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Stanford University Law School
- Securities Class Action Clearinghouse
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MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH (68581)
ALAN SCHULMAN (128661)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
SPECTOR & ROSEMAN, P.C.
ROBERT M. ROSEMAN
2000 Market Street
12th Floor
Philadelphia, PA 19103
Telephone: 215/864-2400
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ELLEN GUSIKOFF STEWART (144892)
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
Attorneys for Plaintiffs
[Additional counsel appear on signature page.]
SUPERIOR COURT OF THE STATE OF CALIFORNIA
COUNTY OF SAN MATEO
STANLEY CRAIN, SIDNEY GOLDSTEIN, ) Case No. [403776]
NORMAN J. MACK, RAJ. MARWAHA and ) [filed Feb. 18, 1998]
CONDON N. BENNET, On Behalf of ) CLASS ACTION
Themselves and All Others Similarly )
Situated, ) COMPLAINT FOR VIOLATION OF
) CALIFORNIA CORPORATIONS
Plaintiffs, ) CODE §§25400 AND 25500;
) CALIFORNIA CIVIL CODE
vs. ) §§1709-1710; AND CALIFORNIA
) BUSINESS AND PROFESSIONS
VIVUS, INC., LELAND F. WILSON, ) CODE §§17200, ET SEQ.
VIRGIL A. PLACE, DAVID C. YNTEMA, )
JULIAN S. GANGOLLI, SAMUEL D. )
COLELLA, RICHARD L. CASEY, PETER )
BARTON HUTT, WILLIAM L. SMITH, NEIL )
GESUNDHEIT, and DOES 1-25, )
inclusive, )
)
Defendants. ) Plaintiffs Demand A
____________________________________) Trial By Jury
INTRODUCTION AND OVERVIEW OF ACTION
1. This is a class action on behalf of purchasers of the
common stock of Vivus, Inc. ("Vivus" or the "Company"), between
May 15, 1997 and December 9, 1997 (the "Class Period"). This
action alleges that during the Class Period, defendants
artificially inflated Vivus' stock through the issuance of false
and misleading statements about Vivus' business, products, finances
and future prospects of the Company. As Vivus' stock was inflated
by defendants' misrepresentations and omissions, from $15-3/81 on
May 14, 1997 to its Class Period high of $41-7/8 per share in
October 1997, Vivus insiders named as defendants sold over 235,000
shares of their own Vivus stock, pocketing over $6.7 million.
However, in truth, during the Class Period, Vivus' business was
suffering as demand for its only product, Medicated Urethral System
for Erection (alprostadil) ("MUSE"), had diminished. Moreover, the
Company's prospects were bleak as the efficacy of the product was
doubtful at best and competitive products were on the horizon which
were more desirable to patients than was the Company's MUSE
product.
2. Vivus focuses on the development of products for the
treatment of erectile dysfunction. In November 1996 the Company
announced it had received U.S. Food and Drug Administration ("FDA")
clearance to manufacture and market MUSE in the United States. In
1997 Vivus commenced selling MUSE through its direct sales force,
reporting product sales revenue for the first time in the first
quarter of 1997. As a result of these developments, the price of
____________________
1 All amounts are adjusted to reflect a 2-for-1 stock split
effective June 1997.
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Vivus' stock rose to as high as $40 per share in mid-February 1997.
However, in late February 1997 doubts about the Company surfaced as
competitive products emerged which showed advantages to MUSE (the
competitive products could be taken orally, rather than being
inserted into the urethra as was MUSE), questions as to the
efficacy of MUSE arose, and the prescription rates for MUSE
flattened and even began to decrease as renewal prescriptions were
diminishing. These doubts about the Company caused its stock to
retreat to 1995 levels, dropping to as low as $15-1/8 in early May
1997. This sharp drop limited the amount of money the insiders
could generate through exercising their options and selling stock.
Moreover, the insiders knew that once the competitive products were
available, the outlook for the Company's one and only product,
MUSE, would be extremely poor. The insiders therefore wanted to
dispose of many more of their shares at much higher prices before
this occurred.
3. For all these reasons, beginning at least by May 1997,
defendants undertook a scheme intended to inflate Vivus' stock
price by issuing statements with respect to the purportedly
superior nature of MUSE and the resultant anticipated impact on the
Company's future earnings. The Company announced on May 12, 1997,
that the Board had declared a 2-for-1 stock split to "reflect the
sound future of the Company." In an attempt to reverse the
downward trend of the Company's stock price, defendants
communicated with analysts and told them demand was strong, in fact
stronger than the Company's capacity to provide product, and that
the Company had received extremely positive feedback from managed
care organizations who were willing to pay for MUSE. The
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defendants also told analysts that concerns over the levels of
prescriptions were misplaced as such data was meaningless due to
the high level of distribution sales through "alternative
channels," and that demand was very strong, forecasting 1997 and
1998 earnings per share ("EPS") of $.60 and $1.23, respectively.
4. Throughout the summer and fall of 1997, defendants
continued to misrepresent the Company's results of operations, the
demand for MUSE, and the Company's future prospects by falsely
representing that MUSE was a safer and more effective therapy for
a majority of men afflicted with erectile dysfunction, reporting
inflated revenues of $100 million for the first three quarters of
1997, representing that MUSE would still have a profitable niche in
the market despite the introduction of oral treatments, and raising
the Company's 1997 and 1998 earnings forecasts to $0.94-$1.08 per
share and $1.65-$1.72 per share, respectively, without any
reasonable basis and, indeed, knowing that such forecasts could not
be met.
5. Finally, before the market opened on December 10, 1997,
the Company revealed in a press release that it would not meet
fourth quarter revenue goals, missing them by as much as 25%. It
blamed the shortfall on problems in moving to its new 90,000 square
foot plant. This announcement sent Vivus' stock price down more
than 34% to as low as $12-1/2 per share. The stock closed at
$13-13/16, down more than 65% from the Class Period high of
$41-7/8, and later dropped to less than $10 per share.
6. Since then, Vivus has announced that fourth quarter
revenues will be 25% lower than the third quarter, blaming the
shortfall on production problems, despite reporting increases in
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production capabilities in July 1997. The true story is that the
fourth quarter results will be worse than anticipated due in large
part to Vivus' improper revenue recognition in prior quarters. In
a conference call with analysts after the December 10, 1997 press
release, Vivus' management admitted that distributors' inventory
had increased from 30 days in the September-October time frame to
45 days in December. This had occurred despite a reduction in
monthly production from 800,000 to 600,000 units in November. The
increase in distributor inventory and decrease in production were
inconsistent with the Company's claims that it was capacity
constrained. In fact, distributor inventory increased because
Vivus was parking inventory at distributors in order to mask a
deterioration in demand for its product.
7. Taking advantage of the artificial inflation in Vivus'
stock price during the Class Period, the individual defendants sold
235,073 shares of their Vivus stock at prices as high as $36.08 per
share, pocketing over $6.7 million and, in many instances, selling
large portions of the shares they owned (or had acquired via the
exercise of options during the Class Period):
Aggregate
Defendant Shares Sold Proceeds
--------- ----------- ---------
Casey, Richard 10,000 $ 297,500
Collela, Samuel 36,833 $1,092,570
Gangolli, Julian 50,240 $1,307,398
Gesundheit, Neil 8,000 $ 214,000
Hutt, Peter Barton 10,000 $ 294,400
Place, Virgil A. 20,000 $ 596,950
Smith, William L. 10,000 $ 250,000
Wilson, Leland F. 30,000 $ 904,595
Yntema, David C. 60,000 $1,836,600
------- ----------
TOTALS 235,073 $6,794,013
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8. Each of defendants' positive statements about Vivus'
products and business during the Class Period was materially false
and misleading when issued, and failed to disclose, inter alia, the
following adverse information, which was then known to defendants
due to their access to internal Vivus information:
(a) That defendants had no reasonable basis for a belief
that Vivus' sales of MUSE would continue to increase during and
after 1997 because defendants knew that users of the product were
not and would not repeat their use;
(b) That demand for MUSE had actually diminished since
early 1997 as users found MUSE much less effective than Vivus had
represented it would be and because new users awaited oral
treatment as a much more desirable alternative to MUSE;
(c) That Vivus was not capacity constrained but was
actually warehousing excess product with distributors including
Cord Logistics, Alternate Site Distributors ("ASD") (a division of
Bergen Brunswig Corporation) and Janssen International, in order to
overstate its revenues by recording product shipped to these
distributors as revenue and conceal the decrease in demand for
MUSE; and that, as a result, Vivus' revenues in the second and
third quarters of 1997 were each overstated by at least 15%, and
net income was overstated by at least 30% (as described in
¶¶74-78);
(d) That Vivus' gross margins were not representative of
the margins Vivus would achieve on future sales due to the
exclusion of raw material costs purchased prior to November 1996
from the Company's reported results;
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(e) That Vivus would have to curtail its production to
move to its new facility and to do maintenance on its old facility;
(f) That the IMS (a provider of pharmaceutical industry
research) data which showed a flattening in prescriptions was
indeed meaningful as it reflected the flattening of demand for MUSE
since the beginning of 1997, and that the additional demand for
MUSE which the defendants asserted was illusory;
(g) That future supplies of MUSE would be constrained as
a result of the irregularities the FDA found during a post-approval
inspection; and
(h) That there was no reasonable basis for making
positive representations about Vivus' projected revenues and future
growth, as defendants knew that the market for repeat users was not
as large as represented, and that once an oral pill was approved,
the market for MUSE would be greatly diminished.
