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Lazard Research Report on Ventrus BioSciences

Lazard Research Report on Ventrus BioSciences

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    Lazard research report ventrus Lazard research report ventrus Document Transcript

    • INITIATING COVERAGE July 25, 2011 VENTRUS BIOSCIENCES (VTUS) 22 RATING: BUY 20BIOPHARMA PRICE: $11.89 18 16 PRICE TARGET: $24 14WILLIAM TANNER, PHD MARKET CAP: $156.0 M 12212-632-1512william.tanner@lazardcap.com S&P 500: 1,345 10 8COLLEEN MACKEY DRG: 332 6212-632-6413colleen.mackey@lazardcap.com 4 Dec Feb Apr Jun SOURCE: FactSet VTUS: Emerging player in large GI markets — initiating coverage with a BUY rating and $24 PT Small cap BioPharma targeting large unmet medical needs — success would make Ventrus big player in the space. In our opinion, Ventrus is uniquely positioned to develop treatments for large unmet GI disorders that lack effective prescription treatments, as they have been relatively ignored by large BioPharma companies. VEN 309 (iferanserin for hemorrhoids) and VEN 307 (diltiazem for anal fissures) could be important new therapies with little competition. Market cap belies stage of development and proof of concept of lead drug candidates. A market cap of $156M stands in contrast to the proof of concept and late stages of clinical testing of the company’s lead assets, in our opinion. Savvy investors may wish to take advantage of the obscure genesis of Ventrus and the inefficient manner in which the market may have valued the company. Ventrus could address markets alone or become an acquisition candidate for GI-focused market player. The unmet medical need for effective treatments should position VEN 309 and VEN 307 as drugs of substantial potential. We believe the commercial markets are addressable by a focused sales force that leverages the unmet medical need and the search for effective alternatives. Valuation and risks. Our $24 PT for VTUS shares is derived from the NPV for VEN 309 and VEN 307. Risks include successful clinical development of lead assets, regulatory approval and commercial market penetration. DECEMBER YEAR 2010 2011E 2012E 1Q11A 2Q11 3Q11 4Q11 YEARRevenue (M) $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0EBITDA (M) NM NM NM NM NM NM NMEPS $(24.67) $(0.38) $(0.68) $(0.44) $(0.44) $(1.94) $(0.55)FCF/S NM NM NM NM NM NM NM CAPITALIZATION VALUATION 2010 2011E 2012EShares Outstanding (M) 13.1 P/E NM NM NMTotal Net Debt (M) NM Rel. to S&P 500 NM NM NMEnterprise Value (M) 106.1M EV/EBITDA NM NM NMTotal Debt / Capitalization NM FCF Multiple NM NM NMEffective May 10, 2005, Lazard Frères & Co. LLC (“LF&Co.”) transferred its capital markets business (which includesequity research, syndicate, sales and trading) to a new privately-held company, Lazard Capital Markets LLC, which isneither owned nor controlled by LF&Co. LF&Co., which is part of publicly-traded Lazard Ltd, has retained, amongother things, its investment banking business (including its mergers and acquisitions and financial restructuringpractices). Please see pages 22-23 for important disclosures and analyst certification.
