
* The inventions may not have been Dr. Najarian’s to assign – The alleged Qsymia inventions were conceived and reduced to practice while Dr. Najarian was employed by third-parties presumably using their resources; therefore, these third parties may be the rightful owner of the invention. Also, Vivus may have to rely on lab notebooks and patient records from said former employers in hopes of supporting its patent positions. Trying to swear back even a day could require the cooperation of former employers that may be in the midst of determining their own rights to the alleged invention.
Each of the above arguments will be discussed in more detail below.
Europe – An Early Venue to Challenge the Qsymia Patents
* Basic Qsymia claims challenged in Europe – lets see how Vivus reacts.
The US Patent and Trademark Office (USPTO) recently created a new forum for challenging pending patent application that is similar to the third-party observation practice seen in Europe. These “Preissuance Submissions”, which are described in more detail here, allow for any member of the public, including private persons and corporate entities, to file third-party submissions such as patents, published patent applications, or other printed publications of potential relevance to the examination of a patent application. Unfortunately the option of filing a preissuance submission with the USPTO was not available when the currently pending Najarian patent application (US App. No. 12/683,353) published in April 2010; however, if another application from the Najarian patent family is filed in the US, I strongly suspect a preissuance submission will follow shortly thereafter.
In Europe, on the other hand, one can file (anonymously) a third-party observation that formally challenges the validity of a European application anytime during the pendency of said application. This being the case, I took the opportunity to file a third-party observation directed to Vivus’ European Patent Application No: 07011472.3, which published as EP1825851.
One of the most important things to understand about this pending European application is that the claimed indication, Syndrome X, is a nearly irrelevant side show. Most of the pending claims in Vivus’ EP1825851 application are directed to methods of treating Syndrome X – a rather poorly defined collection of metabolic conditions sometimes characterized by hypertension, diabetes (hypoglycemia and hyperinsulinemia) and obesity. Based on a search of all patent use codes in the FDA’s Orange Book, there are no drugs currently approved in the US for Syndrome X, and even if Qsymia is approved in Europe, it will likely be solely indicated for obesity, as it is in the US, and not Syndrome X. Therefore, the Syndrome X claims are of limited commercial interest.
The heart of the alleged Najarian invention and Vivus’ current $1.5 billion market cap is encompassed by the two pending European claims not limited to treating Syndrome X: one directed to a pharmaceutical composition comprising a sympathomimetic agent (e.g., phentermine) and an anticonvulsant sulfamate derivative (e.g., topiramate); and the other claim directed to a kit with said composition. The issued patent claims that are currently protecting Qsymia are like these claims in that any combination of these two drugs, regardless of the purposes for which they are used, is covered, or the combination at times limited to the purpose of causing weight loss. If I can sink these claims, then, by extension, I should be able to sink the entire Qsymia franchise.
There are a number of ways I could attack these two claims, but for now I will rely on the simplest argument: the claims are not novel in light of the prior art (i.e., they are anticipated by the earlier filed McElroy patent). While the patent rules and terminology are different in Europe as compared to the US, and Qsymia may never be approved there, the third-party observation, which can be viewed here, may offer an early preview into how Vivus intends to address some of the validity challenges discussed in this report, including the impact of McElroy. If Vivus has a strong position and believes in it, the company and its patent counsel can fend off my attack. If they abandon the claims immediately, it is because they know my attack would prevail. And their failure to overcome or not face my challenge will strongly suggest their previously issued claims to the combination per se or to claims to using the combination for weight loss (which is also described by McElroy) are similarly vulnerable.
And now I offer a more detailed discussion of some of the validity arguments the company is likely to face in the US when the Najarian patents are challenged during ANDA litigation.
Prior Art – Known Drugs and Known Doses in a Known Combination
Next I provide a summary of the prior art, including the McElroy patent, that existed before Dr. Najarian filed his first patent application in June 1999. Considered in its totality, the prior art shows what was known in the field of obesity-related therapeutics at the time of Dr. Najarian’s alleged invention.
In the mid and late 1990’s researchers were combining known anorexiants such as phentermine with a wide range of drugs in hopes of finding the next weight loss combination. The best known combination was phentermine and fenfluramine (of notorious phen-fen fame), while other combinations included phentermine with metformin, and antidepressants such as Prozac, Zoloft, and Wellbutrin. As Dr. Michael Anchors describes in his June 1997 US Patent No. 5,795,895 directed to weight loss combinations comprising phentermine and selective serotonin reuptake inhibitors (SSRIs), these combinations presumably offer an improved side effect profile.
The combination of phentermine with a selected SSRI significantly reduces all side-effects of the therapy because an appropriate SSRI can be selected to offset the side-effects of phentermine. If a patient suffers constipation from phentermine, Zoloft, a diarrhea-producing drug, can be used to offset the constipation. If phentermine causes insomnia, Desyrel can improve sleep. If phentermine causes loss of sex drive, Luvox can restore it.
A similar situation is described by Lee and Morley (Obes Res. 1998 Jan;6(1):47-53), who investigated metformin as a potential weight loss drug among overweight diabetics, in the below passage:
In research trials using single-drug therapy for obesity, there appears to be a maximum weight loss of about 10 kg, even with prolonged medication treatment, raising the question of whether more effective treatment may require combination drug therapy. The rationale for the use of combined drug therapy for weight control is that using medications with different pharmacological properties may allow greater weight loss than single-drug treatment, and with minimal side effects.
Among the other drugs being investigated for weight loss at the time was topiramate – a newly approved anticonvulsant discovered and marketed by Johnson & Johnson known to have weight loss properties. The use of topiramate for weight loss is the subject of a J&J patent to inventor Shank that was originally filed in 1996 – three years prior to the first Najarian patent filing. It expires in 2017 and is revisited in the freedom-to-operate section of this report.
* Phentermine, a well known appetite suppressant, was on the market, and had been since 1959, in dosages ranging from 8 mg to 37.5 mg. A wider range of phentermine dosages, from 3 mg to 150 mg per day, were described in the literature including published patents. (See, for example, American Medical Association. AMA Drug Evaluations Annual 1991. Chicago, IL: American Medical Association, 1991., p. 2000; and US Patent No. 5,019,594 “Method for decreasing appetite“ May 28, 1991, Interneuron Pharmaceuticals, Inc.)
* Topiramate, an anticonvulsant with known weight loss properties, was the subject of ongoing clinical weight loss research. (See, for example, US Patent No. 6,071,537 – Shank patent; Potter et al. “Sustained weight loss associated with 12-month topiramate therapy” AES Proceedings Annual Meeting of the American Epilepsy Society December 7-10, 1997, page 97, Neurological Research Center, Southwestern Vermont Medical Center, Bennington, VT, U.S.A.; Rosenfeld et al. “Topiramate and concomitant weight loss” AES Proceedings Annual Meeting of the American Epilepsy Society December 7-10, 1997, page 98, PADS Investigator Group, The Comprehensive Epilepsy Care Center for Children and Adults, St. Louis, MO; Rush Presbyterian Medical School, Chicago, IL; and Allegheny University, Philadelphia, PA, U.S.A.
* Topiramate was available in 25 mg, 50 mg, 100 mg, and 200 mg dosages with the preferred dosing regimen, according the Physicians Desk Reference, calling for a dosing titration starting at 25 mg and increasing in 25 mg increments to up to 400 mg depending on the indication. (Source: Topomax label – highlights of prescribing information). The original topiramate patent from McNeil Lab claimed dosage values of about 10 to 500 mg (Source: claim 7 of US Patent No. 4,513,006)
* Methods for treating obesity with a range of topiramate dosages were claimed in issued US patents filed before, or shortly after in the case of Kozachuk, the Najarian patent was filed:
- 25 to 200 mg (claim 4 of US Patent No. 6,071,537 – Shank)
- 15 to about 2000 mg per day (claim 5 of US Patent No. 6,323,236 – McElroy)
- 1 to 5000 mg per day (claim 2 of US Patent No. 6,191,117 – Kozachuk)
* Phentermine was being combined with a wide range of drugs for weight loss in an attempt to improve efficacy and/or reduce side effects. (Source: US Patent No. 5,795,895; Lee and Morley, “Metformin Decreases Food Consumption and Induces Weight Loss in Subjects with Obesity with Type II Non-Insulin-Dependent Diabetes” Obesity Research, Vol 6, No 1, Jan 1998, pgs 47-53)
* The combination of topiramate with phentermine to treat obesity and overeating was disclosed in a patent filed by Susan McElroy in February 1999. Topiramate ranges of 15 mg to 2000 mg are described in the patent. Pharmaceutical compositions comprising topiramate in combination with other medications are also described in dosage units from about 5 to about 1000 mg of active ingredient, and in “time-release, delayed release or sustained release delivery systems.” Dosages are also described in terms of function and results, with a preferred dose described as “the lowest safe dosage that provides appropriate relief of symptoms”. (Source: US Patent No. 6,323,236, and its corresponding provisional application.)
* Finally, there is at least one medical doctor claiming that in his practice he used topiramate and stimulants, including phentermine, which were administered for the treatment of obesity at least one year prior to Dr. Najarian’s filing date, in which case this public use/sale might constitute an absolute bar to the Najarian patents under pre-AIA 35 U.S.C. 102(a) or (b). Dr. Mark Holland of the Holland Clinic in Albuquerque makes precisely this claim.
Litigation Tip: Contact doctors like Dr. Holland who were active in weight loss clinics during the mid to late 90’s to determine if they were prescribing phentermine and topiramate in the public. One patient record from 1998 or earlier, and the whole patent family could come down. Litigators may also have questions for Dr. Najarian about where and when he first prescribed topiramate alone and in combination with phentermine. Did his early use constitute a sale? Was it part of a clinical trial under the guidance of the FDA?
The relevant passages from the references cited above can be found in this table, “Vivus Prior Art Table”. The table will be emailed to Vivus’ patent counsel, Mintz Levin, explaining the references may need to be submitted to the US Patent and Trademark Office. While some of the references (e.g., McElroy) were previously submitted to the USPTO as part of information disclosure statements (IDS’s), it seems to me their proper context and relationship together has not been properly considered, for example, because of what I consider to be misleading statements made by Vivus’ previous patent counsel.
Validity – Anticipation
* Unless Vivus can somehow establish an earlier filing date, the McElroy patent will likely stand as a 102(e) anticipation reference.
The use of topiramate for indications outside of epilepsy received the attention of Susan McElroy, a researcher at the University of Cincinnati, who in February 1999 filed a patent to the combination of topiramate with other medications, including phentermine, to treat impulse control disorders such as overeating and obesity. More specifically, Dr. McElroy disclosed a combination of topiramate with a psychostimulant, which is defined to include phentermine, for the treatment of “overweight/obesity condition”. This application became US Patent No. 6,323,236, and is featured prominently in the later executed assignment agreement between Vivus and Dr. Najarian. In the assignment, sections 3.2 (i) and (ii) account for the possibility that McElroy might “interfere, overlap or otherwise conflict with” the Najarian patent.