9. The charts below show Vivus' stock price while defendants
were issuing their false and misleading statements, defendants'
stock sales at inflated prices and the stock's collapse as the true
facts became publicly known, and that, when compared to similar
companies, the price action of Vivus' stock was due to company-
specific events and not due to industry trends.
//
//
//
//
//
//
//
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May 15,1997 - December 15, 1997
Daily Stock Prices
Vivus Inc.
vs. NASDAQ Biotech Index
May 15, 1997 - December 12, 1997
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JURISDICTION AND VENUE
10. This Court has jurisdiction over all causes of action
asserted in this Complaint pursuant to the California Constitution,
Article VI, §10, because this case is a cause not given by statute
to other trial courts. The claims asserted herein arise under
§§25400 and 25500 of the Cal. Corp. Code, §§1709-1710 of the Cal.
Civ. Code and §§17200, et seq. of the Cal. Bus. & Prof. Code.
11. Each of the individual defendants resides in and is a
citizen of the State of California. Vivus has its principal place
of business in San Mateo County, California. Each of the false and
misleading statements made by defendants were made for the purpose
of facilitating the sale of the Vivus securities sold by defendants
during the Class Period in and from California. The amount of the
named plaintiffs' claims are less than $75,000 each, exclusive of
interest and costs. This action is not removable to federal court.
THE PARTIES
12. (a) Plaintiff Stanley Crain purchased 500 shares of
Vivus common stock on December 9, 1997 at $20-15/16 per share and
has been damaged thereby.
(b) Plaintiff Sidney Goldstein purchased 200 shares of
Vivus common stock on November 5, 1997 at $23-3/4 per share and has
been damaged thereby.
(c) Plaintiff Norman J. Mack purchased 200 shares of
Vivus common stock on November 11, 1997 at $23-3/4 per share and
has been damaged thereby.
(d) Plaintiff Raj. Marwaha purchased 500 shares of Vivus
common stock on November 5, 1997 at $24-1/8 per share and has been
damaged thereby.
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(e) Plaintiff Condon N. Bennet purchased 1,000 shares of
Vivus common stock on November 21, 1997 at $25-1/2 per share and
has been damaged thereby.
13. Defendant Vivus was a California corporation until it
reincorporated in the State of Delaware in May 1996. It is
headquartered in Menlo Park, California and is a developer of
advanced therapeutic systems for the treatment of erectile
dysfunction. The Company was founded in 1991, went public in 1994
with a 2.5 million share initial public offering, and did
additional secondary public offerings in 1995 and 1996. In
November 1996, the Company received FDA approval of its primary
product, MUSE, a non-invasive system that delivers pharmacologic
agents topically to the urethral mucosa.
14. (a) Defendant Virgil A. Place ("Place") is the founder
of the Company and has been the Company's Chairman of the Board and
Chief Scientific Officer at all relevant times. Because of
defendant Place's position with the Company, he knew the adverse
non-public information about Vivus' business, finances, products,
markets, and present and future business prospects via access to
internal corporate documents (including the Company's operating
plans, budgets and forecasts and reports of actual operations
compared thereto), conversations and connections with other
corporate officers and employees, attendance at management and
Board of Directors' meetings and committees thereof and via reports
and other information provided to him in connection therewith.
Based on inside information, defendant Place sold 20,000 shares of
his Vivus stock during the Class Period for proceeds of $596,950.
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(b) Defendant Leland F. Wilson ("Wilson") has been
President, Chief Executive Officer and a director of the Company at
all relevant times. Because of defendant Wilson's position with
the Company, he knew the adverse non-public information about
Vivus' business, finances, products, markets, and present and
future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and
employees, attendance at management and Board of Directors'
meetings and committees thereof and via reports and other
information provided to him in connection therewith. Based on
inside information, defendant Wilson sold 30,000 shares of his
Vivus stock during the Class Period for proceeds of $904,595.
(c) Defendant David C. Yntema ("Yntema") was Vice
President, Finance and Chief Financial Officer of the Company at
all relevant times. Because of defendant Yntema's position with
the Company, he knew the adverse non-public information about
Vivus' business, finances, products, markets, and present and
future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and
employees, attendance at management and Board of Directors'
meetings and committees thereof and via reports and other
information provided to him in connection therewith. Based on
inside information, defendant Yntema sold 60,000 shares of his
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Vivus stock during the Class Period for proceeds of $1,836,600 --
61% of his stock holdings.
(d) Defendant Julian S. Gangolli ("Gangolli") was Vice
President, Marketing of the Company at all relevant times. Because
of defendant Gangolli's position with the Company, he knew the
adverse non-public information about Vivus' business, finances,
products, markets, and present and future business prospects via
access to internal corporate documents (including the Company's
operating plans, budgets and forecasts and reports of actual
operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at management
meetings and via reports and other information provided to him in
connection therewith. Based on inside information, defendant
Gangolli sold 50,240 shares of his Vivus stock during the Class
Period for proceeds of $1,307,398 -- 100% of his holdings.
(e) Defendant Neil Gesundheit ("Gesundheit") was Vice
President, Clinical and Regulatory Affairs of the Company at all
relevant times. Because of defendant Gesundheit's position with
the Company, he knew the adverse non-public information about
Vivus' business, finances, products, markets, and present and
future business prospects via access to internal corporate
documents (including the Company's operating plans, budgets and
forecasts and reports of actual operations compared thereto),
conversations and connections with other corporate officers and
employees, attendance at management meetings and via reports and
other information provided to him in connection therewith. Based
on inside information, defendant Gesundheit sold 8,000 shares of
his Vivus stock during the Class Period for proceeds of $214,000.
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(f) Defendant William L. Smith ("Smith") was Vice
President, Research and Development of the Company at all relevant
times. Because of defendant Smith's position with the Company, he
new [sic] the adverse non-public information about Vivus' business,
finances, products, markets, and present and future business
prospects via access to internal corporate documents (including the
Company's operating plans, budgets and forecasts and reports of
actual operations compared thereto), conversations and connections
with other corporate officers and employees, attendance at
management meetings and via reports and other information provided
to him in connection therewith. Based on inside information,
defendant Smith sold 10,000 shares of his Vivus stock during the
Class Period for proceeds of $250,000 -- 93% of his holdings.
(g) Defendant Samuel D. Colella ("Colella") was a
director of the Company until his resignation in July 1997.
Because of defendant Colella's position with the Company, he knew
the adverse non-public information about Vivus' business, finances,
products, markets, and present and future business prospects via
access to internal corporate documents (including the Company's
operating plans, budgets and forecasts and reports of actual
operations compared thereto), conversations and connections with
other corporate officers and employees, attendance at Board of
Directors' meetings and committees thereof and via reports and
other information provided to him in connection therewith. Based
on inside information, defendant Colella sold 36,833 shares of his
Vivus stock during the Class Period for proceeds of $1,092,570.
(h) Defendant Peter Barton Hutt ("Hutt") was a director
of the Company during the Class Period. Because of defendant
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Hutt's position with the Company, he knew the adverse non-public
information about Vivus' business, finances, products, markets, and
present and future business prospects via access to internal
corporate documents (including the Company's operating plans,
budgets and forecasts and reports of actual operations compared
thereto) conversations and connections with other corporate
officers and employees, attendance at Board of Directors' meetings
and committees thereof and via reports and other information
provided to him in connection therewith. Based on inside
information, defendant Hutt sold 10,000 shares of his Vivus stock
during the Class Period for proceeds of $294,400.
(i) Defendant Richard L. Casey ("Casey") was a director
of the Company during the Class Period. Because of defendant
Casey's position with the Company, he knew the adverse non-public
information about Vivus' business, finances, products, markets, and
present and future business prospects via access to internal
corporate documents (including the Company's operating plans,
budgets and forecasts and reports of actual operations compared
thereto), conversations and connections with other corporate
officers and employees, attendance at Board of Directors' meetings
and committees thereof and via reports and other information
provided to him in connection therewith. Based on inside
information, defendant Casey sold 10,000 shares of his Vivus stock
during the Class Period for proceeds of $297,500.
(j) The individuals named as defendants in ¶14(a)-(i)
are referred to herein as the "Individual Defendants."
15. The true names and capacitates of defendants sued herein
under California Code of Civil Procedure §474 as Does 1 through 25,
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inclusive, are presently not known to plaintiffs, who therefore sue
these defendants by such fictitious names. Plaintiffs will seek to
amend this Complaint and include these Doe defendants' true names
and capacities when they are ascertained. Each of the fictitiously
named defendants is responsible in some manner for the conduct
alleged herein and for the injuries suffered by the Class.
16. Defendants Place and Wilson by reason of their positions
as Chairman of the Board and President/CEO, respectively, were
controlling persons of Vivus and had the power and influence, and
exercised the same, to cause Vivus to engage in the wrongful
conduct complained of herein. Vivus, in turn, controlled each of
the Individual Defendants.