    • KEY DRIVERS TO MONITOR TRADING / DIVIDEND DATA1) Data from Phase III trial of VEN 309 in Q1 2012 Range Since IPO on 12/17/10 $20-$62) Data from European Phase III trial of VEN 307 in 2Q12 Avg. Daily Trading Volume (000) 1253) VEN 307 NDA filing in 2013 Dividend / Yield $0.00 / 0.0% KEY RISKS TO MONITOR BENCHMARKS1) Successful completion of VEN 309 Phase III trial ROIC NM2) Successful completion of E.U. VEN 307 Phase III trial Book Value P/S * NM3) Uptake of Rectiv as a treatment for anal fissures (approved Price/Book * NM6/21/11) Free Cash Flow Yield * NM Projected 3-year EPS Growth Rate -3% Institutional Ownership 10% * Last actual quarterFOREC AST PERCENT CH ANGE (Y/Y) DECEMBER YEAR 2010 2011E 2012E 1Q11A 2Q11 3Q11 4Q11 YEARRevenue NM NM NM NM NM NM NMEBITDA NM NM NM NM NM NM NMEPS NM NM NM NM NM NM NMFCF/S NM NM NM NM NM NM NM COMPANY DESCRIPTION Ventrus is a specialty BioPharma company developing therapeutics to treat gastrointestinal disorders for which available treatments are relatively ineffective. VEN 309 (iferanserin) is a 5HT-2a receptor agonist for treating hemorrhoids. By modulating vasomotion, the drug could be effective for reducing swelling caused by blood vessel engorgement that is characteristic of hemorrhoids. If approved, VEN 309 would be the only prescription treatment indicated for the condition and should fare well, in our opinion, as an alternative to topical creams. Proof of concept has been demonstrated in numerous Phase II trials, and commencement of Phase III testing is expected to commence in 2H11. VEN 307 is a cream preparation of the calcium channel blocker diltiazem (originally approved as Cardizem for treating hypertension) and is being developed for treating anal fissures. Diltiazem is currently being used by some physicians (obtained from compounding pharmacies), so its effectiveness would appear to have been established in real-world settings. Availability of a prescription formulation would likely be more attractive to physicians unwilling to search for or rely upon drug obtained from compounding pharmacies. The focused nature of the markets could allow Ventrus to commercialize the products without the need for a commercial partner. 2
    • INVESTMENT THESISVentrus is a specialty BioPharma company developing therapeutics to treatgastrointestinal disorders for which available treatments are relatively ineffective.VEN 309 (iferanserin) is a 5HT-2a receptor antagonist for treating hemorrhoids.By modulating vasomotion, the drug could be effective for reducing swellingcaused by blood vessel engorgement that is characteristic of hemorrhoids. Ifapproved, VEN 309 would be the only prescription treatment indicated for thatcondition and should fare well, in our opinion, as an alternative to topical creamsand off-label treatments. Proof of concept has been demonstrated in numerousPhase II trials, and commencement of Phase III testing is expected in 2H11. VEN307 is a cream preparation of the calcium channel blocker diltiazem (originallyapproved as Cardizem for treating hypertension) and is being developed fortreating anal fissures. Diltiazem is currently used by some physicians (obtainedfrom compounding pharmacies), so its effectiveness would appear to have beenestablished in a real-world setting. Availability of a prescription formulationwould likely be more attractive to physicians unwilling to search for or rely upondrug obtained from compounding pharmacies. The focused nature of the marketscould allow Ventrus to commercialize the products without the need for acommercial partner.REASONS TO BUYValuation is compelling. As discussed in a subsequent section of this report, weestimate the fair value of VTUS shares at $24, so we view the stock as beingsignificantly undervalued at the current price. By our analysis, either the marketviews successful development of VEN 309 and/or 307 as of low probability orour revenue estimates are too aggressive.Meaningful catalysts lie ahead. Results from the Phase III trial of VEN 309 fortreating hemorrhoids could become available in 1Q12. Results from a Phase IIItrial of VEN 307 being conducted in the E.U. in patients with anal fissures shouldbecome available shortly thereafter.Ventrus could develop the first FDA-approved prescription medication fortreating hemorrhoids. In the U.S., an estimated 4M prescriptions are writteneach year for medications that are not approved as a treatment for the condition.An estimated 22M units of over-the-counter (OTC) products are sold each yearfor treating hemorrhoids as well. Most current treatments provide only temporarysymptom relief and do not address the underlying disease pathology. Patientswith persistent symptoms may progress to rubber band ligation, an invasiveprocedure that involves banding the internal hemorrhoid for 4-7 days.Product portfolio offers attractive blend of development and regulatoryrisks. Our expert physician channel checks suggest that successful developmentof VEN 309 is not without challenges given that a well-defined path to developtreatments for the condition does not exist. Obviously, given the number ofprescriptions and OTC units dispensed each year, the demand for an effectivetreatment could be robust. VEN 307, by contrast, may be easier to develop giventhat abundant proof of concept exists in the real-world setting by virtue of the use Ventrus Biosciences (VTUS) 3