As it turns out, the McElroy patent does present a number of problems for the later-filed Najarian patent. In a time when doctors were liberally prescribing combinations of drugs for weight loss, Dr. Najarian chose two drugs, phentermine and topiramate, already known to have weight loss properties. Likely unknown to Dr. Najarian at the time, this same combination had already been described for the treatment of weight loss in the not-yet-published McElroy patent.
Under 35 USC 102(e) (pre-AIA), one cannot be granted a patent to an invention if that invention was first described in an earlier patent application filed by someone else. The McElroy patent clearly falls in this category as prior art under 35 USC 102(e). See the below disclosures from McElroy’s US Provisional Application No: 60/121,339 filed February 24, 1999, which later issued as US Patent No. 6,323,236:
The combination of topiramate with phentermine for the treatment of obesity:
Specifically, topiramate may be administered in combination with other medications to treat certain symptoms and disorders including:
I. Treatment of Binge Eating (Binge Eating Disorder, Bulimia Nervosa, Anorexia Nervosa with Binge eating) with serotonin re-uptake inhibitors (e.g., citalopram (CELEXA), clomipramine (ANAFRANIL)), fluoxetine (PROZAC), fluvoxamine (LUVOX), venlafaxine (EFFEXOR), other antidepressants (e.g., bupropion (WELLBUTRIN) nefazodone (SERZONE), tricyclics (e.g., NORPRAMIN and PAMELOR), trazodone (DESYREL), Substance P antagonists), psychostimulants, (e.g., d-amphetamine, phentermine; and sibutramine (MERIDIA)) and orlistat.
II. Treatment of overweight/obesity condition with sibutramine (MERIDIA); psychostimulants, (e.g., d-amphetamine, phentermine) and orlistat.” [emphasis added] (See page 24, lines 6-17).
The combination of topiramate with phentermine for the treatment of obesity in a range of doses. For example, pharmaceutical compositions in varying amounts from 5 to about 1000 mg of active ingredient are disclosed:
The pharmaceutical compositions herein will contain, per dosage unit, e.g., tablet, capsule, powder injection, teaspoonful, suppository and the like from about 5 to about 1000 mg of the active ingredient. (See page 6, lines 9-11).
Dosage may be adjusted appropriately to achieve desired drug levels, locally or systemically. Generally, daily oral doses of active compounds will be from about 0.01 mg/kg per day to 2000 mg/kg per day. (See page 26, lines 18-20).
In addition, dosages of the pharmaceutical compositions are also described in terms of function and outcome known to those skilled in the art:
It is preferred generally that a minimum dose be used, that is, the lowest safe dosage that provides appropriate relief of symptoms. (See page 26, lines 16-17).
Additional pharmaceutical compositions comprising topiramate in combination with other medications (e.g., phentermine) in pharmaceutically acceptable amounts are disclosed:
When administered, the formulations of the invention are applied in pharmaceutically acceptable amounts and in pharmaceutically acceptable compositions. (See page 25, lines 12-13).
The compositions may conveniently be presented in unit dosage form and may be prepared by any of the methods well known in the art of pharmacy. In general, the compositions are prepared by uniformly and intimately bringing the compounds into association with a liquid carrier, a finely divided solid carrier, or both, and then, if necessary, shaping the product. Compositions suitable for oral administration may be presented as discrete units such as capsules, cachets, tablets, or lozenges, each containing a predetermined amount of the active compound. [emphasis added] (See page 27, lines 12-19).
Additional pharmaceutical compositions of the invention include various controlled release systems including time-release, delayed release or sustained release delivery systems:
Other delivery systems can include time-release, delayed release or sustained release delivery systems. Such systems can avoid repeated administrations of the active compounds of the invention, increasing convenience to the subject and the physician. Many types of release delivery systems are available and known to those of ordinary skill in the art. They include polymer based systems such as polylactic and polyglycolic acid, polyanhydrides and polycaprolactone… (See page 27-28, lines 21-23 and 1-3).
McElroy is a big problem for Vivus – a problem the company has known about since it first bought the rights to the Najarian patents and referenced the McElroy patents in the corresponding Assignment Agreement. However, at least in the US, McElroy alone may not be sufficient to destroy the entire Najarian patent estate if Dr. Najarian can establish that he invented Qsymia prior to Dr. McElroy’s earliest filing date (February 17, 1999), in which case the McElroy patent can be eliminated as prior art in the US.
Vivus Conference Call Question: Hads the company determined the earliest invention date that may be awarded to Dr. Najarian for his alleged topiramate/phentermine invention?
Establishing an earlier invention date may prove difficult, though, as evidence will need to be provided, likely in the form of lab notebooks and medical records from Endo Health Solutions (Interneuron) and Harvard, to demonstrate any earlier invention date. This could prove difficult since such an inquiry may alert each institution to its respective rights to the invention.
Validity – Obviousness
* The company likely lacks the evidence to demonstrate surprising and unexpected results required to overcome the strong obviousness arguments facing the Najarian patents.
If Vivus somehow gets around the anticipation arguments described above, an obviousness challenge likely awaits as the next challenge.
In order to better understand the likely obviousness arguments facing the Najarian patents, it is important to first provide a quick overview of the evidence (or results) found in the Najarian patents. The Applicant needs to provide evidence that the invention is surprising and unexpected in order to overcome an obviousness rejection. In the case of drug combinations, the claimed combination must produce effects that are not merely additive, but instead produce a synergistic or other unexpected positive effect. It is analogous to filing a patent application directed to a method for staying warm that comprises wearing a sweater and a jacket. In order to be patentable, the Applicant must first show that a sweater and jacket worn together is actually warmer than a sweater or jacket worn alone, and, secondly, that the sweater and jacket combination is warmer than one would expect if two warm articles of clothing are worn together. The combination may in fact be warmer, but is it surprisingly or unexpectedly warmer as required by patent law? Does the combination offer other benefits aside from warmth? For example, is there any quantifiable evidence that the sweater and jacket together are more comfortable or offer any other advantages?
As described earlier in this report, Dr. Najarian first filed patent applications directed to phentermine and topiramate combinations for the treatment of weight loss on June 14, 1999 as US Provisional Patent Application 60/139,022. Additional provisional applications were filed in January and February of 2000, and a US utility application was filed on June 14, 2000. Example 1 of the first provisional application begins with what appears to be a prophetic human trial in which patients would be prescribed increasing doses of topiramate together with a fixed dose of 15 mg phentermine. This is followed by a table (not titled) that includes data (patient weight and blood pressure) from seven individuals. The reader learns this is not a prophetic example, but rather a description of actual, early experiments designed to show the efficacy of the phentermine/topiramate combination in human patients at a dose of 15 mg for phentermine and 25-200 mg of topiramate. The example states, “patients not previously being treated with an anorexiant at the outset of the study experienced an average of about 3.5% weight loss when [sic] after only 2-6 weeks”.
Additional examples are added in subsequent provisional filings, and the final provisional application (60/181,265) filed February 2000, includes data from more patients (N=13) over a longer period of time (5-9 months), and the patient’s BMI is also included.
None of the Examples described above include controls, inclusion criteria or statistics. These are poorly powered, unblinded experiments that contain conclusions like “patients also report experiencing less side effects than any previous weight loss treatment tried” (page 16, lines 10-11 of US Provisional Application No. 60/139,022). There is no data to support these statements. Patients were not given phentermine or topiramate alone as a comparison. The experiment lacks clinical credibility and the results are often anecdotal. Here is a deeper look at the flaws in Dr. Najarian’s experimental design:
1. No controls – An uncontrolled experiment is not an experiment – rather it is a mere observation; i.e., if you cannot compare the results from individuals treated with individuals not treated, no meaningful conclusions can be drawn.
2. Inclusion criteria – Physiological parameters in humans and animals are notoriously variable from subject to subject; if one does not focus on a particular population of subjects (or individuals) with known characteristics that might be expected to react in a relatively similar manner, obtaining meaningful scientific results is often impossible.
3. Lack of statistics and power – Because of the above mentioned variability in physiological parameters, even in a tightly defined population, it is often necessary to measure results in tens or even hundreds of subjects who are treated in precisely the same manner against a similar number of subjects who are treated in a separate precise manner before meaningful results can be obtained. To determine if the number of subjects is sufficient (i.e., the experiment is sufficiently powered in such as way to yield meaningful results), there are universally recognized statistical methods that can be employed. In the present case, the sample size is clearly far too small and no statistical analysis is performed.
4. Blinded vs. unblinded –If human patients know they are receiving an active drug or believe they are receiving an active drug, they tend to have heightened physiological responses that are consistent with their expectation of how the drug should effect them. This is known as the placebo effect. Hence, experiments are often blinded so human subjects do not know whether they are taking an active drug or a placebo. This effect has also been demonstrated in situations where the researcher knows whether the drug or the placebo is being administered to the subjects, but the subjects remain blinded. Therefore, any serious clinical study that is going to be referenced for regulatory purposes is almost always double blinded such that neither the subject nor the researcher know if the subject is receiving placebo or drug.
The brief descriptions above are the foundations of experimental design taught in high schools around the world. Failure to adhere to any one of the basic principles described above is absolutely fatal to experimental design. The fact that all four were largely ignored in Dr. Najarian’s examples means that you can only draw one conclusion: he gave a handful of human subjects a combination of two known weight loss drugs and they lost weight. Under these circumstance, any other finding would have been surprising. For an example of a simple, properly designed clinical study, see this ongoing Mayo Clinic clinical trial (NCT01834404) that is investigating the peripheral pharmacodynamics of phentermine and topiramate in obese patients. It is interesting to note the investigators at the Mayo Clinic have chosen to use the generic components of Qsymia, phentermine and topiramate, in their blinded, randomized and controlled study – not the formulation offered by Vivus.
In regards to the alleged improved tolerability (i.e., fewer side effects), Dr. Najarian relies on anecdotal evidence from an unspecified number of subjects. These types of conclusions are usually avoided by real scientists until they can be substantiated by properly designed experiments with quantifiable, objective results.
So what can we conclude from the results disclosed Dr. Najarian’s patents?
Well, to begin, a lot was known about phentermine and topiramate as weight loss agents before Dr. Najarian filed his patent application in June 1999:
- Phentermine was (and still is) the most widely prescribed weight loss drug on the market. Since its approval in 1959, phentermine had been available or described in the full range of doses and formulations contemplated by Dr. Najarian.
- Topiramate was a recently (1996) approved anticonvulsant that had also been investigated (and patented) for its well-documented weight loss properties in ranges, formulations and with dosing regimens that overlap with those described and claimed by Dr. Najarian.
- Phentermine together with topiramate was described for the treatment of overweight and obesity in the earlier-filed McElroy patent (US Patent No. 6,323,236).
Not unexpectedly, the USPTO rejected the original claims in Dr. Najarian’s US Application No. 09/593,555 as prima facie obvious. The examiner argued that it is obvious that the combination of phentermine with topiramate – both with well documented weight loss properties – will cause weight loss and affect other physiological parameters (e.g., blood pressure, glucose levels) that follow weight loss. See pre-AIA 35 USC 103.