17. Each of the defendants is liable for making false and
misleading statements, and for willfully participating in a scheme
or conspiracy and/or aiding and abetting the violations of
California law that damaged Class members. All of the defendants
pursued a common goal, i.e., inflating the price of Vivus stock by
making false and misleading statements and concealing material
adverse information. The conspiracy was designed to and did: (i)
deceive the investing public, including plaintiffs and the other
members of the Class, (ii) artificially inflate the price of Vivus
stock during the Class Period; (iii) cause plaintiffs and the other
members of the Class to purchase Vivus stock at inflated prices;
and (iv) increase the value of defendants' Vivus shareholdings and
permit them to sell off their holdings at artificially inflated
levels to profit from the scheme.
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AIDING, ABETTING, CONSPIRACY
AND WILLFUL PARTICIPATION
18. Each of the defendants is liable for negligently,
recklessly or intentionally making false and misleading statements,
and/or willfully participating in a scheme or conspiracy, and/or
aiding and abetting the violations of California law that damaged
Class members by making false and misleading statements for the
purpose of selling their own shares of Vivus stock, as well as
selling Vivus securities at prices artificially inflated by their
false and misleading statements. In committing the wrongful acts
alleged, the defendants acted willfully and pursued a scheme and
conspiracy designed to inflate the price of Vivus stock and deceive
the investing public regarding Vivus's results of operation, the
status and success of Vivus' MUSE drug, and Vivus's future revenue
and EPS prospects.
MOTIVE AND OPPORTUNITY
19. Each defendant had the opportunity to commit and
participate in the violations of law described herein. The
Individual Defendants were the top officers and directors of Vivus
and they controlled its press releases, corporate reports, SEC
filings and its communications with analysts. Thus, the defendants
controlled the dissemination of, and could falsify, the information
about Vivus' business, products, financial results and future
prospects that reached the public and impacted the price of Vivus'
stock.
20. Each of the Individual Defendants also had the motive to
commit and participate in the violations of law described herein.
During the past couple of years, Vivus' stock traded at a price/
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earnings multiple reserved for premier growth companies with track
records of meeting the investment community's expectations for high
profit growth. This stock performance enabled the Individual
Defendants to exercise stock options and to sell stock at large
profits. The executives wanted to maintain their positions with
Vivus which would have been threatened had the truth come out about
the decrease in demand and the diminished future revenue stream the
Company would derive from the sales of MUSE. For all these
reasons, maintaining Vivus' image as a company poised for strong
future growth as a result of the purported wide acceptance of MUSE
and the expanding market for it was extremely important to Vivus'
top executives.
21. The Individual Defendants were intimately familiar with
Vivus' business and the industry in which it operated and thus knew
the nature and extent of the problems that were afflicting Vivus'
business by the spring of 1997, and what they portended for the
future of Vivus' business. Defendants wanted to and did make it
appear that Vivus' MUSE was a superior product which would produce
significant future revenues without any real threat from competing
products or procedures and that, as a result, the Company was
succeeding and could achieve sustained revenue and profit growth.
Defendants engaged in their wrongful conduct so that Vivus' stock
price would trade at artificially inflated levels, enabling them to
sell large amounts of their Vivus stock at artificially inflated
prices, pocketing large sums for themselves before the truth about
the decline in Vivus' business became known.
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VIVUS' AND ITS INSIDERS' ACTUAL
KNOWLEDGE OR RECKLESS DISREGARD OF
THE UNDISCLOSED ADVERSE
CONDITIONS IMPACTING VIVUS' BUSINESS
22. As part of Vivus' corporate planning and management
process, it prepares a corporate business plan and budget for each
fiscal year, typically referred to as the Fiscal Year Corporate
Plan/Budget. The Fiscal Year Corporate Plan/Budget ("Plan/Budget")
for a given fiscal year is prepared and revised during the last
half of the preceding fiscal year and approved near the end of that
year. Thus, work began on Vivus' 1997 Plan/Budget in the last half
of 1996, and the 1997 Plan/Budget was completed by top management
for Board review and approval by October or November of 1996.
Vivus' Plan/Budgets were very detailed presentations of the
corporation's operations and included forecasted revenues,
expenses, net income and EPS for the fiscal year on an overall
corporate basis. In addition, Vivus' Plan/Budget also included
detailed forecasted revenue for MUSE, which was based on internal
studies of acceptance and use by patients and ongoing demand.
Vivus' Plan/Budget presented these forecasted or budgeted results
on a monthly, quarterly and annual basis and contained narrative
explanations as to the plan's key assumptions and how management
proposed to achieve those results. Each Individual Defendant was
aware of and received copies of Vivus' 1997 Plan/Budget and each
played a significant role in preparing, revising and/or approving
the Plan/Budget.
23. In order to monitor Vivus' corporate performance
throughout the fiscal year, including the sales and future sales of
its main product, MUSE, Vivus' top managers received monthly
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financial reports prepared by its financial department, headed by
defendant Yntema as Chief Financial Officer, sales data report
from its sales department, and technical medical reports from its
medical department, as well as other written and oral reports from
members of management, including divisional managers. In order to
effectively manage its business and control its cash flow, Vivus'
management information system was capable of generating reports on
a daily basis showing orders received (by product), shipments (by
product), product development, as well as overall corporate
revenues, cash balances, receivables, etc. As a result of this
system, Vivus' top managers were aware of the corporation's
performance on a daily basis and thus were aware, virtually
immediately, of any significant problems with orders, demand for
MUSE or shipment delays.
24. In addition to this daily monitoring system, Vivus'
finance and sales departments generated monthly financial and sales
reports, respectively, providing detailed data with respect to
overall corporate revenue, net income, EPS, as well as sales of
MUSE -- all presented so as to compare performance for that month,
quarter and the year-to-date to the Plan/Budget. These financial
and sales reports included a so-called "Flash" report prepared
after the end of each month (and also throughout each month) and
distributed immediately to top management, which provided summary
product shipment, sales and income data. These monthly financial
reports also included a so-called "Monthly Financial
Statement/Package," which provided even more detailed information,
including graphic comparisons of actual performance to forecasted
performance and a narrative explanation of any material variance of
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actual results compared to forecasted or budgeted results, which
was completed within 10 days after the end of the month and
immediately provided to members of top management.
25. When Vivus encountered a slow down in orders, especially
from current users of MUSE, and became aware of the effect on sales
of competing products and new more efficient products, Vivus'
internal corporate procedures required that the sales and finance
managers immediately advise top management of these problems via
oral and written reports. Such reports were issued and included
the following: (1) notification to top management of the impact on
volume shipments and revenues; (2) production of MUSE based or
demand and future demand (or lack thereof) for the product; and (3)
request for action to be taken given the decline in the demand for
MUSE.
26. Because Vivus had only one product, MUSE, the Company's
top executives monitored the demand for and success of that product
on a weekly basis, as well as the status of competitive products.
Thus, when it was discovered that there was a slow down in demand
as a result of patients not purchasing new doses in late 1996 and
early 1997, the Individual Defendants were immediately advised of
the situation by the sales and finance personnel. Vivus closely
monitored the amount of unsold products held by its distributors.
The Individual Defendants also closely monitored the production of
MUSE and were immediately apprised as soon as problems arose as to
volumes produced. Because of the problems which the Company began
to experience, it was readily apparent to defendants that the
earnings and future revenue growth they had predicted would not be
achieved and it was immediately a matter of major concern and
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discussion among Vivus' top corporate managers, including the
Individual Defendants.
27. Because of the foregoing, each of the Individual
Defendants was aware of Vivus' 1997 forecasts and budgets, the
internal reports detailing the distribution problems, and the
financial reports comparing Vivus' actual results to those budgeted
and/or forecasted. Based on the negative internal reports
specified earlier and reports of the Company's actual performance
compared to that budgeted and forecasted, the Individual Defendants
each knew Vivus' business was not performing as well as publicly
represented. Thus defendants each actually knew that the forward-
looking public statements issued during the Class Period about
Vivus were false and misleading when made and they actually knew or
recklessly disregarded that the non-forward-looking statements
issued during the Class Period about Vivus were false and
misleading when made.
BACKGROUND TO THE CLASS PERIOD
28. Vivus never recorded any revenue from its founding in
1991 through 1995, as it sought to develop a treatment for erectile
dysfunction. During this time the Company financed its operations
primarily through the sale of preferred and common stock. As its
development and deployment of MUSE got closer, its stock price
began to climb as well.
29. On March 28, 1996, the Company announced in a press
release that it had submitted a New Drug Application to the FDA for
the use of MUSE (alprostadil) in treating erectile dysfunction.
The press release noted that approximately 30% of men between the
ages of 40 and 70 in the U.S. suffer from moderate to complete
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impotence. According to the release the product's "potential world
market is estimated at 47 million men by the year 2000."
30. On May 6, 1996, the Company announced in a press release
the results of the Company's pivotal studies in erectile
dysfunction, which demonstrated beneficial effects on the quality
of life of patients and their partners with the use of MUSE.
31. On May 31, 1996, the Company announced that it expected
to receive $54.4 million in net proceeds from its common share
offering which it believed would be sufficient to support the
Company's operations through the introduction of its first product.
The Company also disclosed that it expected spending levels to
continue to increase during 1996 as it developed its commercial
manufacturing, marketing and sales capabilities.
