Cowen’s Response is Inadequate & Incomplete

by bobbydiggs

Stock Analysts Are Still Failing to Dig into the Potential Weaknesses of Vivus’ Qsymia Patent Estate

Yesterday Cowen & Company put out the following note. (I have added numbers in brackets to facilitate referencing and analyzing particular arguments):

 COWEN [1] QUICK TAKE DISTRIBUTION

July 20, 2012

Vivus (VVUS) — Neutral

Qsymia IP estate seen as likely to hold; JNJ patent the key issue

This morning we held an investor conference call with a biopharma IP attorney in order to discuss the Qsymia IP estate post-approval and in light of yesterday’s movement in the stock due to potential concerns with Qsymia’s IP. Despite the drop in the stock today, we believe that the key takeaways from the call were actually positive, overall, in that it only ended up with one main outstanding issue (the JNJ Shank patent), which we believe would not end up being insurmountable for Vivus. Our thesis on VVUS remains unchanged, we reiterate our Neutral rating, but view today’s stock reaction as probably overdone.

Give me the bottom line:

Qsymia IP looks strong [2] overall, “non-obvious”, especially given the [3] “unexpected” improved tolerability profile of the combination.

4 patents with roughly [4] 100 claims: “chances are, at least one of them will hold, and that’s all you need”.

[5] Our consultant believes there are better than 50/50 chances that this IP estate can withstand challenges.

What’s the problem then? The main potential issue he sees with the IP estate is the [6] JNJ “Shank” patent, which expires in 2017. This patent makes broad claims regarding treatment of obesity “comprising” the use of topiramate. He believes that the Qsymia Najarian patent estate could potentially be seen as infringing on this patent.

But… Given that JNJ is not marketing topiramate for the treatment of obesity, [7] they’re unlikely to be able to stop Vivus from getting to the market, nor would they be able to claim irreparable harm. We see a royalty settlement between Vivus and JNJ as the most likely eventual outcome.

Generic competition not seen as much of an issue: Given the [8] strength of the IP estate, generic competition prior to the end of the Vivus patent life in 2020 is less likely. Furthermore, [9] a generic entrant may need to conduct the large, expensive post-marketing CVOT trials (~10,000 patients), which we see as very unlikely.

McElroy not really an issue [10], either: The McElroy/U of Cincinnati patents cover impulse control disorders, like binge eating, which even though related, are not the same indication.

Simos Simeonidis, Ph.D.

Yatin Suneja

 

 My Take:

I have a lot of trouble with this piece of “analysis”.  Please allow me to explain by the bracketed numbers I have imbedded in the text.

 [1] There are thing in life you want to do quickly without a lot of thought, like jumping out of the way of a speeding tractor-trailer.  However, patent analysis is not one of them.

How many hours did your patent attorney spend on this endeavor and what portion of the relevant documents did he read and consider?  

I think the answers are just a few and not much.  You need to go back and do your homework or leave the adult table and stop pretending to be a participant in the conversation.  I am willing to cut Vivus and its management some slack, because we don’t really know how bad their patent position on Qsymia is, but I am not willing to cut you stock analysts anything.  The sole reason for your profession is asking questions of the company’s management and analyzing the publicly available data. You not doing your job is the sole reason we have a company with a murky, inexplicable patent position and a 2 to 3 billion-dollar market cap in an industry where intellectual property is a requirement to take each breath.  Stop playing geisha to every capital-hungry company’s CFO, stop pimping your investment banking colleagues for their next underwriting assignment, and go analyze a stock.  The ticker VVUS would be an interesting place to start.

 [2 & 8]  Stop with the conclusory statements about Vivus having a STRONG patent position on Qsymia.

Does Vivus management give you a fee each time you repeat their mantra?

I have provided 30 odd pages of facts and analysis in my original post questioning the strength of this position.  You have provided neither additional facts nor any analysis that brings into question any of the issues I have raised.  You need to remove “strong” from your lexicon until you learn how to use the word properly.

 [3] So you have concluded that the Qsymia patents are “non-obvious” because there is an “unexpected” improved tolerability profile of the Qsymia combination?

I know that is what was said to the USPTO during the prosecution of the Qsymia patents.  However, in the first paragraph of page 73 of Vivus’ February 22, 2012 Advisory Committee Briefing Document that they submitted to the FDA, they state:

 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.

When it is in front of the patent office the side effect profile is surprising and unexpected, but 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?  Who knew what when?  Is Vivus lying to the USPTO or the FDA?  Or did their story evolve over time and they simply forgot to tell the patent office?  Would such an omission be consistent with the patent applicant’s duty of candor under 37 CFR 1.56?  The only things that are non-obvious to me is whether serious instances of misconduct have occurred, who committed them and when?

 [4] There are a hundred claims, one of them has got to be good.

Does Wall Street really compensate people with six to seven figure salaries for saying things that are that stupid?  

I wouldn’t tolerate that level of analysis from my six-year-old daughter, but fortunately I don’t have that problem, because she would never say something that was that mind-blowingly dumb.  Can I get her a job with your firm?  She has a diploma from kindergarten and she could run intellectual circles around you guys. Besides, the family could really use the fat Wall Street salary.

 [5] So you give the Vivus patent estate a slightly better than 50% chance of surviving.  First, the bad news, that is not consistent with the “don’t worry, be happy” tone of your note or the headline, “Qsymia IP estate seen as likely to hold.”  I am not sure if anyone has explained it to you yet, but the Qsymia patent estate not surviving is a bad thing – a scenario that I seriously doubt investors have fully considered or thought there was a 50% chance of occurring.  This news is a little like being told you your investment portfolio could disappear with the flip of a coin.  Not good.  Second, the good news, I seriously doubt your consultant has had the time to accurately assess the patent estate, and upon further reflection may put the odds of survival at significantly better than 50/50.  I wouldn’t, but that is just my opinion and I am not a highly paid lawyer.

[6] You understand Shank.  Good.  Your batting average is not high, but I am glad that you have addressed at least one of the many issues raised in this blog and the Citron Research piece.  What about all of the other issues?

 [7] Why would J&J need to show irreparable harm, get some sort of temporary injunction, and keep Qsymia from ever seeing the market?

Last time I checked a permanent injunction was still an available remedy for a victorious patent holder in an infringement suit. For all of this to go horribly wrong for Vivus, J&J merely needs to initiate a patent infringement suit when Vivus launches Qsymia, drive the stock down and buy Vivus for pennies on the dollar. Even if Qsymia is eventually a blockbuster, it will take time for the company to generate revenue.  In the meantime, Vivus is relatively small, short on cash and legally unsophisticated.  If you are small and an eight hundred pound gorilla is beating you with a stick, it doesn’t have to kill you immediately for it to ruin your day.

 [9] First, generic competition doesn’t need to wait until 2020 if the Vivus patents aren’t valid.  Second, if the makers of topiramate and phentermine don’t combine the two drugs in a single formulation and don’t mention anything about weight loss on the label of their products, they don’t have to do clinical trials, or anything other than watch the money roll in.

How does Vivus stop this? 

Nobody has explained that to me.  Instead, we have analysts who are either avoiding the issues, or still don’t understand them.

 [10] As for McElroy, I think I am coming around to your position, as will be discussed in my next blog.

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