    • of compounded diltiazem. Our checks reveal that availability of prescriptiondiltiazem, FDA approved and marketed by a biopharma company, might still bean attractive alternative in the face of more inexpensive compounded material.Ventrus could be a natural acquisition candidate. We believe Ventrus couldbe an attractive target for companies with business operations that focus ongastrointestinal disorders or others that may be seeking to enter those markets.RISKSDevelopment risks. As with practically any development-stage biopharmacompany, the primary risk associated with investing in VTUS shares relates todevelopment and commercial activities. VEN 309 may blaze a trail with the FDAas to how hemorrhoid treatments should be developed. The company attemptedto negotiate a Special Protocol Assessment (SPA) with the FDA but believed thatreaching an agreement would unnecessarily delay pivotal clinical testing. Wenote that SPAs are by no means a binding contract with the Agency. We suspectthe company will, nevertheless, design the study to assess appropriate endpointsthat assess the drug’s safety and effectiveness.Regulatory risks. VEN 309 has not been approved by the FDA, so there is anobvious, albeit generic, risk that the Agency might not approve the drug. We seeless risk with VEN 307 given that the drug is essentially repurposed diltiazem.Because the anal fissure indication will likely encompass a much smaller patientpopulation than the original hypertension one, we doubt the FDA will havesignificant issues with approval.Competition from Rectiv. Rectiv (nitroglycerin ointment) was approved onJune 21, 2011, as the first prescription drug for the treatment of pain associatedwith chronic anal fissures. Consultants do not view it as a suitable alternativegiven the side effects, especially when there exists substantial variability in bloodflow at the site of application, as would likely be the case with anal fissures.Need for additional capital. We forecast Ventrus becoming profitable in 2015,and our model contemplates a raise of $50M in 2013. Inability to raise capitalcould negatively impact the commercial launch of the products.FINANCIAL MODEL AND VALUATIONProbability-weighted NPV analysis yields a fair value of $24 per share. Weview the fair value of VTUS shares as being driven mainly by the successfulcompletion of Phase III testing and commercialization of VEN 309 for treatinghemorrhoids and VEN 307 for treating anal fissures. We have not included anycontribution from VEN 308 (phenylephrine gel for fecal intolerance) in ourfinancial model as the company is not actively developing it at this time. Basedon our revenue models, the value attributed to each drug is shown in the NPVanalysis in Exhibit 1. When additional proof of concept is provided, we wouldlikely be inclined to increase the probability of technical success (pTS) and thatwould have the effect of increasing the value of each asset. For example, at a pTS Ventrus Biosciences (VTUS) 4
    • of 100%, the fair value per share would be $24 for VEN 309 and $23 for VEN307. Exhibit 1. VTUS share valuation VTUS NPV Valuation NPV pTS Adjusted NPV Fair Value/Share VEN 309 $314 50% $157 $12 VEN 307 $305 50% $153 $12 Shares (M), 2011E 13.1 Fair Value $24 Source: LCM research; pTS = probability of Technical SuccessThe market model for VEN 309 is depicted in Exhibit 13 at the end of this report.In brief, we use a prevalence of approximately 12.5M persons with hemorrhoidsin the U.S. and approximately 28M in the E.U. We assume the monthly cost to beapproximately $150 at launch with 4% annual price increases going forward.Our financial model assumes that Ventrus sells VEN 309 in the U.S. and receivesroyalties of 25% of gross sales from a partner in the E.U. We project that Ventruswill pay royalties of 3.5% and 1.2% to Amer in the U.S. and E.U., respectively.Projections assume FDA approval in 2014, with sales commencing in 2015.Penetration of the hemorrhoid market grows from 1% after launch to a peak of20% in the U.S. and 15% in the E.U. Each 5% market share translates intoapproximately $250M in sales.Based on the proof of concept data, we believe the probability that VEN 309 iseffective for treating hemorrhoids is relatively high. However, given that theprogram is not without development risk, we applied a discount rate of 25% anda probability of technical success (pTS) of 50% to the NPV estimate to arrive atour per share estimate of $24.Exhibit 2 provides details of our modeled future payments to Amer for VEN 309. Ventrus Biosciences (VTUS) 5