32. In a press release dated July 18, 1996, the Company
announced its second quarter results (ended June 30, 1996) and that
it had entered into a distribution agreement with Alternate Site
Distributors, a subsidiary of Bergen Brunswig Corp., to provide
direct distribution, telemarketing and customer service efforts in
support of the U.S. marketing and sales effort. This agreement,
according to the Company, was a component of its marketing and
distribution strategy for the Company's primary product, MUSE.
33. On September 4, 1996, the Company announced European
findings which confirmed the safety, efficacy and quality-of-life
results seen in the trials the Company had conducted in the U.S.
The press release also stated that the Company had signed a major
marketing pact with Astra AB in May 1996 under which Astra would
market and sell MUSE throughout Europe as well as Australia, New
Zealand, South America and Central America. The company would
- 21 -
market MUSE in the U.S. by itself. In addition to up-front
payments and commitments for certain milestone payments, Vivus
retained all manufacturing and proprietary rights under the
agreement.
34. On October 7, 1996, the Company disclosed in a press
release that it had received an approval letter from the FDA for
the use of MUSE. The Company noted that it expected to begin
marketing the product in the U.S. following final FDA marketing
clearance, which was subject to standard final labeling
requirements and agreement that the Vivus manufacturing facility,
methods and controls complied with FDA requirements. The single-
use, prescription-only drug-and-applicator system was expected to
sell for about $20-$25.
35. On November 20, 1996, the Company announced that it had
received FDA clearance to market the MUSE urethral suppository for
the treatment of impotence. Defendant Wilson said that he
anticipated the Company would begin to ship its product in early
1997. According to the press release, approximately 30% of men
between the ages of 40 and 70 in the U.S. suffer from moderate to
complete erectile dysfunction. The world market for such sufferers
is expected to be 47 million men by the year 2000. The press
release cited authority that "MUSE is clearly a very effective,
desirable treatment choice," according to J. Francois Eid, M.D.,
professor of urology, Cornell University School of Medicine. "It
should be considered first-line therapy for all causes of erectile
dysfunction. MUSE offers men and their partners a convenient,
discreet treatment that can easily integrate into a patient's sex
life."
- 22 -
36. The Company's stock had climbed during this eighteen-
month period, rising from $15 per share in July 1995 to $38 a share
in October 1996.
37. On January 2, 1997, the Company issued a press release,
quoting an article in the New England Journal of Medicine ("NEJM")
that MUSE was "well-tolerated and effectively restored the capacity
for erection and sexual intercourse in a substantial proportion of
men with chronic erectile dysfunction." According to Harin Padma-
Nathan, M.D., assistant professor of urology at the University of
Southern California School of Medicine and the lead author of the
Vivus clinical study, "MUSE is a significant advancement in the
treatment of erectile dysfunction." The NEJM article reported the
results of the largest study ever published of men with impotence,
which were from the VIVUS-sponsored multi-centered study of MUSE.
The results were also reported in the Boston Globe.
38. On January 23, 1997, the Company announced that it had
signed an international marketing agreement with Janssen
Pharmaceutical International, a subsidiary of Johnson and Johnson.
Vivus would receive a $5 million payment as a result of the
execution of the agreement and additional payments would be made in
the event that certain milestones were reached.
39. On January 30, 1997, Vivus announced its 1996 year-end
and fourth quarter financial results, which included net losses for
the fourth quarter due to higher administrative expenses associated
with hiring additional sales and other personnel to support the
growth of the Company's operations, as well as higher marketing and
marketing research expenses. The Company noted:
- 23 -
"Initial product orders and reorders for MUSE in the U.S.
have been exceeding our expectations," said Leland F.
Wilson, president and chief executive officer. "Due to
this unexpected demand, we are experiencing a temporary
shortage of the 125-microgram dose, one of our four
dosage strengths. We have adjusted our manufacturing
schedule accordingly and we expect to meet the current
market demands for this dose within a few weeks. The
strong demand for MUSE further supports the belief that
erectile dysfunction is a significant health issue and
that MUSE offers a safe and effective treatment."
Wilson further commented, "In addition, earlier this
week we executed a five-year lease on a 40,000 square
foot building that will be built out to support expansion
of our manufacturing capabilities."
40. By February 19, 1997, Vivus stock price reached $40 per
share based on the perception that MUSE had achieved widespread
market acceptance.
41. However, in late February, Vivus' stock decreased after
doubts arose over the efficacy and future of MUSE. On February 24,
1997, Barron's published an article questioning the future
prospects of MUSE and the Company. The article quoted at length
Dr. Harin Padma-Nathan, the lead author of the MUSE study that
"helped inflame Vivus's shares when [his study] was published in
the New England Journal of Medicine" Dr. Padma-Nathan stated that
he was "watching this from afar with great amazement and some
confusion" because, while "investors seem convinced that Muse will
become the dominant therapy for impotence," he noted that only 5%-
10% of the patients at his Santa Monica practice area were opting
for it. "That's because he informs them Muse is less effective
than injection therapy and may even result in more pain." After
this article, more negative information emerged, including a
flattening in the number of prescriptions for MUSE, information
about an oral alternative offered by competitor Pfizer, and
- 24 -
disclosures that the FDA had found deficiencies in Vivus's
manufacture of MUSE. As a result, the stock began to drop and by
May 12, 1997, Vivus stock had closed below $16 for the first time
since 1996.
42. In order to artificially inflate the price of Vivus stock
to prior levels and reap the benefits of selling their stock at
inflated prices, the defendants made the false and misleading
statements alleged herein, falsely asserting that demand for MUSE
was strong and growing, that competitors' products would not
significantly impact the Company, that the FDA problems were
resolved and that Vivus' growth prospects were outstanding.
FALSE AND MISLEADING
STATEMENTS DURING THE CLASS PERIOD
43. On May 15, 1997, Vivus issued a press release announcing
that its Board of Directors approved a stock repurchase program to
purchase up to 1,000,000 shares of its common stock. Vivus sought
to show through this announcement that its shares, trading at $15-
$16, were undervalued. The press release quoted Wilson as stating:
"Vivus views our shares to be an undervalued investment
opportunity given the company's outstanding financial
performance and growth potential. The implementation of
a stock repurchase program reflects our continued
confidence in the company, our management team and our
long-term growth prospects."
44. Vivus also discussed the Company's prospects with
analysts in an effort to disseminate positive statements and
inflate the price of its stock. On May 22, 1997, PaineWebber
issued a report on Vivus, written by Charles Olsziewski, based on
conversations with Vivus management (Wilson and Yntema) in which it
reiterated its Buy rating on Vivus, forecasting EPS of $.60 and
$1.23 in 1997 and 1998, respectively. The report also stated:
- 25 -
While corporate gross margins (75.4% compared with our
70.4% estimate) were artificially boosted by the
aforementioned milestone payment, margins on net product
sales were much better than we were anticipating (71.0%
versus our 62.6% estimate). This can largely be
attributed to enhanced economies of scale resulting from
higher throughput.
* * *
Capacity. Market demand for the MUSE has continued
to be higher than the Company's current capacity.
Although Vivus has been able to increase its production
capability from 450,000 units per month at the beginning
of 1997 to 600-650,000 units by the end of the March
quarter, it: has become clear that significant additional
capacity is required. Aside from the company's plan to
increase current capacity 20% by June, it has leased and
initiated construction of an additional 90,000 square
feet of production space in the same business park where
its current manufacturing facility is presently located.
This much-needed production capacity should come on line
by the end of 1997. Vivus is also evaluating a number of
sites in Ireland for the future construction of a
European manufacturing facility, slated to begin
production by mid-1998.
* * *
International Markets. Although the initial demand
for the MUSE has been extremely robust, investors should
recall that the product is not yet available
internationally. . . .
Reimbursement. MUSE has received a very positive
reception from both PBMs (pharmacy benefit managers) and
managed care organizations in general. To date,
approximately 65% of the prescriptions written for the
MUSE have been reimbursed by third-party payors.
45. On June 12, 1997, PaineWebber issued another report on
Vivus written by Olsziewski, based on discussions with Vivus
management (Wilson and Yntema), reporting that Vivus had satisfied
the FDA with respect to deficiencies in its manufacture of MUSE.
The report also stated:
MUSE production has remained unaffected throughout
1997; resulting sales have been limited only by the
company's capacity constraints. On that front, we expect
Vivus to increase its current production capability from
600-650,000 units per month to at least 750,000 units by
- 26 -
the end of the June quarter. The company's new 90,000
square foot manufacturing facility is still scheduled to
come on line by the end of 1997.
46. On June 24, 1997, Vivus announced in a press release that
MUSE had been shown to restore erections and the capacity for
sexual intercourse in diabetic men regardless of the duration of
their diabetes.
47. On June 26, 1997, a story on Vivus appeared in the Select
Federal Filings Newswires repeating the Company's assertion that it
had resolved the FDA concerns over its manufacture of MUSE. The
article stated:
Recently, Vivus, did have some production
difficulties. The manufacturing facility in New Jersey
was inspected by the FDA in February and March and was
found to have several deficiencies. The company cut
production at the facility and diverted employees away
from production while the problems were corrected.
This slowdown resulted in some shortages of MUSE,
but the company believes it has corrected all of the
problems reported by the FDA and is awaiting an agency
reinspection of the facility.
48. On July 7, 1997, Vivus announced the resignation of
Samuel Colella as a director of Vivus. Within the next 24 days,
Colella disposed of 36,833 shares, 35% of his actual stock
holdings.