In order to overcome an obviousness rejection, the burden is on the Applicant to show surprising and unexpected results. In a response and corresponding declaration, Dr. Najarian and his counsel tried to argue that the efficacy and side effect profile from the topiramate/phentermine combination was indeed surprising and unexpected. However, they were unable to base such a showing on proper evidence. Instead, they relied on the results from the poorly designed experiments described above while making absolute conclusions based on anecdotal observations. For example, in a July 16, 2002 Applicant Response for the above identified application, Vivus’ patent counsel grossly overstates the allegedly improved side effect profile by saying the “side effects are canceled out by each drug”. This conclusion is later refuted by the company’s own clinical trial results. See the company’s Advisory Committee Briefing Document (AdCom) submitted to the FDA in February 2012:
the side effects of QNEXA [QSYMIA] 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. (See page 73 of the AdCom).
Later in the AdCom, the company offers another description of Qsymia’s side effect profile (see page 156, “9.2 Risks of Treatment” section):
The safety and tolerability profile of QNEXA [QSYMIA] demonstrated in the clinical development program is consistent with the known adverse effects of the approved component agents when used as monotherapy for various indications. Adverse effects observed with phentermine and topiramate monotherapy, which inform current labeling, were generally observed in subjects treated with doses higher than those studied in the QNEXA clinical development program.
It is important to note, the clinical trial results are the only results that come from properly designed experiments that follow the basic experimental principles set out above. Thus it is not entirely surprising that the results from the FDA trials contradict the results from the earlier Najarian experiments in regards to allegedly improved side effects – a critical discrepancy that Vivus fails to share with the USPTO despite having a duty to do so under 35 USC 1.56 (Duty of Candor).
When it is in front of the patent office or payers the side effect profile is surprising and unexpected, but when it is in front of the FDA, it is consistent with expectations. Which is it? Or is the Qsymia combination’s side effect profile surprisingly and unexpectedly consistent with expectations? How do you think that will play out in patent litigation? Could these inconsistencies be viewed as anything other than intentionally misleading?
Validity – Enablement and Written Description
* The Najarian patents lack the required enabling disclosure and written description that is commensurate with the scope of the issued the claims – and Vivus’ own patent counsel agrees; minimally disavows the lowest two doses of Qsymia, arguably all four doses, in current ongoing prosecution.
Adding to Vivus’ patent problems is the company’s attempts to secure new patents outside of the original Najarian patent portfolio. As a reminder, these new later-filed Vivus patent applications must overcome Najarian as prior art. In an effort to do so, Vivus’ current patent lawyers have admitted that the Najarian patents do not teach how to make or use the two lowest doses of Qsymia – an enablement requirement stipulated under 35 USC 112.
Below is a sampling of the statements made by Vivus’ own lawyers about the Najarian patents – the only issued US patents covering Qsymia:
As stated supra, provided the disclosure of Najarian, the ordinarily skilled artisan would readily recognize that the statement cited by the Examiner is so broad as to be uninformative regarding the derivation of the specific daily maintenance dosages for topiramate, as recited by the pending claims [15-50 mg topiramate]. Najarian defines a “maintenance dose” as “an ongoing daily dose given to a patient” that typically follows a ramp-up or drug titration period. Furthermore, as noted by the Examiner, Najarian teaches that a maintenance dose for topiramate is “at least 50 mg daily”. The ordinarily skilled artisan reading Najarian, as a whole as is required, would readily recognize that an effective daily maintenance dose of topiramate cannot be less than 50 mg. In fact, the ordinarily skilled artisan would regard a daily maintenance dose of 50 mg of topiramate as the minimum possible effective dosage, and then turn to the working examples provided by Najarian to optimize the treatment regime. [Emphasis added. Hyperlink added for clarity]. (See pages 6-7 from the February 2012 Response After Non-Final Action for US Patent Application No. 12/481,540).
Later in the same response, Vivus’ patent counsel provides this characterization of the Najarian patents:
Provided the disclosure of Najarian, considered in its totality, the ordinarily skilled artisan would have no reasonable expectation of predictable results or success by using the claimed low dosages of topiramate because the skilled artisan would expect such low dosages to be ineffective…
As described supra, the ordinarily skilled artisan would not expect the claimed low dosages of topiramate to be efficacious for inducing weight loss. This low dose of topiramate recited by the instant claims [15-50 mg] provides unexpected and superior properties by further decreasing the likelihood of adverse side effects observed with higher dosages of topiramate. (Pages 7-8 of the same February 2012 Response).
Based on the above statement, at least two of the four doses of approved Qsymia containing less than 50 mg of topiramate are not covered by the company’s own issued patents.
- 3.75 mg/23 mg (phentermine/topiramate)
- 7.5 mg/46 mg (phentermine/topiramate)
- 11.25 mg/69 mg (phentermine/topiramate)
- 15 mg/92 mg (phentermine/topiramate)
Vivus’ patent counsel goes even further when, on page 7 of the same response, they explain that Example 2 of the Najarian patent teaches administering up to 400 mg of topiramate (median dose 200 mg), which is eight times higher than the dosage of topiramate claimed in the later-filed pending claims.
Because Najarian teaches an optimized daily maintenance dosage of topiramate that is so significantly greater than the daily maintenance dosages of the instant claims, the ordinarily skilled artisan would not modify, and particularly, would not decrease the daily maintenance dosage of topiramate below the 200 mg taught by Najarian with any reasonable expectation of predictable results or success…In fact, Najarian teaches away from the daily maintenance dosage of topiramate of less than 50 mg… [emphasis added]
Vivus’ patent counsel is telling me I should not expect topiramate doses of less than 200 mg to work “with any reasonable expectation of predictable results or success.” Now it seems they are suggesting that none of the approved doses of Qsymia are covered by the issued patents.
These statements will have major implications when Vivus tries to assert the Najarian patents against generic competition. In a sense, Vivus has committed patent suicide. The company has effectively disavowed the only claims covering Qsymia.
It is as if Vivus’ patent attorneys find themselves stranded in the middle of a vast, inhospitable desert with no water and no means of transport except a broken down old car that barely runs. Instead of maintaining the car as best they can and trying to drive their way out, they have determined that disassembling the car and reassembling its parts into a jet pack offers their best chance for survival. Yes, in an all-or-nothing plan, they will fly their way to safety or die trying. Very aggressive. Very risky.
To be clear, pursuing later claims in new patent applications is a normal tactic; however, it is nearly unheard of to do so at the expense of your only issued patents. Why would Vivus adopt such an aggressive strategy? It seems the company believes the earlier issued Najarian patents are likely to be found invalid and/or unenforceable, and is now faced with a highly risky strategy that requires getting the new patent applications issued at any cost. If this does in fact become the company’s stated strategy, I will address in detail the nearly impossible situation the company faces trying to get its new patent applications issued which I preliminarily introduce in the below section, “Forget Najarian – We Have a New Strategy.” In the meantime, based on the above statements made by Vivus’ own counsel, the generics are left with, minimally, a clear path to Qsymia’s two lowest doses, and patients and doctors need merely to combine the lower doses of Qsymia to circumvent the entire Qsymia franchise.
The company’s enablement problems do not end with its own admissions that topiramate in doses lower than 200 mg do not work. The Najarian patents also lack other necessary details relating to Qsymia’s dosages, formulation and titration that the company admits are required to differentiate Qsymia from its generic components. For example, the Najarian patents lack the following:
- Complete dosage support – The Examples only describe experiments in which 15 mg of phentermine are administered to patients;
- Titration data – Phentermine is never administered in escalating doses;
- Description and data for extended-release topiramate formulation – There is no evidence that extended release topiramate offers any therapeutic advantage because extended release topiramate was never administered to any patients; and
- Description and data for a single dose formulation – topiramate and phentermine were never administered together in a single formulation.
As discussed in a recent Federal Circuit decision, Wyeth v. Abbott Laboratories (June 2013), valid patent claims need to be enabled according to 35 USC 112 across their full scope. The court offered this summary of the enablement requirements (see page 5):
A patent’s specification must describe the invention and “the manner and process of making and using it, in such full, clear, concise, and exact terms as to enable any person skilled in the art to which it pertains . . . to make and use the same.” 35 U.S.C. § 112(a) (2012). Claims are not enabled when, at the effective filing date of the patent, one of ordinary skill in the art could not practice their full scope without undue experimentation. …. Enablement is a question of law based on underlying facts.
The company’s management and its current patent counsel both make statements that contradict and otherwise compromise the company’s patent position. Let’s start with the company’s most recent 10-K filed on February 26, 2013 (see pages 39-40), where the company stresses the importance of Qsymia’s titration, dosing and formulation to differentiate it from its generic substitutes:
Both of the active pharmaceutical ingredients in Qsymia, phentermine and topiramate, are available as generics and do not have a REMS requirement. The exact doses of the active ingredients in Qsymia are different than those currently available for the generic components…The safety and efficacy of Qsymia is dependent on the titration, dosing and formulation, which we believe could not be easily duplicated, if at all, with the use of generic substitutes. [emphasis added]
That’s interesting because combining generic substitutes is exactly what Dr. Najarian did to come up with his alleged invention. However, he fails to provide the necessary enabling disclosure relating to titration, dosing and formulation that the company now claims makes Qsymia distinctive.
I will allow Vivus’ own patent counsel to point out the shortcomings in the Najarian patents. In a December 2012 Response to Final Rejection for currently pending US Application No. 12/481,548, Vivus’ counsel makes clear that Najarian does not contemplate phentermine titration:
Najarian does not teach or suggest the method of pending claim 46, from which all other claims properly depend. Claim 46 requires, inter alia, a second dosage form comprising an increased amount of both phentermine and topiramate, wherein the second dosage form maintains the ratio of phentermine to topiramate…These features are neither taught nor suggested by the combination of Najarian and Lian. As stated on the record by the Examiner, Najarian does not teach incremental increases of phentermine by week. [emphasis added] (Page 6 of the December 2012 Response).
It seems Najarian only has experimental support (albeit flawed because of the experimental design failures described herein) for 15 mg of phentermine, which is the maximum phentermine dose found in Qsymia’s approved formulations:
- 3.75 mg/23 mg (phentermine/topiramate)
- 7.5 mg/46 mg (phentermine/topiramate)
- 11.25 mg/69 mg (phentermine/topiramate)
- 15 mg/92 mg (phentermine/topiramate)
As for formulation, statements made during Vivus’ current patent prosecution offer this admission that Najarian lacks an adequate description of Qsymia’s present day formulation:
Najarian fails to teach or suggest the combination of the formulation and escalating dosage regime recite by claim 19 (i.e., controlled release beads in the form of….). Rather, Najarian teaches general methods of formulation, that fail to teach or suggest the material recited in claim 19, as amended herein. (Page 5 of April 2012 Response for US Application No. 12/481,548)
How does Vivus, in light of the numerous admissions made by the company and its patent counsel during subsequent patent prosecution – specifically pointing out how the Najarian patents fail to teach or suggest, and in some cases actually teach away from, key features of Qsymia related to titration, dosing and formulation – try to assert these same patents against alleged infringers?
Litigation Tip: Ask the judge to agree to the patentee’s position as to the lack of enablement and thus invalidity of the alleged invention.