    • Exhibit 2. VEN 309 Modeled Payments to AmerSource: LCM Research The market model for VEN 307 is depicted in Exhibit 14 at the end of this report. We model Ventrus selling VEN 307 in the U.S. and paying royalties of 8% to S.L.A. Pharma. Projections assume FDA approval in 2014, with sales commencing in 2015. Penetration of the anal fissure market grows from 1% after launch to a peak of 20%. Each 5% market share translates into approximately $240M in sales. Exhibit 3 provides details of our modeled future payments to S.L.A. Pharma for VEN 307.Exhibit 3. VEN 307 Modeled Payments to S.L.A. PharmaSource: LCM Research Given that VEN 309 could address large markets and encounter little in the way of meaningful competition, we believe it may be most helpful to conduct sensitivity analyses around major variables such as pTS, pricing and market penetration. In that way, investors can better assess the reasonableness of the assumptions and the impact of deviation from them. Exhibit 4 depicts a sensitivity analysis varying pTS for both assets and the discount rate. As noted in Exhibit 1, we applied a pTS of 50% for both VEN 309 and VEN 307. Ventrus Biosciences (VTUS) 6
    • Exhibit 4. VTUS Discount Rate / pTS Sensitivity VTUS Disc. Rate/pTS Sensitivity Discount Rate $ 23.6 15% 20% 25% 30% 35% 30.0% $ 26.8 $ 19.4 $ 14.2 $ 10.5 $ 7.8 40.0% $ 35.8 $ 25.8 $ 18.9 $ 14.0 $ 10.4 pTS 50.0% $ 44.7 $ 32.3 $ 23.6 $ 17.5 $ 13.0 60.0% $ 53.6 $ 38.7 $ 28.3 $ 20.9 $ 15.6 70.0% $ 62.6 $ 45.2 $ 33.0 $ 24.4 $ 18.2Source: LCM ResearchWe also wanted to examine the impact of pricing and market penetration on theNPV of the assets. Exhibit 5 depicts sensitivity analyses varying monthly costand peak market penetration. As depicted in the VEN 309 market model inExhibit 13, we assume a cost of treatment of $150/month and peak marketpenetration of 20%. Our revenue model has been set up such that marketpenetration for years preceding peak penetration are derived by subtracting setbasis points of market share from the preceding year, specifically (workingbackward from peak), 450bps, 450bps, 500bps, 250bps and 200bps.Exhibit 5. VEN 309 Price (monthly)/Penetration SensitivitiesSource: LCM ResearchExhibit 6 depicts a similar analysis for VEN 307 for the U.S. market only.Exhibit 6. VEN 307 Price (monthly)/Penetration SensitivitySource: LCM Research Ventrus Biosciences (VTUS) 7
    • VEN 309 — NOVEL APPLICATION OF A CNS DRUGIferanserin is a new chemical entity (NCE) that has been formulated as anointment for intra-anal application to treat hemorrhoids. The pharmacophore is ahighly selective, 5HT-2a receptor antagonist that was initially developed byscientists at a major pharmaceutical company for treating various disorders of thecentral nervous system (CNS). Beset by poor penetration of the blood-brainbarrier, development of the drug was directed toward use as a treatment ofvascular diseases.Peripheral 5-HT2a receptors are believed to be involved in blood clotting and inthe contraction of arteries and veins, two events that are likely associated with theformation of hemorrhoids. By reducing 5-HT2a receptor activity, it would bepredicted that VEN 309 might improve blood flow from the dilated veins thatcomprise the hemorrhoid, thereby reducing bleeding, itchiness and pain.On June 5, 2011, Ventrus entered into an Asset Purchase Agreement with SamAmer & Co., Inc. to acquire all rights, title and interest to VEN 309 for thetopical treatment of symptomatic hemorrhoids.HEMORRHOIDS ARE SWOLLEN VEINS IN THE RECTUM OR ANUSHemorrhoids are described as swollen/inflamed veins in the rectum and anus, andthey often arise as a result of straining during defecation and heavy lifting.Occurrence of hemorrhoids during pregnancy is also not uncommon. It has beenestimated that, by age 50, approximately half of adults have experiencedsymptoms of hemorrhoids.Physiologically, progressive occlusion of venous return vessels is believed toinduce stretching of the vessels that can lead to vascular stasis. Ultimately,hemorrhoids can become swollen and inflamed and trapped blood leads to theformation of piles (protruding skin folds that are filled with static andthrombosed blood). Typical patient symptoms include bleeding, pain, itching,swelling and difficulty defecating. Exhibit 7 depicts an illustration ofhemorrhoids. Ventrus Biosciences (VTUS) 8