49. On July 9, 1997, Vivus announced in a press release net
income of $10 million or $0.28 per share for the second quarter,
ended June 30, 1997, on product sales of $33.5 million. Wilson was
quoted:
"The numbers reported today reflect the vitality of
the erectile dysfunction market and the fact that MUSE
and the concept of transurethral delivery have been well
accepted by erectile dysfunction specialists and
patients. In the six months since product launch, we
believe MUSE has become the number one product ranked by
sales in the erectile dysfunction market place. Within
- 27 -
this first six months, MUSE has also achieved rapid
formulary acceptance with approximately 67% of retail
prescriptions reimbursed through third party insurance
coverage."
50. After releasing its results, Vivus (Wilson and Yntema)
held a conference call with analysts in which it told them:
• Demand was strong and the Company had a growing backlog
despite operating at capacity.
• Competitive products would not hit the market until 1999,
at the earliest.
• The effectiveness of MUSE had actually increased since it
was introduced at the beginning of the year.
• The company was successfully adding capacity which would
lead to increased product sales in late 1997 and in 1998,
• Management was comfortable with 1997 and 1998 EPS of
$.77-$1.00 and $1.35-$1.42, respectively.
Analysts repeated this information to the marketplace where it
became part of the total mix of information affecting the price of
Vivus stock.
51. On July 10, 1997, Credit Suisse First Boston ("First
Boston") issued a report on Vivus based on statements made by the
defendants, written by Rebecca Yarchover, rating the Company a Buy
and stating:
Second quarter earnings of $0.28 blew-away our $0.17
estimate (Our estimate had included $0.04 for a milestone
payment that has been delayed until the third quarter).
The company outperformed in all areas; higher product
sales and lower expenses accounted for majority of the
difference from our estimate. Based on second quarter
results and continued near-term positives, we are raising
our estimates for 1997 and 1998 to $1.00 and $1.42 from
$0.90 and $1.22, respectively. In addition, we are
raising our price target to $35.
* * *
Management stated that it believes product efficacy
has been increasing over the past six months as much of
the improper usage, improper training and lack of
titration appears to be working its way out of the
- 28 -
system. Additionally, the company's flow constrictor,
affectionately known as Actis, appears to improve
effectiveness even further.
* * *
The additional 20% capacity we expected came to
fruition during the quarter, and we think the company is
running at approximately 750,000 units per month (650,000
units *1.2). The company hopes to squeeze additional
capacity increases out of the existing facility during
the remainder of the year. The new facility the company
is building should be on-line by the end of the fourth
quarter and will have four times more manufacturing lines
than the current facility. Additionally, the company
continues to examine sites in Ireland for an
international manufacturing facility.
52. On July 10, 1997, PaineWebber issued a report on Vivus
written by Olsziewski rating the Company a Buy and stating:
2. Based on these results and additional capacity that
came on line late in the June quarter, we have raised our
fully taxed 1997 and 1998 earnings estimates to $0.77
(from $0.60) and $1.35 (from $1.23) per share,
respectively.
* * *
Sales of the MUSE to date have been limited only by the
capacity constraints that Vivus has been facing. In late
June, the company increased its production capability
from 600-650,000 units per month to about 750,000 units
per month with the addition of a new filling machine. A
new 90,000 square foot production facility is still
slated to be up and running by the end of the year --
when fully implemented, it will augment the company's
current capacity by fourfold. Vivus is also continuing
to evaluate sites in Ireland for the future construction
of a European manufacturing facility.
53. On July 28, 1997, Vivus issued a press release announcing
the U.S. commercial launch of ACTIS(R) (Venous Flow Controller), a
new innovative treatment for erectile dysfunction, more commonly
known as impotence. ACTIS is a fully adjustable penile band which
is placed around the base of the penis to impede blood flow out of
the penis. ACTIS was cleared by the FDA in December of 1996.
- 29 -
54. On September 3, 1997, after speaking with Vivus
management, PaineWebber's Olsziewski issued a report on Vivus
rating the Company a Buy and stating:
COMPETITION. Most investors remain concerned about
new oral treatments for erectile dysfunction,
particularly Pfizer's* (PFE $57 7/8) Viagra (sildenafil).
While there has been much discussion to the contrary, the
company has yet to submit its NDA to the FDA, but we do
expect a filing some time in September (a couple of
months earlier than we originally anticipated). When, or
if, an oral medication becomes available, it would be
naove [sic] for us to assume that it would not become the
average individual's initial treatment of choice. The
availability of oral medications will, we believe, prompt
many more sufferers to come into the clinic to seek
treatment, particularly in light of the advertising
budget that Pfizer will allocate to Viagra. We do,
however believe that oral medications will not be
successful in all cases (probably most often in
psychogenic patients or those with mild organic
dysfunction), allowing a safe and effective treatment
such as the MUSE to assume a profitable niche within the
growing erectile dysfunction market. Investors should
recall that there [are] an estimated 50 million men with
erectile dysfunction worldwide. We are assuming that one
million of these men (only 2% of the total population)
will be using MUSE therapy by the year 2000.
55. On October 3, 1997, First Boston issued a report on Vivus
based on its conversations with management. The report stated:
Current U.S. sales are not indicative of demand.
According to management, wholesalers are without stock
and order backlog grows every month. Relief is in sight
with a new production facility slated to open in the
first quarter of 1998 which should increase manufacturing
to five times current levels.
56. On October 8, 1997, Vivus announced net income of $11.3
million or $0.31 per share for the third quarter ended
September 30, 1997, based on product sales of $39.1 million.
57. After releasing the Company's third quarter results,
management (Wilson and Yntema) spoke with analysts telling them
that:
- 30 -
• Within the next year or two Vivus would have new products
in addition to MUSE.
• Vivus would have additional capacity in the first quarter
of 1998.
• Vivus management was comfortable with 1997 and 1998 EPS
forecasts of $0.94-$1.20 and $1.65-$1.77, respectively.
• International approvals to market MUSE would offset the
impact of any oral introductions in 1998.
Analysts repeated this information to the market where it became
part of the total mix of information affecting the price of Vivus'
stock.
58. On October 9, 1997, PaineWebber issued a report written
by Olsziewski rating Vivus a Buy and estimating 1997 and 1998 EPS
of $0.94 and $1.65, respectively. The report also stated:
VIVUS is up 117% so far this year, while the S&P 500
is up 31.5%. We continue to believe that the MUSE is a
safe and effective therapy for the majority of the 50
million men worldwide that are afflicted with erectile
dysfunction. Moreover, we remain of the opinion that
there will be room for more than one therapeutic option
in this marketplace. Within the next 12-24 months, we
fully expect that Vivus will become more than a "one-
product company," using its cash-rich balance sheet and
stock to acquire additional products or technologies in
the urology arena. Our 12-month target price is now $50
(30x our new 1998 estimate and 25% above its recent
close), certainly justified given the tremendous growth
that the company is experiencing. We reaffirm our buy
(1) rating on these shares, recognizing that they are
best suited for aggressive accounts that can tolerate an
above average level of volatility.
59. On October 9, 1997, First Boston issued a report on Vivus
written by Kelly James rating the Company a Buy and forecasting
1997 and 1998 EPS of $1.20 and $1.72, respectively. The report
also stated:
With continued manufacturing gains near-term,
additional capacity and direct-to-consumer advertising
coming in 1Q 1998, the near-term prospects for MUSE
remain exceptional. With sales expanding incrementally
in this capacity-constrained environment, our revenue
- 31 -
forecasts are too conservative. We are raising our MUSE
sales forecasts to $144 million (versus $139 million) and
$252 million (versus $229 million) for 1997 and 1998,
respectively.
60. On October 13, 1997, First Boston issued an additional
report based on conversations with Vivus management which stated:
VIVUS shares have been weak today on concerns over
weekly prescription trends, down 14% in new prescriptions
and 11% in total prescriptions versus the preceding week.
While these trends are not positive, we are comfortable
with management's long standing view of the prescription
trends: Weekly numbers have not been reflective of the
sales of MUSE and MUSE receives significant sales from
channels that are not surveyed by IMS, namely the VA
hospitals and staff model HMOs.
In the third quarter, prescription trends were flat
while sales grew 17% sequentially, reflecting the
disconnect between reported results and the actual sales
of the product. VIVUS continues to operate at capacity
and sells all the product it can manufacture.
61. On December 1, 1997, PaineWebber issued a report authored
by Olsziewski, based on communications with Vivus' management
(Yntema and Wilson), which stated:
Vivus has received authorization from the Medicines
Control Agency (MCA) to market the MUSE in the United
Kingdom. Astra AB, the company's marketing partner in
Europe, Australia, New Zealand, and South and Central
America, will pay $2 million to Vivus now that final
approval has been granted. Based on the mutual
recognition procedure, we anticipate that the MUSE will
become available in most other European Union countries
by the second quarter of 1998. Recent news about the
original plant's return to FDA compliance should, we
believe, expedite the approval of the MUSE in some new
markets because this designation is required for
marketing clearance in certain Central and South American
countries, as well as the Far East. Validation studies
at the new manufacturing facility in Lakewood, New Jersey
are nearly complete and we continue to look for this new
capacity to come on line in early 1998. Our rating on
VVUS remains buy for aggressive accounts that can
tolerate an above average level of volatility. Our 12-
month target price stands at $50 (30 times our 1998
estimate), more than twice its current price.
