An Open Letter (Email) to Lazard
Dear Mr. Schimmer and Mr. Kuo,
I enjoyed reading your September 4th equity research report that reviews Vivus’ Qsymia patent estate. I agree that the investment community has been under the false impression that Qsymia will safely enjoy patent exclusivity until 2020. The Qsymia patents face a wide range of potentially fatal challenges (see vivuspatent.wordpress.com for my analysis of the Qsymia portfolio) some of which you address in your report. Your report also contains some interesting points I had not considered. I wanted to take this opportunity to comment on some of the items in your report while also asking a few questions (that I hope you or others can weigh in on):
* Timing of the Paragraph IV filing
I agree it’s very likely only a matter of time. Nearly every new combination approved by the FDA under 505(b)2 has been challenged (or, alternatively, there were never patents granted to challenge). However, I disagree that it’s a matter of Qsymia achieving some measure of commercial success before a generic files – not for a market potentially as big as obesity. There are numerous examples of drugs being challenged immediately upon approval that were never forecast to make more than $50 million (see Avanir’s Nuedexta). I think there could be a number of other reasons why we have not yet seen acceptance of an ANDA:
- Filers have already filed but the FDA has not yet reviewed or accepted the application (e.g., backlog at the FDA or the filer cannot get the formulation correct);
- Generics or pharma companies are pursuing a route (e.g., license from Harvard or Endo) that does not require formal ANDA challenge;
- Filers are waiting for Qsymia’s safety to be better established; or
- Filers are waiting for a better understanding of the post-approval study requirements.
If I had to guess, I would say the first reason is the most likely. The barriers for filing are too low ($100-$200k?) for generics not to throw their hats into the game.
* Obviousness arguments
I never fully vetted the Physician’s Desk Reference (PDR) as a reference that allegedly teaches away because I was so focused on what I view as the absurd statements made by the inventor, Dr. Najarian, and the company’s patent counsel in declarations and later responses that seemed to sway the examiner and ultimately lead to the allowance of the ‘890 patent. Like you say, the PDR does not specifically teach away from combining phentermine with topiramate or any other drug for that matter. In fact, phentermine was being combined with a wide range of other drugs (e.g., antidepressants, other stimulants, metformin) for weight loss at this time, thus further weakening Vivus’ argument. However, I think any discussion of obviousness takes you to the absolute statements made by Dr. Najarian saying the side effects of topiramate and phentermine disappear when the drugs are combined (hence “surprising and unexpected results”), and the later statements made by Vivus’ patent counsel claiming there are no references that teach combining the two drugs – when in fact she was almost surely aware of the earlier McElroy patent that discloses the combination for the treatment of obesity.
Did you or your patent lawyer ever look at McElroy (US Patent No. 6,323,236) as an anticipation reference?
Vivus may or may not be able to swear behind McElroy in the U.S., but in Europe that option does not exist. I have filed a third party observation in Europe that cites McElroy as an anticipatory reference. It will be interesting to see how Vivus handles this challenge.
* The Pharmakon deal
I agree the Pharmakon deal provides valuable insight in to the weakness of the Qsymia patents. Essentially Pharmakon gets paid back (at nearly a 40% interest rate) regardless, and could potentially end up with the patents (albeit bloodied and battered) if any of a number of triggering events occur. Pharmakon is sophisticated when it comes to patents, and I too view this as further evidence of Qsymia’s patent vulnerabilities (and the desperation of the former management regime).
* Vivus’ new patent applications are weak
I agree with your assessment that these applications are likely never to issue, and if they do, Vivus will have a very hard time ever enforcing them. In addition to the reasons you list, the patents will also likely face an absolute bar under 35 USC 102(b) because of prior public use or a related obviousness challenge since the invention is only a minor variation of such a public use. As described in this New York Times article, Dr. Najarian operated a weight loss clinic in Los Osos, California from 2001 to 2010, where he “treated thousands of patients” with topiramate and phentermine. Did this use include the specific combinations of dose, formulation and titration regimens claimed in the new applications, or was the invention a mere trivial variation from these? His nine years of practicing medicine at his weight loss clinic could, among other things, constitute a public use of the invention prohibited under pre-AIA 35 USC 102(b) thereby barring the company’s ability to secure patents filed after 2001, including the June 2003 continuation-in-part application (No. 10/454,368) that issued as the first of the Najarian patents (No. 7,056,890) and the new applications filed in 2008. In addition to the prescribing history of Dr. Najarian, there is evidence other weight loss doctors were also combining phentermine with topiramate and still other researchers were experimenting with extended release topiramate (see US Patent Application No. 11/297,737).
* Partnership and buyout discussion
I agree it is extremely unlikely that there is going to be a partner or buyer for Qsymia given all of the uncertainty around the drug’s exclusivity. It’s not just the looming Paragraph IV, it’s the weakness of the Qsymia patent estate. It’s very unlikely Vivus could prevail in such a suit, and it may lose quickly given the preponderance of evidence (including inequitable conduct arguments) a judge is likely to find.
Does your valuation assume Vivus gets a partner? Without a partner, how does the company pay for the DTC marketing and sales network that most people agree is necessary for Qsymia to reach its full potential? The post-approval studies? Major dilution? We’ve seen what the company does on its own in terms of sales and marketing, and it seems DTC is not an immediate priority. Further, the obesity space is proving challenging. It will likely take the experience and deep pockets of a major pharmaceutical partner to fully penetrate this market, so I have a hard time seeing sales reaching $589 million in 2016 (as you estimate) if it has to go it alone or enters into a co-promotion arrangement. Your co-promotion partnership analysis is new to me and quite convincingly shows challenges with such an arrangement.
All together, I am pleased to see someone with the experience and credibility of Lazard take on this patent issue. I think this truly is a unique situation where the value of a single asset ballooned to nearly $3 billion (July 2012) based on a lot of assumptions, speculation and over-exuberance, while the patent experts in the room were either ignored or did not speak loudly enough.