Unenforceable – Inequitable Conduct
* The Najarian patents are likely to be found unenforceable due to inequitable conduct – most notably because of statements made, and not made, during patent prosecution.
Given the above patentability issues, especially those resulting from the McElroy patent, how is it the USPTO has granted over 160 Qsymia-related claims to Vivus?
This is a legitimate question. The company and its trusting analysts often cite the 160 issued claims as evidence of a strong patent portfolio around Qsymia. First, there is a long history of the USPTO granting patents that are later found to be invalid or unenforceable during patent litigation. A patent may be found to be invalid for any one or more of the reasons provided in the above section. Second, in the case of the Najarian patents, in addition to being unpatentable, the patents may be found to be unenforceable in light of inequitable conduct committed during patent prosecution. This inequitable conduct stems from two key events that occurred during the Najarian patent prosecution:
#1. Statements made in a precarious declaration from the drug’s inventor, Dr. Najarian, in which he provides the key arguments used to overcome an obviousness rejection introduced by the patent examiner, contradict with statements later made by the company to the FDA. In the declaration, Dr. Najarian counters the obviousness rejection by arguing that the combined drugs, when administered together, have surprisingly fewer side effects than the individual drugs alone.
Under 35 USC 1.56, Applicants and their patent counsel have a duty to notify the patent office of any information material to patentability – failure to do so may be grounds for a finding of inequitable conduct. For example, possible inequitable conduct may have arisen if data from the later conducted clinical trials contradict any of the absolute statements made by Dr. Najarian in his declaration. Below are the statements made Dr. Najarian in his declaration, and the statements from Dr. Najarian’s patent counsel that accompanied his declaration:
“Applicant submits herewith a Declaration under 37 C.F.R. §1.132 (the “Declaration”) that shows that the combination of a sympathomimetic agent such as phentermine with an anticonvulsant sulfamate derivative such as topiramate, provides for the desired weight loss. Further, the Declaration also shows that unpleasant side effects are observed when phentermine and topiramate are administered alone, but not when administered in combination.” (See page 4 of the response dated July 16, 2002 for U.S. Application No. 09/593,555).
“In these same patients, over and over, I surprisingly found that the addition of a sympathomimetic agent such as phentermine greatly diminished the side effects of topiramate. Further, this allowed patients who, previously, could not tolerate topiramate, to be able to take topiramate in combination with phentermine. I have also had patients who previously had difficulty tolerating phentermine when administered alone as a weight loss treatment because it was too stimulating and caused insomnia, even when taken in the morning as a single dose. These same patients could tolerate phentermine when combined with topiramate, since both drugs nicely cancel out each other’s side effects.” (See Declaration from Inventor Najarian (Section 10. A.), filed July 2002 during prosecution of U.S. Application No. 09/593,555).
Again, if Dr. Najarian, Vivus or its patent counsel came into possession of any information (e.g., clinical trial data) that contradicts the above statements, they have a duty to disclose this information to the USPTO during the pendency of the any patent application in the patent family. Based on comments made in the company’s AdCom document, it seems the side effects observed when phentermine and topiramate are administered alone do not disappear when administered in combination. See below.
“As such, the side effects of QNEXA 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.” AdCom document (filed February 22, 2012), page 73, first paragraph.
“The safety and tolerability profile of QNEXA demonstrated in the clinical development program is consistent with the known adverse effects of the approved component agents when used as monotherapy for various indications. Adverse effects observed with phentermine and topiramate monotherapy, which inform current labeling, were generally observed in subjects treated with doses higher than those studied in the QNEXA clinical development program.” AdCom document (filed February 22, 2012), page 156, “9.2 Risks of Treatment” section.
The absolute statements made during patent prosecution were misleading, now shown to be untrue, and were critical in overcoming earlier obviousness rejections.
#2. Statements made by the patent practitioner during prosecution of the Najarian applications opens Vivus up to enforceability challenges by third parties. Specifically, Vivus’ patent practitioner, Diane Reed, prosecuting the Najarian applications on behalf of Dr. Najarian and Vivus makes the following statement on page 18 of 22 of the May 18, 2005 response to an office action in the case of Application No. 10/454,368 that issued as US Patent No. 7,056,890:
Even if, hypothetically, there were no warnings regarding phentermine combination therapy, one of ordinary skill in the art would still have been led away from combining phentermine with a second weight loss drug, insofar as the only reference in the 1996-1999 time frame describing the combination of phentermine with a second weight loss drug actually teaches away from the present invention as well. See the attached publication by Bradley et al. (Appendix B), which summarizes a study on using phentermine in combination with bupropion hydrochloride for weight loss. Not only did the second drug fail to increase weight loss relative to phentermine alone, it actually reduced phentermine’s efficacy! [emphasis added]
Ms. Reed’s statement cuts right to the heart of the issues surrounding the patentability of the Najarian patents. And it is blatantly false. As described above and featured in detail in the European Third Party Observation, the McElroy patent clearly describes the combination of phentermine with, not just a second weight loss agent, but with topiramate itself, to treat eating disorders, including obesity and overeating.
Making matters worse for Ms. Reed is the fact that she had earlier submitted an information disclosure statement (IDS), on December 13, 2001, that lists the McElroy patent as a reference. Here is a timeline of the events:
- October 16, 2001 – Assignment Agreement between Dr. Najarian and Vivus executed whereby the rights to the alleged phentermine/topiramate invention were assigned to Vivus contingent on the effects of the McElroy patent.
- December 13, 2001 – IDS filed in the case of Application No. 09/593,555 disclosing the McElroy patent; the McElroy patent is the only document disclosed in the IDS.
- May 18, 2005 – Response filed by Ms. Reed in the case of Application No. 10/454,368 (a continuation-in-part application claiming priority to Application No. 09/593,555), in which she makes false statement.
Is it possible Ms. Reed forgot the contents of the McElroy patent? That seems very unlikely since it was the only reference included in the December 13th IDS, and was submitted immediately after the Najarian Assignment was executed and filed with the USPTO. As a reminder, the Najarian Assignment has multiple contingencies surrounding the impact of the McElroy patent on the Najarian patent estate, making it clear that the parties negotiating and drafting the assignment agreement were extremely concerned by the contents of the McElroy patent and its impact on the Najarian patents. Thus it is hard to believe the relevance of the McElroy patent was lost on Ms. Reed. Clearly her remarks are material (i.e., without her absolute statement, I think it is very unlikely the Najarian patents overcome the obviousness rejection), and since the content of the McElroy patent was so well known to all of the parties, it leaves one wondering whether the omission was intentional or an act of malpractice.
Question for your patent counsel: Given the above fact pattern, what is the likelihood of the Najarian patents becoming unenforceable due to inequitable conduct?
Whether this was malpractice or an impermissible intentional misstatement, its effects could be devastating. If these actions are found to be inequitable conduct, they may make the entire patent family unenforceable.
Misleading investors or incompetence? A short story about Wax and Hatch
* Vivus has a long history of either not understanding patent and regulatory issues, or misleading investors on these issues. The story of Qsymia patent term extension, although not likely material to the company’s ultimate success or failure, offers another reason not to trust statements made by the company.
A petition for patent term extension was preliminarily denied on May 30, 2013. Although largely a moot point since the patents are unlikely to survive until 2020, this episode illustrates the company not understanding or intentionally misinterpreting for the investing public key issues related to its patents. To begin, the company repeatedly told investors and analysts that it expects some form of patent term extension. Here is an exchange from a February 22, 2012 Vivus conference call:
Jefferies & Company, Inc., Research Division
That’s helpful. And then maybe an update on the IP situation for Qnexa. When -based on the current patent landscape and your expectations for Hatch-Waxman extension of whatever their critical patent is, what – when should we expect U.S. exclusivity to last through if Qnexa is approved soon?
Timothy E. Morris
Chief Financial Officer and Senior Vice President of Finance & Global Corporate Development
It’s Tim Morris here. Yes, the IP situation remains the same. We have patents that go through 2020 that doesn’t include any Wax and Hatch [sic] extension. So if approved, we’ll apply to that immediately and believe that we’ll apply and extend the date.
Jefferies & Company, Inc., Research Division
And what degree of — or how many years of the Hatch-Waxman extension would you expect based on the time that you’ve been in trials and in regulatory review?
Timothy E. Morris
Chief Financial Officer and Senior Vice President of Finance & Global Corporate Development
There will be additional, but until we have applied and approved — and got it approved, it’s difficult to give you an exact number.
Qsymia has never been, and never will be, eligible for a patent term extension under the current rules because it is a combination of two previously approved drugs – see in re Alcon Laboratories 13 USPQ2 1115). Further, under a plan reading of the statutes (35 USC 156) and the clear precedent of case law, it is almost impossible to arrive at this conclusion; yet the company’s CFO is telling analysts “there will be additional” patent term extension, it is just a matter of how many months or years are added. This anecdote is just one more example of the company’s lack of candor (or poor understanding of patent and regulatory law), and should be one of many red flags for investors. Unfortunately for current management, even if they are far more competent and ethical than the former team, it is left with an IP estate and strategy that was built under the old management with all its flaws.
Ownership – Not Najarian’s to License
It is not clear that the phentermine/topiramate invention was Dr. Najarian’s to assign to Vivus. Instead, his former employers, Interneuron Pharmaceuticals (now Endo Health Solutions) and Harvard Medical School (where he taught and practiced medicine at Harvard’s affiliate Mount Auburn Hospital) may be entitled to rights to the invention if he used their resources or facilities to make any part of the invention.
With regards to Endo Health Solutions, the following letter was sent to the heads of the legal and HR departments in August 2013. It lays out some of the facts surrounding Dr. Najarian’s employment at Interneuron and also inquires whether Endo has looked into the matter of Qsymia patent rights.
First, it seems reasonable to conclude that Dr. Najarian was investigating weight loss drugs while at Interneuron Pharmaceuticals – both as a consultant and later as Vice President of Medical Affairs and Medical Director. It seems not only was Dr. Najarian focused on developing obesity-related therapeutics – but these new therapeutics likely contained phentermine (or dexfenfluramine) or combinations thereof. In fact, in the declaration he submitted during prosecution of his patent application, Dr. Najarian states, “As Medical Director at Interneuron Pharmaceuticals, I designed and conducted one of the critical studies that analyzed the relationship of the weight loss drug Redux to heart valve problems.” (See section 3.)
While the patents covering Qsymia have validity and enforceability issues, a license to these patents, which Endo and/or Harvard may be able to provide according to US patent law, could be a valuable part of a litigation strategy pursued by Endo or another pharmaceutical/generic player (for example, with a license from Harvard).
This opportunity may be of particular interest to Endo since it was announced on June 6th that the company is undergoing a restructuring initiative to refocus on its core drug business. Specifically the company said it aims to enhance organic growth drivers across business lines through improved execution with a priority on near-term revenue generating assets. The fact that Qsymia was invented by one of its former employees, Thomas Najarian, while he worked at Interneuron Pharmaceuticals, which changed its name to Indevus Pharmaceuticals in 2002 and was later bought by Endo Health Solutions (NASDAQ: ENDP), may mean the company can launch its phentermine/topiramate combination drug as early as July 2015 – a development that seems to fit nicely with the company’s new corporate goals.