- 32 -
62. As a result of defendants' false statements, the price of
Vivus' stock increased to $41-7/8 during the Class Period and the
defendants were able to sell 235,073 shares for proceeds of more
than $6.7 million, at prices as high as $36.08.
63. However, before the market opened on December 10, 1997,
Vivus stunned the market when it announced that it would not meet
its revenue goals for the fourth quarter because of efforts to
expand production capacity into its new 90,000-square foot plant,
stating:
The company said it expects about a 25% reduction in
fourth quarter product revenues from the third quarter as
it continues to be "capacity constrained" because of the
expansion and the suspension.
64. Also on December 10, 1997, Asensio & Company issued the
following release:
A study of 123 impotent men treated with Vivus' Muse
product at the Centre for Impotence and Fertility in
Rome, Italy found that Muse failed to make 121 of the
penises rigid. This test's endpoint was very different
than Vivus' 1996 study, which used an "Erection
Assessment Scale." The Italian study actually measured
the rigidity of each penis and concluded that the penises
were not hard.
In letters dated October 10, 1997 and October 17,
1997 Asensio & Company, Inc. advised Vivus, Inc.,
(Nasdaq: VVUS) that it had reviewed certain of IMS
America's Pharmaceutical Industry Research Data
pertaining to the sales of Vivus' Muse product. In
particular, Asensio & Company reviewed IMS' National
Prescription Audit ("NPA") data for new and refill Muse
prescriptions for the six (6) months period ended
September 30, 1997 and compared Vivus' reported sales for
the same period to the IMS prescription data. As a
result, Asensio & Company found that a very significant
portion of Vivus' Muse product sales were allegedly sold
through outlets not monitored by IMS' NPA service. NPA
is the recognized industry leader providing a complete
and precise view of the prescription marketplace.
Asensio & Company requested a description of the
customers not tracked by IMS' NPA audit or other
information that could explain the discrepancy. Vivus
failed to provide any of the requested information.
- 33 -
Asensio & Company believes Vivus' 25% sales drop is a
result of poor product performance and early nonrecurring
sales to undisclosed sources.
65. As a result of these announcements, the price of Vivus
stock dropped 40% on one day volume of 13.3 million, to $13-13/16,
later falling to $9-15/16.
66. Analysts immediately cut their earnings estimates for
1997 and 1998. First Boston decreased its 1997 and 1998 EPS
estimates from $1.20 to $1.05 and from $1.42 (First Boston's 1998
EPS had been $1.72, as recently as October) to $0.72, respectively.
67. In a conference call with analysts, the Company later
admitted that demand had "plateaued and may have even decreased a
little bit over the last, you know, several months," and that
production had dropped to 600,000 units in November versus 800,000
in prior months. The defendants failed to disclose the November
problems until December 10, 1997, even as the insiders sold an
additional 70,240 shares for $1.7 million during November 1997.
68. Each of the positive statements about Vivus' products and
business during the Class Period was materially false and
misleading when issued, and failed to disclose, inter alia, the
following adverse information which was then known only to
defendants due to their access to internal Vivus information:
(a) That defendants had no reasonable basis for a belief
that Vivus' sales of MUSE would continue to rapidly increase during
and after 1997 because defendants knew that users were not and
would not repeat their purchase of the product.
(b) That demand for MUSE had actually diminished since
early 1997 as users found MUSE much less effective than Vivus had
- 34 -
earlier represented it to be and new users awaited oral treatment
as a much more desirable alternative to MUSE;
(c) That Vivus was not capacity constrained but was
actually warehousing product with distributors including Cord
Logistics, ASD (a division of Bergen Brunswig Corporation) and
Janssen International, to overstate its revenues and conceal the
decrease in demand for MUSE, and as a result, Vivus' revenues in
the second and third quarters of 1997 were each overstated by at
least 15%, and net income was overstated by at least 30% (as
described in ¶¶74 to 78);
(d) That Vivus' gross margins were not representative of
the margins Vivus could expect to achieve on future sales due to
the exclusion of raw material costs purchased prior to November
1996 from the calculations;
(e) That Vivus would have to curtail its production in
late 1997 to move to its new facility and to do maintenance on its
old facility;
(f) That the IMF data which showed a flattening in
prescriptions was indeed meaningful as it reflected the flattening
of demand for MUSE since the beginning of 1997, and that the
additional demand for MUSE claimed by defendants was illusory;
(g) That future demand for MUSE would be constrained as
a result of the irregularities the FDA found during a post-approval
inspection; and
(h) That there was no reasonable basis for making
positive representations about Vivus' revenues and future growth,
as defendants knew that the market for repeat users was not as big
- 35 -
as represented and that once an oral pill was approved, the market
for MUSE would be greatly diminished.
FALSE FINANCIAL REPORTING
69. In order to overstate its revenues, gross profits, net
income and EPS during the Class Period, the defendants caused the
Company to violate generally accepted accounting principles
("GAAP") and SEC rules by improperly recognizing revenue on
shipments of product into what Vivus termed "alternate distribution
channels," which in fact were not bona fide sales due to
contingencies such as the right to return unsold product.
70. Vivus reported the following financial results for the
first three quarters of 1997:
Q1 Q2 Q3
-- -- --
Product Sales $27.8 M $33.5 M $39.1 M
Gross profit $24.7 M $23.9 M $27.8 M
Net Income $ 9.6 M $10.0 M $11.3 M
EPS $ 0.27 $ 0.28 $ 0.31
71. Vivus later included these results in Form 10-Q's filed
with the SEC. The Form 10-Q's, which were signed by Yntema and
Wilson, represented the following:
The accompanying unaudited condensed consolidated
financial statements have been prepared in accordance
with generally accepted accounting principles for interim
financial information and with the instructions to Form
10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes
required by generally accepted accounting principles for
complete financial statements. In the opinion of
management, all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair
presentation have been included.
72. This statement was false and misleading as to the
financial information reported in the Form 10-Q's during 1997, as
such financial information was not prepared in conformity with
GAAP, nor was the financial information "a fair presentation" of
- 36 -
the Company's operations due to the Company's improper revenue
recognition and inadequate disclosures relating to Vivus' gross
margins, in violation of GAAP and SEC rules.
73. GAAP are those principles recognized by the accounting
profession as the conventions, rules and procedures necessary to
define accepted accounting practice at a particular time.
Regulation S-X (17 C.F.R. §210.4-01(a)(1)) states that financial
statements filed with the SEC which are not prepared in compliance
with GAAP are presumed to be misleading and inaccurate.
Regulation S-X requires that interim financial statements must also
comply with GAAP, with the exception that interim financial
statements need not include disclosure which would be duplicative
of disclosures accompanying annual financial statements. 17 C.F.R.
§210.10-01(a).
Improper Revenue Recognition
74. Vivus engaged in improper revenue recognition to mask the
diminishing demand for its principal product (MUSE) by recognizing
revenue on shipments to distributors which were not bona fide sales
due to return privileges and other contingencies.
75. GAAP, as set forth in FASB Statement of Concepts
("Concepts") No. 5, states that revenue should not be recognized
until it has been both earned and is collectible. Concepts No. 5,
¶83 states in part:
(a) . . . Revenues and gains generally are not recognized
until realized or realizable . . . . Revenues and gains
are realizable when related assets received or held are
readily convertible to known amounts of cash or claims to
cash.
(b) . . . Revenues are not recognized until earned . . .
and revenues are considered to have been earned when the
- 37 -
entity has substantially accomplished what it must do to
be entitled to the benefits represented by the revenues.
(Footnote omitted.) GAAP, as set forth in FASB Statement of
Accounting Standard ("SFAS") No. 48, Revenue Recognition When Right
of Return Exists, prohibits the recognition of revenue when the
right of return exists unless certain conditions are met. SFAS No.
48 applies to transactions "in which a product may be returned,
whether as a matter of contract or as a matter of existing
practice." SFAS No. 48, ¶3. SFAS No. 48, ¶¶6-7 states:
6. If an enterprise sells its product but gives the
buyer the right to return the product, revenue from the
sales transaction shall be recognized at time of sale
only if all of the following conditions are met:
a. The seller's price to the buyer is
substantially fixed or determinable at the date of
sale.
b. The buyer has paid the seller, or the buyer is
obligated to pay the seller and the obligation is
not contingent on resale of the product.
* * *
7. If sales revenue is recognized because the
conditions of paragraph 6 are met, any costs or losses
that may be expected in connection with any returns shall
be accrued in accordance with FASB Statement No. 5,
Accounting for Contingencies. Sales revenue and cost of
sales reported in the income statement shall be reduced
to reflect estimated returns.
76. After the first six weeks of marketing MUSE, Vivus saw
prescriptions for the product level-off and even begin a slight
decline. Nevertheless, Vivus continued to post strong sequential
revenue gains by shipping product to as yet undisclosed outlets
which are not monitored by prescription data services. These
shipments to "alternate outlets" were not valid sales as the
shipments were accompanied by conditions, such as receiving
regulatory approval and resale of the products. These conditions
- 38 -
made the "sales" incomplete and not recognizable pursuant to GAAP.
As a result of Vivus' improper recognition of revenue it was able
to show growing revenues in the face of flat to down prescriptions.
