Sunday, May 22, 2011

A New Drug Could Send This Small Cap Stock up 30% or More

Some things still aren't discussed in polite society. Obesity and erectile dysfunction are among them.

But if I abided by this convention, then you'd miss out on what could be the next-big-thing in the drug stock space. Instead, in the interest of your portfolio, I'm willing to break this taboo...

A small developer of novel drugs for sexual health and obesity plans to submit a new drug application (NDA) to the U.S. Food and Drug Administration (FDA) in the second quarter of this year. The window is still open for you to get in at under $10 per share.

This NDA is for avanafil, a new erectile dysfunction (ED) drug that has completed Phase III testing. Avanafil is a PDE5 inhibitor, like Viagra, Cialis or Levitra, but potentially safer and more spontaneous than any drug yet on the market. If avanafil performs in the market the way it has performed in Stage II and Stage III tests, then it's going to give these competitors a run for their money.

PDE5 inhibitors are a roughly $4 billion market worldwide. The leader is Pfizer's (NYSE: PFEViagra, at with a share of about $2 billion. The drug comes off patent protection in 2012. Eli Lilly's (NYSE: LLY)Cialis earns $1.7 billion in sales andGlaxoSmithKline's (NYSE: GSKLevitra accounts for the rest of the market.

Of course, ED drugs are a demographic play on the aging baby-boom generation. (We can't give you rock-and-roll, but two out of three ain't bad.) However, fidelity to these drugs is low -- 20 million-plus men have flirted with Viagra, but many continue to play the field. This switching mostly reflects men's search for drugs with different side effect profiles or that better enable spontaneous sex.

The little-known small drug company developing avanafil is Vivus (Nasdaq: VVUS).

Here are some reasons to consider the stock...

  • Avanafil's upcoming NDA submission and FDA review process mean that it will never be more undiscovered than right now.
  • Vivus also has an obesity drug in late-stage development, giving it two ways to succeed. If Vivus can show that Qnexa (for obesity) is reasonably free of side effects, then it has the potential to become a $1 billion drug. 
  • Thanks to its savvy sale of earlier products, Vivus is not a cash-strapped biotech, but instead has ample cash to fund avanafil and Qnexa. Vivus has a market cap of about $600 million, no debt and at the end of 2010 had $139 million in cash, or about $1.70 per share. Management estimates it will have about $100 million in cash for the end of 2011.
Though it has been more than seven years since the last new ED drug was introduced, Vivus's avanafil may have the charm. Vivus claims that in its Stage III avanafil trials, many men were able to have intercourse as soon as 15 minutes after dosing. That's more quickly than other ED drugs on the market, which can take half an hour or more to work.

A 2005 study by Vivus also suggested avanafil passes out of the body more quickly than competitor drugs, reducing the risk of interaction with nitrates prescribed for heart disease, for example. If supported by further data, this would greatly expand the potential market for avanafil, since nitrates are contraindicated with other PDE5 inhibitors and many older men take them.

The fast action and, if borne out, compatibility with nitrates, should distinguish avanafil and support a market for it even in the face of generic erosion after Viagra goes off-patent in 2012.

Vivus's avanafil phase III program includes four pivotal studies, based on standard endpoints for ED drug studies, which so far have shown success rates comparable to competitor drugs within a shorter period of time.

Vivus is still analyzing how these results compare to competitors' studies, in order to test its hypothesis that avanafil may have a more specific mechanism of action than other PDE5 inhibitors, a lower side effect profile and higher tolerability. Since diabetes and prostate surgery are two of the main causes of ED, Vivus is also running trials in this area, although the prostate surgery trial results will be submitted later as a supplement to the NDA.

Vivus intends to file an NDA for avanafil in the second quarter of 2011 -- which could, theoretically, be as soon as this week, since we are in the second quarter already. Vivus's filing of the avanafil NDA will likely be a catalyst for the stock price, which historically has ticked upward on positive news of new products in development.

Vivus plans its first quarter earnings call for May 2, and may have more news then.

Action to Take--> An investor with an appetite for risk would do well to consider buying Vivus ahead of its submission of the NDA for avanafil.  I think the market has overlooked avanafil in its rush to consider the obesity drug Qnexa.  If avanafil does only as well in the ED marketplace as Levitra, and if Vivus can strike a marketing deal where it receives a royalty of 30% of avanafil sales, then by my calculations, avanafil could represent as much as $3.00 per share or more of Vivus’s value. You can capture that value by buying the stock now, ahead of the NDA submission planned for this quarter.

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