    • Exhibit 7. Internal and External HemorrhoidsSource: LCM ResearchAccording to data from the National Institute of Diabetes and Digestive KidneyDiseases, there are approximately 12.5M adults in the U.S. affected byhemorrhoids. The significant size of the patient population notwithstanding, thereare currently no FDA-approved prescription drugs for treating the condition. As aconsequence, patients commonly resort to use of over-the-counter (OTC)treatments, with the majority of them providing only temporary relief from thesymptoms and not addressing the underlying disease pathology, i.e., the vasculardysfunction. Alternatively, prescription drugs (e.g., corticosteroids) are oftenused in an off-label manner.If those interventions do not provide adequate relief, ultimately surgicalprocedures may be resorted to. External hemorrhoids can sometimes be dealtwith by a simple incision providing relief by draining pooled blood. Moreinvasive procedures can involve rubber band ligation that essentially chokes offthe blood supply at the base of the structure. Sclerotherapy (sometimes used fortreating varicose veins) involves injection of a chemical solution such as sodiumtetradecyl sulfate into the hemorrhoid. Logic suggests that treatments that avoidthe need for more aggressive intervention might be met by a receptive market.PIVOTAL TESTING OF VEN 309 RESTS ON PREVIOUS WORKPhase III testing of VEN 309 is expected to begin in 2H11, and the trial has beendesigned to include approximately 600 patients in a double-blind, 3-arm design.Iferanserin (0.5%) ointment will be compared with placebo ointment in thefollowing cohorts: 1) placebo as needed for 14 days, 2) iferanserin as needed for14 days and 3) iferanserin as needed for 7 days followed by placebo as neededfor 7 days. Approximately 80 trial sites are expected to participate, and allpatients will be evaluated for follow-up at 28 days. All patients will roll over toactive treatment after 28 days with a 12 month follow-up to assess recurrence(open label).Inclusion criteria call for patients with symptomatic grade I to III internalhemorrhoids who have experienced bleeding and pain or itching for two Ventrus Biosciences (VTUS) 9
    • consecutive days prior to randomization. These grades encompass hemorrhoidsthat do not prolapse and those that prolapse upon defecation and spontaneouslyreduce or must be manually reduced. Grade IV internal hemorrhoids, or thosethat are prolapsed and cannot be manually reduced, will be excluded. Theprimary endpoint is no bleeding on days 7-14, which is during the second weekof treatment. A secondary endpoint will consider no pain or itching during thesame period of time.Questions have arisen as to why the trial was not designed to test VEN 309against an active comparator. As it relates to pharmacologic treatment, becausethere are no FDA-approved drugs with an indication for hemorrhoids, there is novalid prescription comparison. Versus an OTC product such as Preparation H(14% mineral oil, 71.9% petrolatum and 0.25% phenylephrine HCl), it could beargued that the placebo being used in Phase III testing is not all that different.According to the company, Phase IIb testing was conducted in Germany in 2003-2004, in a trial that included 121 patients randomized to receive iferanserin 0.5%(same as the Phase III dose) twice per day vs. placebo. Baseline and weekly visitswere conducted over the two week trial with follow-up at 45 days. A bleedingscale of 1-10, with 1 indicating the absence of the symptom and 10 indicating theworst symptom, was the primary endpoint, with itching and pain scales used assecondary endpoints. Exhibit 8 depicts the mean daily bleeding scores, andExhibits 9 and 10 depict the mean daily itching and pain scores, respectively.Exhibit 8. VEN 309 Phase IIb Mean Daily Bleeding Score (Germany)Source: Company Presentation Ventrus Biosciences (VTUS) 10
    • Exhibit 9. VEN 309 Phase IIb Mean Daily Itching Score (Germany)Source: Company PresentationExhibit 10.VEN 309 Phase IIb Mean Daily Pain Score (Germany)Source: Company PresentationThe company modeled the potential performance of the primary and secondaryendpoints that will be used in the Phase III trial using data from the GermanPhase IIb trial. The expected primary endpoint results based on this data areshown in Exhibit 11 below. Ventrus Biosciences (VTUS) 11
    • Exhibit 11. Analysis of German Phase IIb study for Phase III EndpointSource: Company Presentation.VEN 307 — A PRECRIPTION FORMULATION OF ACURRENTLY USED DRUGVEN 307 (diltiazem cream) is being developed as a topical treatment forrelief of pain associated with anal fissures. Anal fissures are small tears or cutsin the lining of the anus or anal canal that cause bleeding and pain that is oftensevere. Patients frequently resort to surgery for relief, although surgery itself canlead to unsatisfactory outcomes such as fecal incontinence. It is estimated thatthere are approximately 4M cases of anal fissures in the U.S. Verispan L.L.C., apharmaceutical market research firm, indicated that this population made about1M office visits in the U.S. in 2003. Ventrus Biosciences (VTUS) 12
