By Pete Gallo
One of the most spectacular payoffs in public stocks so far this year has been Chilton Investment Co.’s incorrigible portfolio bet on a smaller-cap pharmaceutical specialist called Vivus, whose share-price trajectory has surged from burgeoning to ballistic, thanks to recent regulatory approvals for its experimental weight-loss drug, Qnexa.
Chilton is the largest shareholder in the drugmaker, boasting a gargantuan 9.7 percent stake. That said, Vivus isn’t exactly new to the Chilton portfolio. Regulatory filings with the Securities and Exchange Commission reveal that the hedge fund has steadily upped its share holdings in the company from 5.9 million at the start of 2011 to 8.6 million by the start of 2012. Notably, records show that Chilton added a portion of that stake back in 2010 at recession-battered prices: The stock dipped to as low as $4.98 in July of that year, off a previous high of $12.50.
But things are looking much brighter of late. Vivus began 2012 at about $9.90 and on March 19 closed its trading day on the Nasdaq at $21.13. By April 11, the stock was trading at $22.22 per share. The overall gain bolstered Chilton’s 8.6 million-share stake in value from $85.1 million to $191.1 million — strong medicine for any large fund investor. (Other significant stakeholders include hedge funds managed by Caxton Associates, OrbiMed Advisors, Passport Capital and Europe’s Meditor Group, according to regulatory filings.)
The moves have been a big boon for Vivus, which has seen its market cap swell in a short span. The company specializes in specific strata of pharmaceuticals, with an emphasis on treating sexual dysfunction and obesity, giving it a strong consumer bent. (The company also produces drugs to treat diabetes and sleep apnea.)
For Chilton, piling into the stock may seem to have been a classic buy-low investment strategy. But that may be an oversimplification of the stock’s strategic allure in recent years. Having a pharma investment cycle that is less correlated to broader consumer spending seems to have given Vivus a strong strategic edge, as it used the depths of the recession to focus on research and prepping regulatory endeavors.
That strategy came to recent fruition in the third week in February, when the company won another round of approval from the U.S. Food and Drug Administration, which paves the path for the eventual marketing of Qnexa, Vivus’s primary product in clinical development. Company management seemed to exude a cool confidence that Vivus was poised for better days when in mid-February they unveiled plans to raise growth capital through a public offering of about 10 million shares at $22.50 apiece.
The hedge fund doesn’t seem to have participated in the offering. However, the result was rapid as the market reacted, sending the value of Chilton’s existing stake soaring. Following the announcement of FDA findings on February 22, the stock surged from $10.55 to a recent high of $23.78 on February 27.
But will Qnexa’s promise make it worthwhile for Chilton and other investor heavyweights to stay parked, waiting for further returns from actual sales revenues? Vivus’s recent public offering suggests the company is aiming to press ahead at prudent speed in marketing its obesity drug. Still, that may take time to produce results, even with strong interest from the medical industry and cultural interest in shedding unhealthy fat.
Certainly, Chilton has showed a steady hand and patience with its long-term Vivus stake, but it may want to wait a bit longer. Even given Vivus’s renewed share price and commensurate boost in market capitalization, it is still a smallish midcap, which might make it a prime candidate for acquisition down the line. Filings show the company has upward of $140 million in cash and minuscule debt.
What’s more, the vast bulk of its shares are institutionally held with a handful of big names — including Chilton — on the investor marquee. Surely, as its largest shareholder, Chilton’s preferences would carry substantial weight.
Even if a merger offer eludes, Chilton’s team can’t easily ignore that some Wall Street analysts have put a target share price of $40 on the stock, although much of that assumes sales projections that wildly reach out to the year 2020.
Still, such projections, and other empirically driven guesses or wishes, are perhaps helpful in representing how Wall Street estimates voracious demand in the weight-loss-drug arena and how much growth it foresees for the sector.
Exuberance aside, the stock could be poised for a pullback if the FDA blinks and Vivus faces a regulatory setback next time around. Either way, Vivus is a potential volatility play that could add further upside for Chilton, its largest stakeholder. AR