Here is a copy of the email sent to Endo Health Solutions (EHS):
Dear EHS Executives,
Re: Potential Misappropriation of Extremely Valuable Endo Rights
In the course of doing research for a blog I’ve authored that examines the patent landscape for Vivus’ obesity drug Qsymia, I’ve discovered that Endo Health Solutions may have rights to the patents that cover Qsymia – an asset responsible for the vast majority of Vivus’ current $1.5 billion market cap. I wanted to reach out to your company to see if you’ve previously looked into this somewhat unusual set of circumstances (which are described below), and see if you would be receptive to licensing inquiries.
Qsymia, which was approved by the FDA in July 2012, is the combination of phentermine and topiramate indicated for the treatment of obesity. This combination is the subject of issued patents filed solely by Dr. Thomas Najarian (with no assignee at the time of filing) – who, according to his CV (attached), was serving as the Vice President of Medical Affairs and Medical Director at Interneuron Pharmaceuticals when the invention was made. Dr. Najarian later entered into an extremely lucrative arrangement with Vivus Pharmaceuticals whereby he assigned the company rights to the invention. Vivus launched Qsymia in September 2012. See the Orange Book listing here for a list of the patents covering Qsymia.
As I’m sure you know, typically an employee of a pharmaceutical company has a duty to assign all of his or her work-related inventions to their employer, in this case Interneuron Pharmaceuticals. Given Endo’s corporate history, it seems to me that Endo should be the successor in interest to Interneuron’s rights. However, it is Dr. Najarian that is listed as the sole applicant on the earliest phentermine/topiramate patent applications (see PCT Patent Application WO/2000/076493) – not Interneuron, nor Vivus (which had not yet entered the picture). This seems particularly odd given the fact that, according to Dr. Najarian’s CV, he was working on phentermine-based weight loss drug combinations while working at Interneuron and Vivus’ Qsymia is also a weight loss drug combination comprising phentermine. I would also like to point out that I am sending a similar email to Harvard’s technology transfer office because Dr. Najarian was also serving as a Clinical Instructor in Medicine at Harvard Medical School and practicing medicine as a Staff Physician at Mount Auburn Hospital, which is Harvard Medical School Affiliate, during this time.
It wasn’t until October 2001, when the above mentioned Vivus assignment agreement (attached) was executed, that Vivus was named as the Applicant or Assignee on this patent. In the assignment agreement, which is made between Thomas Najarian, MD, an individual, and Vivus, Inc., a company, the Assignor (Najarian) warrants and represents, among other things, that he has not entered into and will not enter into any assignment, contract or understanding in conflict therewith (See Section 2.3). This appears to be the end of the story. The assignment agreement is signed by both parties. However, no additional evidence is provided, for example in the form of a consultant or employee agreement demonstrating that Dr. Najarian did not have a duty to assign the invention to Interneuron or another third-party. Thus the question remains:
Did Dr. Najarian have a duty to assign the Qsymia invention to a third-party (e.g., Interneuron Pharmaceuticals) when the invention was made in 1999 – or perhaps earlier?
As far as you know, has Endo Health Solutions looked into this issue?
Has your generic subsidiary, Qualitest, who already offers generic phentermine, considered manufacturing and marketing a generic version of Qsymia?
In light of your recently announced restructuring, it seems this may be an asset that could be commercialized with relatively minimal development costs and minimal risk. It’s an unusual story, but perhaps it can play some part in your company’s restructuring.
Robert F. Diggs
A similar email was sent to the Harvard Medical School technology transfer office and to Mount Auburn Hospital in August 2013. The email can be read here. In my experience Harvard’s technology transfer professionals are generally well versed in matters of intellectual property and often take an aggressive position when it is pursuing or enforcing the University’s rights. After all, you don’t arrive at a $30 billion endowment by sitting on your hands when financial opportunities arrive in the inbox.
If I’ve misunderstood the situation, there is an easy way for Vivus to clear up the misunderstanding. On rare occasions, both universities and commercial entities allow their employees to pursue their own inventions without assigning those rights to their employer. However, when this occurs, it is pursuant to a formal letter or agreement, and it usually involves technology completely unrelated to the commercial interests of the business, university or hospital. Vivus needs to simply provide evidence in the form of agreements or letters from Harvard and Endo whereby each institution rescinds all interest in the alleged invention thereby granting Dr. Najarian sole ownership. It seems this should have been a critical part of the company’s preliminary diligence when it first considered licensing the alleged invention – not to mention the diligence process of any underwriter’s counsel that has been in any way involved with a Vivus financing since 2001. Maybe these agreements exist, but they are not a part of the Najarian Assignment, and until the company can provide evidence to the contrary, this will remain a significant risk factor for the company.
Vivus Conference Call Question: Can the company produce any evidence that Dr. Najarian was granted sole ownership of the Qsymia patents by his former employers, Interneuron (now Endo Health Solutions) and Harvard Medical School?
Reminder: Vivus Has a Freedom-to-Operate (FTO) Problem
Based on my earlier analysis, most analysts and investors were focused on what they perceived to be the most imminent threat – a possible infringement lawsuit from J&J. As a reminder, J&J holds two issued patents that are likely to factor into the Qsymia story – one as a major FTO problem. This patent, herein referred to as the Shank patent, is directed to topiramate for the treatment of weight loss; and the second patent, herein referred to as the McElroy patent, is directed to methods for using topiramate alone or in combination for the treatment of eating disorders. The Shank patent is scheduled to expire in 2017 and the McElroy patent in 2020. Although I now believe J&J will have a difficult time showing Vivus infringes the claims of the McElroy patent and the Shank patent may face a prior art challenge, at the very least the Shank patent is still in play and several options remain available to J&J:
- J&J could sit on the patents because it does not deem the Qsymia market worthy of a patent fight.
- J&J could file a patent infringement suit. J&J is likely to maintain this right for years to come without invoking a laches defense since Qsymia has only been on the market for about a year. A favorable decision or settlement for J&J could result in an injunction blocking the sale of Qsymia, or more likely a royalty. A favorable decision or settlement for Vivus will likely come at the expense of time and money – both of which are in short supply for the company.
- J&J could enter partnership or buyout discussions with Vivus while using the threat of a patent infringement suit to reach more favorable terms. This strategy could be coupled with acquiring a license to the Najarian patents from Harvard or Endo to make the discussions even more one-sided.
- J&J could license the patents to a third party (e.g., a generic) to be used as part of an ANDA litigation strategy. This will be discussed in greater detail later.
Regardless of whichever strategy J&J adopts, the Shank patent stands as a serious impediment to any potential partnership and it needs to be accounted for in Vivus’ valuation – just as it was by Pharmakon in their purchase and sale agreement with Vivus, when it made the company represent and warrant the following:
[Section] m (vii) To the Knowledge of Seller, the discovery, development, manufacture, importation, sale, offer for sale or use of the Product, has not and will not, infringe, violate or misuse any patent or other intellectual property rights owned by any Third Person that is not licensed to the Seller under an Existing In-License Agreement. ***
But what’s behind the triple asterisk? The only explanation we have for now is at the bottom of every page in the agreement, “Certain confidential information contained in this document, marked with three asterisks, has been omitted and filed separately with the Securities and Exchange Commission pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended.” We’ll have to wait on the Freedom of Information Act for that answer.
Weak patents are exposed during litigation. And even a “cogent” patent strategy cannot hide weak patents. So it was not surprising that I received a thoughtful question from Andy Baron in the comments section of an earlier blog post, “McElroy FTO – My Bad”, where he asked:
It would be interesting to hear your thoughts on whether Vivus could defeat a paragraph IV ANDA filing. Cowen assumes that a generics company would be subject to and discouraged by the CVOT requirement. Even if they were required to duplicate the VIVUS trial, it might still be lucrative for them to do so and to sell the combo drug in competition with VIVUS, if they could win an infringement suit.
At the time, I was still floored that Vivus had gotten away with convincing everyone it was a $3 billion company (market capitalization on July 2012), and I had not fully vetted the generic situation. In my reply I explained that Vivus faced two forms of generic competition: the traditional generic threat from generic companies that gain ANDA approval and offer the same product as the innovator, and a non-traditional route – somewhat unique to Qsymia – when drug makers offer the generic components of Qsymia (phentermine and topiramate) without specifying the indication.
First, I will discuss the “non-traditional”, generic substitute route in which doctors and patients opt for the generic components of Qsymia. Generic topiramate and phentermine have been available before Qsymia was ever approved and they are likely taking market share from Qsymia – or at the very least making reimbursement more difficult. (It seems this could be easily verified by viewing prescription data for topiramate and phentermine, prescribed alone and together, from IMS Health, which, I was told by a very helpful and patient account manager at IMS Health, is available for purchase in two year increments from the past 30+ years for about $3500 each). Also, it is interesting to note that Supernus now offers an extended-release, once-daily formulation of topiramate, Trokendi XR™, and there is no shortage of generic phentermine available, including a recent inquiry from KVK Tech into the filing requirements for an 8 mg dose of generic phentermine. Taken all together, this non-traditional generic threat eats into Vivus’ non-patent exclusivity period (which expires in July 2015). As a result, instead of enjoying a guaranteed three years of exclusivity, I consider Vivus’ non-patent exclusivity as only a “partial” or “shared” exclusivity period before the problems for Vivus really begin with the introduction of generic Qsymia through the traditional ANDA route.
As I stated in the response to Mr. Baron, ANDA litigation is complicated and above my pay grade. Well, my pay grade is still quite low, but I’ve had some time to read up on ANDA litigation, discuss the situation with a couple of attorneys I know who practice in this area, and consider the potential strategies generic competitors are likely to employ in their bid to introduce phentermine and topiramate combination therapies. These are merely strategies I’ve come up with based on my understanding of Vivus’ current patent situation and my understanding of ANDA rules. Like Mr. Baron before, I encourage any and all questions, challenges, clarifications and other strategies that others have to offer from the ANDA realm. It is complicated, and there are a lot of moving parts, but what makes the Vivus situation so interesting is the vast array of weapons (and shields) available to generic (and non-generic) challengers to Vivus.
First of all, as described throughout this report, the Vivus patents are vulnerable for the following reasons:
- No clear chain of title – Harvard and Endo may be able to assign rights
- Patents are highly susceptible to validity and enforceability challenges – Vivus’ own patent counsel says so
- Non-NCE status – limited non-patent exclusivity and immediate paragraph IV challenges
As for the non-NCE implications, Thomson-Reuters offers an informative, concise overview of an analogous new combination drug, Avanir’s Nuedexta™, which is a combination of dextromethorphan and quinidine approved under 505(b)2 for the treatment of pseudobulbar affect (PBA). Here is a timeline of the ANDA-related events for Nuedexta, which includes paragraph IV filings from Actavis, Impax, Par and Wockhardt:
- October 2010 – FDA approved Avanir’s Nuedexta NDA
- February 2011 – Avanir began promoting (selling) Nuedexta
- March 2011 – first paragraph IV ANDA filed with FDA
- June 2011 – Avanir received notice of ANDA filing
- August 2011 – Avanir files infringement suit (triggers 30-month stay)
- October 2013 – 3 year new combination (non-patent) exclusivity expires
- December 2014 – 30-month stay expires; ANDA can be approved
From the Thomson-Reuters overview, I take away the following rules and assumptions surrounding the ANDA process for Qsymia:
- A paragraph IV ANDA – alleging patent invalidity, unenforceability or non-infringement – for a generic version of Qsymia could have been filed soon after approval of Qsymia in July 2012. New paragraph IV filings are announced by the FDA about every two weeks here. ANDA filings also require a simple bioequivalency study to demonstrate that filer’s formulation has a similar pharmacokinetic profile to the approved drug in a small number of human patients over a relatively short period of time.