The following charts illustrate this inconsistency:
- 39 -
77. Vivus has now announced that fourth quarter revenues will
be 25% lower than the third quarter, blaming the shortfall on
production problems, despite reporting increases in production
capabilities in July 1997. The true story is that the fourth
quarter results will be worse than anticipated due in large part to
Vivus' improper revenue recognition in prior quarters. In a
conference call with analysts after the December 10, 1997 press
release, Vivus' management admitted that distributors' inventory
had increased from 30 days in the September-October time frame to
45 days in December. This had occurred despite a reduction in
monthly production from 800,000 to 600,000 in November. The
increase in distributor inventory and decrease in production were
inconsistent with the Company's claims that it was capacity
constrained. In fact, distributor inventory increased because
Vivus was parking inventory at distributors in order to mask a
deterioration in demand for its product.
78. As a result of Vivus' improper revenue recognition, the
Company's revenues for the second and third quarters of 1997 were
each overstated by approximately 15%, and its net income for those
quarters was overstated by 30%.
Gross Margin Disclosures
79. Vivus also failed to comply with GAAP and SEC rules
requiring meaningful disclosures regarding the financial
information presented, with regard to the gross margins Vivus
reported during the Class Period.
80. SEC Regulation S-K, Item 303 (17 C.F.R. §229.303(a-b))
requires that issuers include a Management's Discussion and
Analysis section ("MD&A") as part of its Form 10-Q's, and that the
- 40 -
MD&A provides information about any significant elements of the
issuer's income from continuing operations which are not
necessarily representative of the issuer's ongoing business.
81. Contrary to this requirement, Vivus failed to inform
readers of its financial statements as to the extent that its
positive gross margins reported during 1997 were higher than they
would otherwise be due to the Company's practice during 1996 of
expensing raw material costs as incurred. These raw material costs
otherwise would have been included in costs of sales when Vivus
ultimately began to report product sales in 1997 (i.e., the costs
would have been included in inventory and charged as a cost of
goods sold when the product was sold). Contrary to Regulation S-K,
Vivus did not disclose the amount by which its gross margins
benefitted from its prior accounting practice, nor that this
artificial boost would cease once raw materials purchased (and
expensed) during 1996 were exhausted. The amount of raw materials
expensed pre-1997 was $10 million, or double Vivus' inventory
balance during the Class Period, and was clearly material to Vivus'
financial results.
82. Vivus' June 30, 1997 and September 30, 1997 Forms 10-Q
stated only the following with respect to gross margins:
Cost of goods sold were $9,584,000 and $17,650,000
in the three and six months ended June 30, 1997. Cost of
Goods Sold were zero for the same periods in 1996 as
there were no product sales.
The resulting product gross margin for the three and
six months ended June 30, 1997 was 71%.
Cost of goods sold were $11,270,000 and $28,920,000
in the three and nine months ended September 30, 1997.
Cost of Goods Sold were zero for the same periods in 1996
as there were no product sales.
- 41 -
The resulting product gross margin for the three and
nine months ended September 30, 1997 was 71%.
83. As opposed to describing the true reasons for its high
gross margin, Vivus' management represented to analysts that the
gross margin was higher than expected due to "economies of scale
resulting from higher throughput." This misleading statement in no
way informed the market as to the amount by which Vivus' gross
margins had received a temporary boost which would soon end.
84. Due to these accounting improprieties, the Company
presented its financial results and statements in a manner which
violated GAAP, including the following fundamental accounting
principles:
(a) The principle that interim financial reporting
should be based upon the same accounting principles and practices
used to prepare annual financial statements was violated (APB No.
28, ¶10);
(b) The principle that financial reporting should
provide information that is useful to present and potential
investors and creditors and other users in making rational
investment, credit and similar decisions was violated (FASB
Statement of Concepts No. 1, ¶34);
(c) The principle that financial reporting should
provide information about the economic resources of an enterprise,
the claims to those resources, and effects of transactions, events
and circumstances that change resources and claims to those
resources was violated (FASB Statement of Concepts No. 1, ¶40);
(d) The principle that financial reporting should
provide information about how management of an enterprise has
- 42 -
discharged its stewardship responsibility to owners (stockholders)
for the use of enterprise resources entrusted to it was violated.
To the extent that management offers securities of the enterprise
to the public, it voluntarily accepts wider responsibilities for
accountability to prospective investors and to the public in
general (FASB Statement of Concepts No. 1, ¶50);
(e) The principle that financial reporting should
provide information about an enterprise's financial performance
during a period was violated. Investors and creditors often use
information about the past to help in assessing the prospects of an
enterprise. Thus, although investment and credit decisions reflect
investors' expectations about future enterprise performance, those
expectations are commonly based at least partly on evaluations of
past enterprise performance (FASB Statement of Concepts No. 1,
¶42);
(f) The principle that financial reporting should be
reliable in that it represents what it purports to represent was
violated. That financial information should be reliable as well as
relevant is a notion that is central to accounting (FASB Statement
of Concepts No. 2, ¶¶58-59);
(g) The principle of completeness, which means that
nothing is left out of the information that may be necessary to
insure that it validly represents underlying events and conditions
was violated (FASB Statement of Concepts No. 2, ¶79); and
(h) The principle that conservatism be used as a prudent
reaction to uncertainty to try to ensure that uncertainties and
risks inherent in business situations are adequately considered was
violated. The best way to avoid injury to investors is to try to
- 43 -
ensure that what is reported represents what it purports to
represent (FASB Statement of Concepts No. 2, ¶¶95, 97).
85. Further, the undisclosed adverse information concealed by
defendants during the Class Period is the type of information
which, because of SEC regulations, regulations of the national
stock exchanges and customary business practice, is expected by
investors and securities analysts to be disclosed and is known by
corporate officials and their legal and financial advisors to be
the type of information which is expected to be and must be
disclosed.
DEFENDANTS' INSIDER SELLING
86. While Vivus' insiders were issuing false and misleading
statements about Vivus' business and finances, the defendants sold
235,073 shares of their Vivus stock for proceeds of about $6.7
million to profit from the artificial inflation in Vivus' stock
price their false statements had created. Notwithstanding their
access to non-public information as a result of their positions
with the Company, the Individual Defendants sold the following
amounts of Vivus shares at artificially inflated prices throughout
the Class Period while in possession of material, non-public
information:
PRICE PROCEEDS
DATE SHARES PER FROM
NAME SOLD SOLD SHARE SALE
---------------------------------------------------------------
Casey, Richard 7/15/97 10,000 $29.75 $297,500
------ --------
10,000 $297,500
------ --------
Colella, Samuel D. 7/16/97 5,000 $30.19 $150,950
7/31/97 10,000 $29.58 $295,800
7/31/97 20,833 $29.58 $616,240
7/31/97 1,000 $29.58 $ 29,580
------ --------
36,833 $1,092,570
------ ----------
Gangolli, Julian 10/13/97 5,000 $36.08 $180,400
11/10/97 340 $26.88 $ 9,139
11/20/97 10,000 $25.00 $250,000
11/21/97 500 $24.91 $ 12,455
- 44 -
11/21/97 9,500 $24.91 $236,645
11/21/97 3,900 $24.91 $ 97,149
11/21/97 6,000 $24.91 $149,460
11/21/97 15,000 $24.81 $372,150
------ --------
50,240 $1,307,398
------ ----------
Gesundheit, Neil 8/29/97 8,000 $26.75 $214,000
------ --------
8,000 $214,000
------ --------
Hutt, Peter Barton 7/14/97 10,000 $29.44 $294,400
------ --------
10,000 $294,400
------ --------
Place, Virgil A. 7/15/97 5,000 $29.26 $146,300
7/15/97 5,000 $30.06 $150,300
7/17/97 5,000 $30.63 $153,150
7/18/97 5,000 $29.44 $147,200
------ --------
20,000 $596,950
------ --------
Smith, William L. 11/20/97 10,000 $25.00 $250,000
------ --------
10,000 $250,000
------ --------
Wilson, Leland F. 7/14/97 18,500 $29.75 $550,375
7/15/97 6,000 $30.62 $183,720
7/16/97 5,500 $31.00 $170,500
------ --------
30,000 $904,595
------ --------
Yntema, David C. 7/16/97 30,000 $31.00 $930,000
10/13/97 15,000 $35.63 $534,450
11/21/97 15,000 $24.81 $372,150
------ --------
60,000 $1,836,600
------ ----------
235,073 $6,764,013
======= ==========
87. During the Class Period other top Vivus executives sold
many thousands of shares of their Vivus stock based on inside
information about the problems with Vivus' business.
FIRST CAUSE OF ACTION
Violation Of §§25400/25500 Of The
California Corporations Code
88. Plaintiffs incorporate ¶¶1-87.
89. Acting individually and pursuant to a common conspiracy
or aiding and abetting each other, defendants concealed and/or
misrepresented material adverse information and/or willfully
participated in the concealment and misrepresentation of such
information regarding Vivus in order to dump millions of dollars of
their own Vivus stock at inflated prices. Defendants' wrongdoing
included the making of, and/or willful participation in the making
of, untrue statements of material facts and the omission to state
- 45 -
material facts necessary in order to make the statements made, in
light of the circumstances under which they were made, not
misleading, and engaging in acts, practices and a wrongful course
of conduct in order to induce the purchase of Vivus stock by
plaintiffs and the members of the Class. Each of the false
statements alleged in ¶¶43-47, 49-50 and 53-57 was made for the
purpose of selling and/or offering to sell securities and was
prepared in and/or disseminated from Vivus' Menlo Park head-
quarters. The false oral statements made in ¶¶50 and 57 were made
in calls in California or in nationwide conference calls
originating from California.
