Description

I’m recommending the purchase of VIVUS, Inc. (“VVUSQ”) shares, a specialty pharmaceutical company currently in Chapter 11 bankruptcy.  The market cap is now less than $5 million and there is a trading restriction disallowing the purchase of more than 800,000 shares to protect the company’s substantial NOL asset (discussed later) so the amount of capital available to be invested is small.  I still believe it’s a worthwhile investment for small funds as I believe recovery could be in excess of $2/share and/or there may be an opportunity to invest more capital.  I also believe this is a fairly straight-forward asymmetric investment idea so although the potential profit dollars could be small for some, the time spent on the analysis is relatively low so it may still be worthwhile. 

VIVUS has three approved drug products and one developmental drug.  The approved therapies are the following (language taken directly from the first day declaration):

i)                    Qsymia® (“Qsymia”), a chronic weight management therapy;

ii)                   PANCREAZE®/PANCREASE® MT (“Pancreaze”), a treatment of exocrine pancreatic insufficiency (“EPI”) due to cystic fibrosis or other conditions; and

iii)                 STENDRA® (“Stendra”), an FDA-approved erectile dysfunction (“ED”) medication, which has also been approved by the European Commission (“EC”) under the trade name SPEDRA (“Spedra”).

The developmental drug is referred to as “VI-0106” with the potential to treat pulmonary arterial hypertension.  The other major asset of the company is $927 million of federal and state NOLs ($649 million federal and $278 million state) as of December 31, 2019. 

As is typically the case with potentially solvent debtors, the facts of the case are very interesting.  The current capital structure is $61 million of secured debt and $171 million of unsecured convertible notes, both tranches entirely owned by Carl Icahn.  The bankruptcy filing was due to the inability to refinance the convertible notes which came due on 5/1/2020.  Concern about refinancing these notes must have been low as recently as 10/3/2019 because the company chose to use balance sheet cash of $49 million to pay down secured notes not due until 2024 rather than the near term convertible notes (although testimony during the confirmation hearing stated this was partially due to a covenant default on the secured notes – the press release announcing the pay down, however, does not state this).  

In February of 2020, the company had term sheets for both senior and junior capital to refinance the entire capital structure.  This transaction fell apart at the end of March as the junior capital provider received a large redemption “due to market turbulence resulting from the COVID-19 pandemic.”  Despite having a maturity due in exactly one month, the company issued 7.22 million shares on 4/1/2020 at $1.60 raising $11.6 million of capital.  The company then began discussing restructuring alternatives with Icahn.  Upon maturity of the notes, the company paid off the $11.3 million of principal not held by Icahn and entered a grace period on Icahn’s piece.  The company continued to try to raise capital throughout the grace period but were ultimately unsuccessful.  Icahn purchased the secured debt and the company filed a prepackaged bankruptcy on July 7^th. 

Pursuant to the plan, Icahn will provide a $90 million exit facility which will be used to pay off or exchange the secured debt and the ~$27 million of unsecured claims will be paid in full.  Icahn will equitize his $171 million of unsecured debt for 100% of the equity in the company and will maintain the full use of the company’s NOLs.  Shareholders were offered $5 million in cash ($0.28/share) and a contingent value right worth $2/share if the company can earn EBITDAR of at least $98.5 million for the combined annual periods of 2021 and 2022 if they agreed to release all parties of all claims and support the plan.  Shareholders who “opt out” would receive no recovery. 

Despite the speed of the process and blatant red flags associated with the pre-pack, the judge denied the equity committee motion.  Only upon the contested confirmation hearing did the judge rule from the bench on 9/11/2020 that an equity committee was warranted. 

In summary, I see the following facts:

1)      As recently as February of this year, the company had a deal to refinance all of the debt leaving the equity in place

2)      As recently as April of this year with a looming maturity, the company raised over $11 million in equity capital at $1.60/share

3)      Icahn would prefer to own 100% of this company including paying off all other unsecured creditors in full than providing the company more than 30 days to source alternative ways to pay off his debt in full

4)      Icahn was willing to pay shareholders $0.28/share and up to another $2.00/share to coerce support for a quick pre-packaged bankruptcy 

With shares trading for $0.235/share as I write this, I find it hard to imagine a recovery for less than the $0.28/share which was already offered.  With an equity committee to be formed shortly, I see multiple paths for an increased recovery.  For starters, additional time is to our benefit as potential suitors may not have had the necessary time to diligence the transaction.  It also gives the shareholders a voice to negotiate a better deal with Icahn rather than the “take it or leave it” proposal previously offered.  Lastly, as more valuation work is done and professionals are hired to work on behalf of shareholders, a shareholder led plan may be an attractive option to capture value for equity.

Catalyst

Increased Settlement

Shareholder led alternative plan (cram-up of debt)