- Once the originator (Vivus) receives notice of an ANDA submission(s), it has 45 days to file an infringement lawsuit, which triggers a 30-month stay on final ANDA approval (which expires 30-months from when Vivus received notice of the ANDA filing).
- If the first ANDA filing is greater than 6 months after drug approval, the stay will exceed the 3-year non-patent exclusivity.
- The stay is only effective until the patent(s) is found to be invalid and/or unenforceable or not covering the product. However, the 3-year non-patent exclusivity will still bar sale of generics until its expiration in July 2015.
- * Upon expiration of the 3-year non-patent exclusivity, generics can launch the drug “at-risk” after gaining FDA approval. (This represents infringement liability, which given the weakness in Vivus patents may not be viewed as much of a risk.)
- In the past, patent litigation to determine invalidity or unenforceability has usually lasted longer than 30 months; however, judges are increasingly resolving trials with the stay expiration date in mind. Also, the length of the trial is dependent on the facts of the case. For example, a case wherein the paragraph IV filer holds a license to the allegedly infringed patents could theoretically be resolved quickly – even when considering it may take 1-2 years just to begin the trial.
The corresponding Vivus ANDA timeline looks like this:
- July 2012 – FDA approved Vivus’ Qsymia NDA
- September 2012 – Vivus began promoting (selling) Qsymia
- Anytime after FDA approval – first paragraph IV ANDA filed with and accepted by FDA
- 20 days later – Vivus receives notice of ANDA filing from ANDA applicant
- 45 day later – Vivus files infringement suit (triggers 30-month stay)
- July 2015 – 3 year new combination (non-patent) exclusivity expires
- 30 months after Vivus receives notice – 30-month stay expires; ANDA can be approved – unless patents found invalid, unenforceable or not infringed sooner
Caveat: “When events in a Hatch-Waxman case do not follow the usual timeline, something interesting may be going on,” observes Thomson Reuters in this 2011 article.
Given the above timeline, the fact paragraph IV filers prevail about 50 percent of the time, and the specifics of the Qsymia case (e.g., there is a war chest of ammunition at the disposal of litigators to attack the Vivus patents), here are some potential scenarios for Qsymia ANDA litigation:
Case 1 – Generic Company A wants to launch generic Qsymia (same dose/formulation)
- Generic Company A files a paragraph IV ANDA.
- Vivus files infringement lawsuit within 45 days.
- Litigation begins. Possible settlement discussions.
- Upon expiration of the 3-year non-patent exclusivity period and the 30-month ANDA approval stay, Generic Company A can launch at-risk even if the outcome of the trial has not been determined. Generic Company A assesses the likely outcome of the trial to make the at-risk determination.
- If Generic Company A prevails in the trial before the expiration of the 30-month ANDA approval stay, Generic Company A can launch upon expiration of the 3-year non-patent exclusivity period.
- Under no circumstances can Generic Company A launch in less than 3 years from approval.
- With a license to the IP from Harvard or Endo, Generic Company A would arguably not have to litigate the validity or enforceability of the Vivus patents since it would be a license holder. Instead, Generic Company A could just wait until the expiration of the 3-year non-patent exclusivity period (unless they could force an interim licensing deal from Vivus). There would likely be parallel litigation surrounding the assignment issues.
Case 2 – Generic Company B wants to launch a Qsymia variant – ANDA route (twin pack)
- Generic Company B files a paragraph IV ANDA and a 505(b)2 application referencing Qsymia.
- Vivus files infringement lawsuit within 45 days.
- Generic Company B begins trials showing its twin pack is similar to Qsymia. This would require more than a simple bioequivalency study but substantially less than the clinical development originally performed by Vivus to get Qsymia approved.
- Litigation begins. Possible settlement discussions.
- Upon expiration of the 3-year non-patent exclusivity period and the 30-month ANDA approval stay, Generic Company B can launch its twin pack – assuming it has been approved by the FDA. If the infringement case is still ongoing, the launch will be at-risk.
- Generic Company B could gain its own 3-year non-patent exclusivity for its twin pack, but it will have incurred the additional costs of a clinical trial and the higher regulatory burden of a 505(b)2 application process. It will also face significant competition from generics making this scenario seem relatively impractical and unlikely.
- With a license from Harvard or Endo, Generic Company B would not have to litigate the patent infringement case.
Case 3 – Generic Company C wants to launch a Qsymia variant without filing a paragraph IV
- Get a license from Harvard or Endo.
- Generic Company C files an ANDA with a section viii statement certifying that the ANDA does not seek approval for any indications claimed by relevant patents listed in the Orange Book – in this case because the ANDA applicant has a license to the patents.
- Generic Company C begins trials showing its variant is similar to Qsymia. Generic Company C can reference Vivus’ data.
- Upon expiration of the 3-year non-patent exclusivity period, Generic Company C can launch its twin pack – assuming it has been approved by the FDA.
- Generic Company C could gain its own 3-year non-patent exclusivity for its variant, but it will have incurred the costs of the 505(b)2 application process, and it will face significant competition from generics making this scenario impractical and unlikely.
Case 4A – Endo Health Solutions – may own rights to the Najarian invention
- Endo files ANDA with a paragraph IV statement certifying that the ANDA does not infringe the patents because the ANDA applicant owns rights to the patents, or
- Endo files ANDA with a section viii statement certifying that the ANDA does not seek approval for any indications claimed by relevant patents listed in the Orange Book – in this case because the ANDA applicant owns rights to the patents so it does not infringe.
- Litigate ownership of the patents.
- At the same time, file suit against Vivus for infringement.
- Endo demands a royalty or shared marketing authorization prior to the expiration of the 3 year non-patent exclusivity period. Meanwhile, the FDA will maintain its requirement that Vivus to continue conduct and fund CVOT studies.
- Assuming Endo’s rights to the patents are established by the courts, it can launch upon the expiration of the 3 year non-patent exclusivity period (July 2015).
Case 4B – Endo Health Solutions – may own rights to the Najarian invention
Goal: maintain validity of the patents (non-ANDA route)
- Litigate ownership of the patents.
- At the same time, file suit against Vivus for infringement.
- Endo demands a royalty or shared marketing authorization prior to the expiration of the 3 year non-patent exclusivity. Meanwhile, force Vivus to continue CVOT studies.
Case 5 – J&J – Already owns blocking patent(s)
- Get a license from Harvard.
- File suit against Vivus for infringement of the Najarian and Shank patents.
- Demand a royalty or shared marketing authorization prior to the expiration of the 3 year non-patent exclusivity, or buy the company for a small fraction of the company’s current share price and fend off others using Shank and Najarian (while Najarian lasts)
Case 6 – Launch in markets without patent coverage
Some things to consider for an ex-US and Europe strategy:
- The Najarian patents were only filed in the US, Europe, Australia and Canada; thereby leaving all of Asia, Latin America and MENA available to generics.
- Some of the markets (e.g., Brazil) do not allow for prescription phentermine.
- Will local jurisdictions require Vivus’ dossier for approval of generics?
- May have to wait for the completion of the CVOT in certain jurisdictions.
- Large generics better equipped to commercialize generic Qsymia than Vivus – may be able to launch outside of US while US ANDA litigation is ongoing. The generics will have already demonstrated bioequivalency when the paragraph IV was filed with the FDA, and without broad geographic patent coverage, generics can make the drug anywhere outside of the US, Europe, Australia, and Canada….say, for instance, in India, Taiwan, China or Israel.
Conference Call Question: Does the company have a plan for commercializing Qsymia outside of the US, Europe, Australia and Canada? How does the company plan on blocking generics in any of these countries?
As an alternative strategy, I considered whether a company may launch a Qsymia-like twin pack (e.g., separate doses of phentermine and topiramate offered in the same package) or a Qsymia-like new formulation (e.g., a fixed dose combination without any sustained release aspect to the formulation).
Although these strategies offer some advantages, I don’t think either scenario is viable because of increased regulatory risk and cost as compared to a straight ANDA challenge or straight ownership challenge. First the advantages: a twin pack may get around the 3-year non-patent exclusivity bar (which is tied to the new combination administered in a single formulation). While I believe Vivus’ currently issued kit claims could be easily knocked out, offering the components of Qsymia in a twin pack would require doing your own 505(b)2 – perhaps as a new formulation – especially since topiramate alone is not approved for weight loss. While 505(b)2 filings and the clinical development work needed to support them are not as expensive as the NCE path, they are not nearly as easy as ANDA approvals.
Will anyone be surprised when the paragraph IV filing comes?
Perhaps, but not Vivus. The company is preparing its investors for the inevitable onslaught of ANDA litigation. In its Feb 2012 Annual Report, the company added this disclosure:
Other entities may also challenge the validity or enforceability of our patents and patent applications in litigation or administrative proceedings. The sponsor of a generic application seeking to rely on one of our approved drug products as the reference listed drug must make one of several certifications regarding each listed patent. A “Paragraph III” certification is the sponsor’s statement that it will wait for the patent to expire before obtaining approval for its product. A “Paragraph IV” certification is a challenge to the patent; it is an assertion that the patent does not block approval of the later product, either because the patent is invalid or unenforceable or because the patent, even if valid, is not infringed by the new product. Once the FDA accepts for filing a generic application containing a Paragraph IV certification, the applicant must within 20 days provide notice to the reference listed drug, or RLD, NDA holder and patent owner that the application with patent challenge has been submitted, and provide the factual and legal basis for the applicant’s assertion that the patent is invalid or not infringed. If the NDA holder or patent owner file suit against the generic applicant for patent infringement within 45 days of receiving the Paragraph IV notice, the FDA is prohibited from approving the generic application for a period of 30 months from the date of receipt of the notice. If the RLD has new chemical entity exclusivity and the notice is given and suit filed during the fifth year of exclusivity, the 30-month stay does not begin until five years after the RLD approval. The FDA may approve the proposed product before the expiration of the 30-month stay if a court finds the patent invalid or not infringed or if the court shortens the period because the parties have failed to cooperate in expediting the litigation. If a competitor or a generic pharmaceutical provider successfully challenges our patents, the protection provided by these patents could be reduced or eliminated and our ability to commercialize any approved drugs would be at risk. In addition, if a competitor or generic manufacturer were to receive approval to sell a generic or follow-on version of one of our products, our approved product would become subject to increased competition and our revenues for that product would be adversely affected.