90. Plaintiffs and the members of the Class have suffered
substantial damages because they paid artificially inflated prices
for Vivus stock. Plaintiffs and the members of the Class would not
have purchased Vivus stock at the prices they paid, or at all, if
they had been aware that the market price had been artificially and
falsely inflated by defendants' misleading statements and
concealment. At the time of the purchases of Vivus stock by
plaintiffs and the members of the Class, the fair market value of
said stock was substantially less than the prices paid by them.
91. By reason of the foregoing, defendants violated §25400 of
the Cal. Corp. Code, thereby entitling plaintiffs and the members
of the Class to recover damages pursuant to §25500.
SECOND CAUSE OF ACTION
Violation Of §§1709-1710 Of The
California Civil Code
92. Plaintiffs incorporate ¶¶1-87.
- 46 -
93. For the purpose of inducing public investors, including
plaintiffs and other members of the class, to purchase or otherwise
acquire Vivus stock, and with intent to deceive such investors, the
defendants engaged in a deceitful course of conduct and/or a
conspiracy to defraud as a part of which said defendants made,
participated in the making of, or aided and abetted the making of,
the misrepresentations of fact and concealed the true facts and
omitted to state material facts as set forth above. Said represen-
tations and statements were not true and defendants did not believe
them to be true. Said acts by defendants were fraudulent,
oppressive and malicious.
94. Plaintiffs and the Class members each relied on one or
more of the false statements alleged herein and were damaged
thereby.
THIRD CAUSE OF ACTION
Unlawful, Unfair or Fraudulent Business Practices
In Violation Of California Business & Professions
Code §§17200, Et Seq.; False Or Misleading
Advertising In Violation Of California Business
& Professions Code §§17500, Et Seq.
95. Plaintiffs incorporate ¶¶1-87.
96. California Business & Professions Code §17200 prohibits
acts of unfair competition, which include "any unlawful, unfair or
fraudulent business act or practice."
97. Defendants' misrepresentations and nondisclosures of
material facts during the Class Period are prohibited by California
Civil Code §§1572, 1709 and 1710, and California Penal Code §395 as
well as principles of common law. Accordingly, defendants have
violated Business & Professions Code §17200's proscription against
engaging in an unlawful business act or practice.
- 47 -
98. Defendants' misrepresentations and nondisclosures of
material facts and breaches of fiduciary duty by illegal insider
trading during the Class Period also constitute an unfair business
act or practice within the meaning of Business & Professions Code
§17200 because defendants were aware (or should have been aware) at
all relevant times, that the Company's operations, performance and
expected EPS were not as represented. No justification existed for
defendants' misrepresentations and failures to disclose material
facts.
99. Defendants' misrepresentations and nondisclosures of
material facts during the Class Period also constitute a fraudulent
business act or practice within the meaning of Business &
Professions Code §17200. Defendants' conduct had a tendency to
deceive the investing public because defendants misrepresented the
quality of the solicited investment and failed to disclose material
facts necessary to make their statements made not misleading.
100. Defendants' use of various forms of marketing to falsely
advertise, call attention to, or give publicity to the sale of
shares of Vivus common stock by, inter alia, untrue and/or
deceptive representations as to the nature and quality of the
investment and Vivus' business and business prospects constitutes
false or misleading advertising within the meaning of Business &
Professions Code §§17500, et seq., because defendants either knew
or reasonably should have known that such advertising was untrue
and/or misleading. Necessarily, defendants' violation of §§17500,
et seq. also constitutes a violation of Business & Professions Code
§§17200, et seq.
- 48 -
101. Accordingly, because defendants have committed unlawful,
unfair and/or fraudulent business acts or practices in violation of
Business & Professions Code §17200, and engaged in false and
misleading advertising in violation of Business & Professions Code
§§17500, et seq., plaintiffs, the members of the Class and the
general public are entitled to relief under §17203 and §17535 which
may include (1) orders or judgments enjoining defendants from
engaging in further unlawful, unfair or fraudulent acts or
practices, or (2) orders of disgorgement or restitution to prevent
defendants from retaining any money or property -- including
profits from illegal insider trading -- obtained by means of their
unlawful, unfair or fraudulent acts or practices. Plaintiffs
additionally request that such money or property be impounded by
this Court, or that an asset freeze or constructive trust be
imposed upon such revenues and profits, to avoid dissipation and/or
fraudulent transfers or concealment of such monies by defendants.
Plaintiffs, the members of the Class and the general public may be
irreparably harmed and/or denied an effective and complete remedy
if such an order is not granted.
CLASS ACTION ALLEGATIONS
102. Plaintiffs bring this action as a class action pursuant
to California Code of Civil Procedure §382 on behalf of all persons
who purchased or otherwise acquired Vivus stock (the "Class")
during the Class Period. Excluded from the Class are each of the
defendants, members of their families and any entity in which a
defendant has an interest.
103. The Class is composed of numerous residents of
California, as well as persons dispersed throughout the United
- 49 -
States, the joinder of whom in one action is impracticable. The
disposition of their claims in a class action will provide
substantial benefits to the parties and the Court. During the
Class Period, Vivus had more than 17 million shares of stock
outstanding, owned by thousands of shareholders.
104. There is a well-defined community of interest in the
questions of law and fact involved in this case. The questions of
law and fact common to the members of the Class, which predominate
over questions which may affect individual Class members, include
the following:
(a) Whether defendants misrepresented material facts;
(b) Whether defendants' statements omitted material
facts necessary to make the statements made, in light of the
circumstances under which they were made, not misleading;
(c) Whether defendants knew or should have known that
their statements were false and misleading;
(d) Whether defendants violated Cal. Corp. Code
§§25400 and 25500;
(e) Whether defendants violated Cal. Civ. Code §§1709-
1710;
(f) Whether defendants violated Cal. Bus. & Prof. Code
§§17200, et seq.;
(g) Whether the price of Vivus stock was artificially
inflated during the Class Period; and
(h) The extent of damage sustained by Class members
and the appropriate measure of damages.
- 50 -
105. Plaintiffs' claims are typical of those of the Class
because plaintiffs and the Class sustained damages from defendants'
common course of wrongful conduct.
106. Plaintiffs will adequately protect the interests of the
Class. They have retained counsel who are experienced in class
action securities litigation. Plaintiffs have no interests which
conflict with those of the Class.
107. A class action is superior to other available methods for
the fair and efficient adjudication of this controversy.
108. The prosecution of separate actions by individual Class
members would create a risk of inconsistent and varying
adjudications.
BASIS OF ALLEGATIONS
109. Plaintiffs have alleged the foregoing based upon the
investigation of their counsel, which included a review of Vivus'
SEC filings, securities analysts' reports and advisories about the
Company, press releases issued by the Company, media reports about
the Company and discussions with consultants, and believe that
substantial evidentiary support will exist for the allegations set
forth herein after a reasonable opportunity for discovery.
PRAYER FOR RELIEF
WHEREFORE, plaintiffs pray for judgment as follows:
1. Declaring this action to be a proper class action on
behalf of the Class defined herein;
2. Awarding plaintiffs and the members of the Class
compensatory and/or punitive damages;
- 51 -
3. Awarding plaintiffs and the members of the Class
prejudgment and post-judgment interest, as well as reasonable
attorneys' fees, expert witness fees and other costs;
4. Awarding extraordinary, equitable and/or injunctive
relief as permitted by law and/or equity; and
5. Awarding such other relief as this court may deem just
and proper.
JURY DEMAND
Plaintiffs demand a trial by jury.
DATED: February 17, 1998
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
WILLIAM S. LERACH
ALAN SCHULMAN
/s/
______________________________
WILLIAM S. LERACH
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
SPECTOR & ROSEMAN, P.C.
ROBERT M. ROSEMAN
2000 Market Street
12th Floor
Philadelphia, PA 19103
Telephone: 215/864-2400
SPECTOR & ROSEMAN, P.C.
ELLEN GUSIKOFF STEWART
600 West Broadway, Suite 1800
San Diego, CA 92101
Telephone: 619/231-1058
KAUFMAN, MALCHMAN, KIRBY
& SQUIRE, LLP
IRA M. PRESS
919 Third Avenue, l1th Floor
New York, NY 10022
Telephone: 212/371-6600
- 52 -
SCHIFFRIN CRAIG &
BARROWAY, LLP
RICHARD S. SCHIFFRIN
ANDREW L. BARROWAY
Three Bala Plaza East
Suite 400
Bala Cynwyd, PA 19004
Telephone: 610/667-7706
BERNSTEIN LIEBHARD & LIFSHITZ
MEL E. LIFSHITZ
274 Madison Avenue
New York, NY 10016
Telephone: 212/779-1414
LAW OFFICES OF LAWRENCE G.
SOICHER
LAWRENCE G. SOICHER
300 Park Avenue, 20th Floor
New York, NY 10022
Telephone: 212/980-7000
Attorneys for Plaintiffs
COMPLNTS\VIVUS.CPT
- 53 -