Why even talk about NCE exclusivity? Stendra? Why not discuss the generic threat as it relates to its sole commercial product in the US (Qsymia), which is a 505(b)2 new combination? What the 10-K conveniently leaves out is Qsymia will not get the benefit of a five year quiet period. Instead generics can file now and begin litigating now with a generic launch a very real possibility as early as July 2015.
As to Mr. Baron’s question, how do the CVOT studies factor into a generic strategy?
As explained in the below excerpt from Vivus’ most recent 10-K, the company is expected to conduct at least four post approval studies to assess the long-term safety of Qsymia, including studies in pediatrics and adolescents, utilization among women with pregnancy exposure, and other studies to assess renal function and cardiovascular outcome. Vivus estimates the cardiovascular outcome trial (CVOT) alone could cost $150-$250M and take as long as five years. And the FDA is increasingly making market authorization holders complete these studies – whereas in the past these studies were often delayed or only partially completed. Some have suggested (see Cowen remarks) the generics might wait to file ANDA submissions if they too are responsible for completing CVOTs or must wait until Vivus completes its trial. As far as I know, the FDA has not weighed in on this matter and there is no precedent – aside from a 2012 case tried in Canada where sibutramine was voluntarily withdrawn from the market after an Abbott CVOT showed an increased risk of non-fatal heart attacks and strokes. The plaintiff sued both Abbott and Apotex, who offered a generic version of sibutramine, but the case against Apotex was dismissed since the plaintiff only took the Abbott drug. For Qsymia, it seems filing a paragraph IV challenge is low risk to the filer and may compel the FDA to weigh in on any post-approval regulatory obligations, so I do not believe the need for costly CVOT studies is a hindrance to ANDA submission filing.
Here is Vivus’ description of its post approval study requirements:
As part of the approval of Qsymia, we are required to conduct several post-marketing studies, including a study to assess the long-term treatment effect of Qsymia on the incidence of major adverse cardiovascular events in overweight and obese subjects with confirmed cardiovascular disease, studies to assess the safety and efficacy of Qsymia for weight management in obese pediatric and adolescent subjects, studies to assess drug utilization and pregnancy exposure and a study to assess renal function. The details of the cardiovascular outcomes study, known as ACQLAIM, have not yet been agreed upon with the FDA. This study could cost between $150.0 and $250.0 million and take as long as five years to complete. Enrollment is expected to begin in the fourth quarter of 2013. There can be no assurance that the FDA will not request or require us to provide additional information or undertake additional prospective studies or retrospective observational studies or that we will be able to agree with the FDA on the details of ACQLAIM. (See page 27 of Vivus’ Feb 2013 10-K]
In summary, Vivus’ Qsymia is currently facing competition from doctor’s prescribing generic phentermine and topiramate (off-label) for the treatment of obesity. The next two years of non-patent exclusivity are more like partial exclusivity in light of this generic competition. Upon the expiration of the 505(b)2 non-patent exclusivity period in July 2015 and the expiration of the 30-month stay on final FDA approval, generic versions of Qsymia can be launched at-risk while patent and assignment litigation matters are handled by the courts. In my opinion, an at-risk launch does not seem to carry much risk given the numerous problems surrounding the Qsymia patent portfolio described herein. Alternatively, licenses from Harvard, Endo or J&J offer a seldom-seen, powerful tool for generics to quickly neutralize Vivus’ efforts to block competitors. Such a license would likely lead to a quick decision from the courts (before the expiration of the 30-month stay) and may also usher in a cross-licensing settlement – all of which point to an early generic launch in July 2015 when the non-patent exclusivity expires.
Play at home: Check to see when Qsymia faces its first ANDA challenge by visiting the FDA’s “Paragraph IV Patent Certifications” page which is updated about every two weeks.
* Making ~$5 million per quarter while spending $50 million per quarter
* Financing on horrible terms – mortgaging the future
* Earnings disappear when generics enter the market
* Financial model – Assuming generic competition enters in the first half of 2016, a unlevered DCF model values Vivus at -$3.24, while a model based on a future revenue multiple values the company at $3.13
Given the questions surrounding Qsymia exclusivity, what is a fair value for Vivus?
Answer: If you accept my hypothesis that generics will enter in early 2016, Vivus should be trading around $0.24 per share (and lower if generics enter immediately after the expiration of Qsymia’s non-patent exclusivity in July 2015). See the valuation models here.
Vivus’ value is based largely on the success or failure of a single product – Qsymia. The company’s erectile dysfunction (ED) drug, Stendra, has some value as evidenced by its recent deal in Europe with Menarini – a strong partner with an impressive sales force in Europe. However, as John LaMattina explains in this Forbes article, the drug faces stiff competition in the crowded ED space that now includes generic Viagra. And the deal terms with Menarini appear to confirm the widely held belief that Stendra (Spedra in Europe) has minimal upside. For example, under the terms of the agreement, in the first year, Vivus expects to receive $51 million including an upfront payment of $21 million. The deal is worth up to an additional $121 million, plus royalties, if all targets are met over the 10 year term. (Oddly, the royalty schedule was not disclosed). The terms of the deal are not overly impressive and they show the company’s continued willingness to mortgage its future to get cash now. Without knowing the royalty (let’s assume about 12% pegged against low sales due to generic competition), I estimate Spedra might kick out $15-20 million per year in Europe after the initial $51 million. A similar deal in the US might see $20-25 million per year. These are not the types of numbers that can overcome the significant operating expenses the company is scheduled to incur in the next five years.
That leaves the company with Qsymia, which everyone agrees is the company’s crown jewel. Yet a closer look at Vivus’ recent financing with Pharmakon – in which it raised $110M – shows how the financial community values the company’s “jewel”.
Recent Financings – A Measure of Ethics and Company Value
This summer’s proxy fight seemed to be driven by ego and emotion, so it is not surprising that both sides seemed to overpromise and under deliver. Among the tactics used by the former regime to build shareholder support were numerous reports (here) of ongoing partnership discussions. The above-mentioned “leak” of “discussions” led to a weeklong rally in the middle of May that saw the stock gain 10-13%, which was predictably (at least for Vivus’ former management) followed by a $220 million convertible offering on May 16th.
Still more alarming was the March 25 financing – the terms of which seem to illustrate the new understanding within the financial community of Vivus’ desperate and highly uncertain situation. The 8-K can be found here and the purchase and sale agreement is here – the latter of which is a fascinating document for its detailed insights into how a sophisticated royalty-based financier views Vivus’ value. Here are some highlights and comments from the Pharmakon deal:
- Vivus receives a $110 million loan from creditor Pharmakon Advisors (Form ADV Part 2A Brochure provides more information on Pharmakon here)
- This is not Pharmakon’s first rodeo. The principals, including Royalty Pharma’s Mr. Legorreta, have done a lot of deals including those with complex, drug-related IP issues (see pages 7-8 of the above-linked brochure)
- Vivus borrowed $50 million immediately and can elect to borrow another $60 million before the end of the year.
- In return, Vivus is required to pay back the loan in quarterly installments tied to net sales of Qsymia (a 25% royalty on sales) starting in the second quarter of 2014, with the final amount of the scheduled payments due in the second quarter of 2018.
- The implied interest rate on the loan is said to be more than 13% – very steep by corporate debt standards; and guarantees a minimum five year return for Pharmakon of more than 40%.
- If Vivus’ scheduled quarterly payment, which is pegged to the 25% royalty, is lower than any scheduled repayment, the difference is added to a final payment when the loan matures in 2018 (plus 3%). Basically, Pharmakon is hoping Vivus cannot meet their repayment schedule.
- To secure the debt, Vivus granted Pharmakon “patents, trademarks, copyrights and regulatory filings” related to Qsymia – basically granting Pharmakon its sole asset, although I would argue that Qsymia IP as collateral is worthless or, in a best case scenario, gets you in a long and expensive ANDA fight you’re likely to lose while also conducting post-approval safety studies to stay on the market. And it gets better…
- Upon the second anniversary of the agreement (March 2015), Pharmakon has the ability to sell all or part of its interest in Qsymia based on host of conditions, including “a promotion and marketing failure” or the accumulation of too much additional debt. This date conveniently falls 4 months prior to the expiration of Qsymia’s non-patent exclusivity – at which time Pharmakon will likely be able to better assess the threat from generics.
- Pharmakon also gained the right to approve (or not approve) any licensing deals, and should the company be bought, the buyer must immediately repay Pharmakon.
Those terms are outrageous for a company with the first new obesity drug launched in more than ten years. Pharmakon basically bought a quarter of Vivus for $110 million, which needs to be paid back at a very high interest rate. That’s a serious discount negotiated by a group, Pharmakon, that routinely defines and values IP risk. Clearly, these risks, which have been discussed throughout this report, are substantial – and the realization of any one of them alone will dramatically change the value of the Qsymia franchise. For example,
Would a patent opposition trigger a default? Would patent assignment-related litigation trigger a default?
In the big picture Pharmakon is the least of Vivus’ worries, but rest assured Mr. Legorreta will be waiting with his hand out should things go sideways in the near future and I think they will. (Side note: A copy of this report was sent to Pharmakon and Royalty Pharma.)
Valuation Model with Patent Assumptions
Let’s start with some comments from Vivus’ new leaders:
From June 4th FMC letter:
“In the absence of the required human and capital resources provided by a large pharma partner, Vivus shareholders are footing a massive bill for operating expenses—over $2.20 per share annualized—while generating insignificant revenue.”
From July 2nd FMC letter:
“It is clear that it will be many years before the revenue and expense lines in the graph cross. Vivus has an unsustainable expense structure with spiraling SG&A costs and, in our view, very little financial discipline. The current Vivus board lacks a single director with public company CFO experience. Consequently shareholder capital is burning at an accelerating pace. Our shareholder slate includes two director nominees with public company CFO experience, who have turned around troubled companies. Their skills will benefit all shareholders.
If you make the following assumptions, Vivus will never be a profitable company:
- Already high costs are going to stay high or increase because of multiple large post-approval studies mandated by the FDA and the need for launching an expensive direct to consumer marketing campaign and building a sales force to target primary care physicians;
- If the company chooses to delay a direct-to-consumer campaign, sales are likely to remain well below analyst expectations;
- The entry of generic competition in the second half of 2015 or sometime in 2016; and
- No partnership or a partnership that protects the partner from sinking costs into an asset that would lose all of its value when generics enter the market.
Despite the new management’s calls to reduce costs, it seems to me the company faces increasing expenses in the form of costly post-approval studies (e.g., CVOT) – ten to be exact – and a major marketing campaign necessary to reach primary care physicians and to ultimately drive sales. I believe the company’s estimated cost ($150-$250 million) for the upcoming CVOT study (enrollment begins Q4 2013) is perhaps too conservative and the 16,000 patient trial will minimally fall on the high side of the company’s estimated cost if one assumes the cost per patient may exceed $15k or more.
If the company really does cut costs, it will have to be largely at the expense of its sales and marketing efforts. This will leave the company under water with anemic sales and a still high relative burn rate. For example, Vivus announced fourth quarter earnings of $2 million and a net loss of $57 million; and the first quarter numbers were not much better with revenue of $4 million and net losses of $54 million. The trend of low sales and high costs continued in the most recent quarter with the company reporting sales of $5.5 million and a net loss of $55.5 million. While Vivus’ revenues are likely to increase, perhaps dramatically, in the coming quarters, time starts to become a factor as the company approaches July 2015 when Qsymia’s guaranteed “partial” exclusivity ends.
Again, I feel Vivus’ new leadership best summarizes the financial health of Vivus in its July 2nd shareholder letter:
The finances may get worse very soon. Vivus is now preparing to launch an expensive direct-to-consumer campaign for Qsymia that almost surely reflects the same amateurism of its previous commercial activities. Sales have been negligible while expenses have been growing at a rate that will lead to even more debt and shareholder dilution. Since Vivus has perhaps less than two years of cash on hand, our nominees’ plan includes reducing wasteful spending on commercial activities that do not generate revenue.
Partnership Near Vivus’ Current Value – Extremely Unlikely
What pharmaceutical company is going to invest its precious sales bandwidth into a product that is likely to be slammed by generics in late 2015 or early 2016?
Diverting resources to a new product with the potential for such a short runway does not fit the conservative pharmaceutical mindset. And this doesn’t even account for the financial costs Qsymia requires to stay on the market. I believe Vivus’ CVOT trial costs are likely to be near or above the high end of their estimated costs of $250 million (and that is just one of the ten post-approval studies required – albeit the most costly one). I just don’t see a pharmaceutical company signing up for this deal, especially with its patent lawyers offering no guarantee of exclusivity after July 2015. I’ll leave the product liability discussion to someone more qualified than me, but it does seem to me that selling a weight loss drug in the US that is known to cause birth defects also represents a significant risk outside of the patent risks discussed here.
DCF and Future Revenue Multiple Models
I enlisted the help of a friend with an MBA from The University of Chicago who has a career in the financial services industry to help compile consensus analyst estimates, along with our own estimates, and use basic DCF and future revenue valuation models to put some numbers behind my assumptions. The numbers are scary if you’re a Vivus investor or potential partner/buyer.
Without estimates beyond 2016 or 2017, these are not perfect valuations, however, you can see the analysts favor the future revenue multiple model for issuing target prices and the current share price is near the target price for the “Middle” analyst. The details for each scenario can be viewed by clicking on the model name (e.g., Bull, Middle or Consensus).
||Future Revenue Multiple
My estimates account for a royalty stack that includes the following:
- Tiered 1-3% royalty to Dr. Najarian (See the Najarian Assignment)
- Estimated 7% royalty to J&J for Shank patent beginning in 2015
- Pharmakon payment schedule (assumes Vivus pays the predetermined amounts)
My estimates also assume Vivus is unable to secure a partnership or gets a partner unwilling to solely shoulder the costs of the ten post-approval studies and the increased sales and marketing efforts. Most importantly, my estimates assume generic competition enters the market during the first half of 2016. My numbers (RFD) are not as bad as one analyst (Bear) that also never forecasts the company reaching profitability.
||Future Revenue Multiple
Here are the different scenarios shown graphically. Dollar amounts are in millions.
The take home message – everyone forecasts negative EBIDTA until sometime in 2015 or 2016 (except for an outlier bull forecast). Nothing after 2020. This represents a small window of profitability that I strongly believe will be occupied by generics – perhaps starting as early as July 2015.
Management’s Options – The Damage is Already Done
It is not clear to me why First Manhattan and Sarissa Capital Management fought so hard to gain control of a company where the only guarantees seem to be lawsuits and lots of red on the balance sheet. Perhaps ego and emotion got the upper hand when objectivity and sound diligence should have prevailed. It seems to me the dog was chasing the car, and – oh sh!t- it caught the car. Now what? In my opinion, Vivus is a company riddled with fatal patent flaws that will make it impossible to ever reach profitability. Unfortunately for Vivus’ new leadership team, the company’s past sins are of biblical proportions and cannot be undone, instead they are likely to haunt the company “to the third and the fourth generation” (See Numbers 14:18). And former CEO Lee Wilson seems to have forecast this demise when he compared Qsymia to Alza’s Ditropan during a 2006 conference call:
You know, our pedigree at VIVUS comes out of ALZA Corporation, which made its life taking drugs which were generic and bringing them to the market in very successful fashion. And so Ditropan is a very good example of that…
However, as I first described in my earlier blog post, Mr. Wilson’s choice of Alza’s Ditropan is an unfortunate one. One month after making these comments, The Court of Appeals for the Federal Circuit affirmed a lower court’s determination that ALZA’s patent on Ditropan XL, a controlled-release formulation of oxybutinin, was invalid due to obviousness. In terms of a financial impact, Ditropan XL, used for the treatment of incontinence, saw its annual sales of $380 million in 2005 fall to $15 million and $13 million in 2009 and 2010, respectively. When generic competition enters, the party is over. And Ditropan XL serves as another example of a new combination or reformulation drug (albeit with annual revenues peaking at $380 million) that failed to enjoy exclusivity over the entire duration of patent term. (See New Combinations Approval table for a list of all 505(b)2 new combinations approved since 2008.)
Whether it’s the early entry of generic competition, failure to secure a partner to drive sales, or a combination of the two, both drugs (Alza’s Ditropan XL and Vivus’ Qsymia) failed to deliver for investors. In Vivus’ case, the company is a one trick pony and the consequences will be severe, unless you were a former member of the Vivus executive team, which conveniently cashed out at the right time. See the former management’s 2012 total compensation for the evidence:
- Leland Wilson $ 3,898,394
- Peter Tam $ 1,846,388
- Tim Morris $ 1,467,427
(Source: 2012 Summary Compensation Table, Vivus’ Amended Annual Report)
New Management – Same Fatal Flaws
The recent proxy vote may have ushered in a long overdue management overhaul, but unless the new board can re-write the patent and regulatory laws in the US, the problems stemming from Qsymia’s incredibly messy patent situation are not going away.
FMC’s June 4 letter to Vivus’ stockholders lays out the shortcomings of the former management team. To me, it is somewhat refreshing to hear others call out the former management’s blatant lack of candor. It has been ongoing since the company first licensed the Najarian IP in 2002 – often at the expense of Vivus shareholders. What the letter does not address is the permanent, fatal flaws that plague the company that no new team of board members can overcome: generics substitutes are already available but more importantly the Qsymia patents are going to be challenged by the generics. The invalidity and unenforceability arguments provided throughout this report will be at the disposal of skilled litigators. And to be crystal clear here: this report is based the research of a former patent agent. I arrived at these patent conclusions based on publicly available information – albeit many of the critical details are buried in obscure patent databases and in the fine print of lengthy agreements. I asked myself a basic question, “how does a company secure patents to a weight loss drug combination made up of two drugs already known to cause weight loss?” Some research to answer the above question led to a series of discoveries that quickly made it clear to me that Qsymia lacks the necessary patents to ever lead Vivus to profitability. My investigation thus far has been analogous to a boy scout equipped with nothing more than a flashlight. So what happens when the real litigation begins? Well, the boy scout is replaced by well funded, experienced litigators that are more like Seal Team Six armed with much more than flashlights during the exhaustive discovery phase that US litigation affords. Add in the Shank patent held by J&J, plus the possibility of licenses to the Najarian patents from Harvard and Endo Health Solutions, and you have very few ANDA litigation outcomes that see Vivus ever reaching meaningful profitability.
Question for your patent counsel: How do you see this Vivus patent situation playing out? Why didn’t I know about this earlier? How much time do I have to get out of my position before the Vivus’ intellectual property house of cards falls?
A closer look at FMC’s proposed strategy to save Vivus
1. Ensure the right management is in place
While FMC’s new directors and officers have an impressive commercial track record, it is all for not if generics flood the market well before the expiration of Vivus’ patents. Maybe if the new board included a top ANDA litigator the company could buy itself a little extra time, but the end result will very likely be the same: a short lived Qsymia franchise that is overrun by generics.
2. Engage the right pharmaceutical partner on the right partnership terms
Whether discussions with potential partners started two years ago or begin in the next six months, it does not matter. Simply there is too much risk. Without some level of certainty around the Qsymia patents, pharmaceutical companies are extremely unlikely to strike the type of deal Vivus needs. Major pharmaceutical companies are notoriously conservative when it comes to patent risk.
3. Fix the unsustainable expense structure that is failing to generate revenue
“ Vivus has an unsustainable expense structure with spiraling SG&A costs and, in our view, very little financial discipline. “ True. See the valuation section above.
“The finances may get worse very soon. Vivus is now preparing to launch an expensive direct-to-consumer campaign for Qsymia that almost surely reflects the same amateurism of its previous commercial activities.” True. But any marketing plan aimed at PCPs will require significant capital. Add in the expensive post-approval studies, ANDA/assignment litigation and a short runway of exclusivity, and it is not clear how Vivus gets out from under its expenses. If the company holds out for a partnership before investing in sales and marketing, revenues will continue to lag as July 2015 comes closer and closer.
4. Fix the U.S. commercial strategy
Easier said than done. A 13x markup in this payer environment is hard to justify when Qsymia, from what I can see, really only offers a convenience factor over its generic substitutes. However, it is hard to imagine Qsymia not getting some traction in the market – after all, it does help patients lose weight and there are an estimated 70 million obese adults. But can the company make enough money before the entry of generics to justify the current $1.5 billion market cap?
5. Optimize Medicare and commercial reimbursement strategy
See #4 above.
6. Execute a Euro-centric approach to obtaining E.U. approval through the centralized procedure
“We believe that Vivus’ seriously flawed approach to E.U. approval for Qsymia has impaired the company’s credibility with European regulators and jeopardizes its substantial value in Europe.” The new team can bring in the best European regulatory experts, but I think it will be hard to get Qsymia approved there. Phentermine is not approved in Europe and European regulators have shown to take a harsh view of obesity drugs. The payer environment is brutal. The non-patent exclusivity incentives (10 to 11 years) are much more favorable, so if Vivus could get the drug approved it will not likely face the same level of generic scrutiny.
Where does the company stand now?
- No partnership at present levels – no one is signing up for the uncertainty and risk
- Continued slow sales – essentially starting from scratch without a partner
- Continued high spend – no partner to pick up the tab
- Generic competition – weak patents means generics are likely to enter before the company ever makes a profit
The need to “check the ‘intellectual property’ box” during diligence is critical – whether you’re an investor, analyst or a potential acquirer/partner. While there will always be investors who gladly account for best case scenarios without properly defining risks and sell-side analysts who refuse to think outside the comforts afforded by a spreadsheet, I believe potential acquirers and partners understand the issues that will never make Qsymia commercially viable – and that’s why we haven’t seen a deal and we’re not likely to see a deal until the share price accounts for these risks. I’ll go a step further and say legal counsel working for a potential partner or acquirer risks career suicide if he or she approves a deal with Vivus, and outside counsel would likely need to consider malpractice liability. The risks are alarming and Vivus is likely to face the hangover from a decade of overpromises, misinformation and sloppy execution alone – without the deep pockets and experience of a commercial partner.