    • Exhibit 12. Anal FissuresSource: VTUS Investor PresentationVEN 307 is a pre-mixed and pre-packaged proprietary formulation of diltiazemthat is applied topically. It yields less than one-tenth the amount of diltiazem inthe blood from the lowest oral dose used for cardiovascular treatment, and yethas a considerably greater effect on sphincter tone than diltiazem when takenorally. Gastroenterologists’ existing familiarity with the use of diltiazem mayallow for accelerated market penetration if the drug is approved. Ventrus licensedthe exclusive North American rights to VEN 307 for the topical treatment of analfissures from S.L.A. Pharma, which completed early-stage clinical trials,toxicology studies and manufacturing up to the end of Phase II.S.L.A. Pharma commenced a Phase III clinical trial in the E.U. in November2010 that is expected to be completed in the second quarter of 2012. Thecompany intends to develop the topical formulation as a Section 505(b)(2) NDAfiling due to previous approval of diltiazem as a systemic agent for hypertensionand angina. This, in combination with the Phase III trial being conducted byS.L.A. Pharma and the planned Phase III U.S. trial, will form the basis of theNDA application. If the U.S. trial is successful, the company intends to conductthree short-term dermal toxicology studies and file an IND with the FDA for onepivotal Phase III trial or two parallel pivotal Phase III trials. Depending on theresults of those trials, an NDA filing could be expected in 2013.In June 2011, the FDA approved Rectiv, a nitroglycerin ointment, as the firstprescription product to treat anal fissures. However, a significant number ofpatients experience headaches as a side effect of nitroglycerin. As mentionedpreviously, consultants do not view nitroglycerin as a suitable alternative giventhe side effects, especially when there exists substantial variability in blood flowat the site of application, as would likely be the case with anal fissures. Ventrus Biosciences (VTUS) 13
    • VEN 308 FOR TREATING FECAL INCONTINENCEVentrus licensed the exclusive North American rights to VEN 308 from S.L.A.Pharma, which developed the specific formulation of phenylephrine for thetopical use of fecal incontinence and developed the manufacturing method.The company held a pre-IND meeting with the FDA in June 2007 concerningVEN 308 for the treatment of fecal incontinence associated with ileal pouch analanastomosis. It was determined that the next clinical study should be a Phase IIbtrial with multiple doses assessed and that existing toxicology data are sufficientto support the trial.At this time, the company is focusing on continuing development of VEN 307and 309 and is not pursuing development of VEN 308.COMMERCIALIZATION POTENTIALWe believe the commercial markets are addressable by a focused sales force ofapproximately 100 sales representatives. Gastroenterologists, colorectal surgeonsand general practitioners would be the obvious prescribers for both VEN 307 and309. A public relations effort, followed by direct-to-consumer marketing, wouldpresumably be required in order to achieve our sales estimates. Given the size ofthe market and the extent of the unmet medical need (particularly forhemorrhoids) if effective, we suspect the ability to persuade physicians andpatients to try the drug would not require an aggressive marketing campaign thatrequires a significant and prolonged investment.INTELLECTUAL PROPERTYVEN 309 is licensed from Sam Amer & Co., Inc. (Amer), which had developedthe drug through Phase II trials and up to readiness for Phase III trials in the U.S.and Europe. The license includes rights to all existing intellectual property andany further improvements on VEN 309 owned by Amer related to the use of theproduct for the topical treatment of anorectal disorders. VEN 309 is covered forcomposition of matter in patents that will expire in August 2015 in the U.S. andFebruary 2018 elsewhere. If approved, VEN 309 will receive five years of dataexclusivity in the U.S. as an NCE under Hatch-Waxman and 10 years from thedate of approval in Europe. Ventrus filed a new concentration range patent inAugust 2010 that, if issued, would grant patent protection until 2030 and preventsubstitutable generic competition.On June 5, 2011, Ventrus entered into an agreement to purchase all rights, titleand interest to VEN 309 from Amer. The transaction is expected to be completeby November 2011.Ventrus has licensed the exclusive North American rights to VEN 307 for thetopical treatment of anal fissures from S.L.A. Pharma, which completed early-stage clinical trials, toxicology studies and manufacturing for VEN 307 up to theend of Phase II. Ventrus is using its own resources to pursue development. VEN Ventrus Biosciences (VTUS) 14
    • 307 is covered by method of use in a patent that will expire in February 2018. Ifapproved, VEN 307 will receive three years of data exclusivity in the U.S. underHatch-Waxman.Ventrus has licensed the exclusive North American rights to VEN 308 fromS.L.A. Pharma, which developed the specific formulation of phenylephrine fortopical use in fecal incontinence and developed the manufacturing method.S.L.A. Pharma’s previous partner, Solvay, conducted pharmacokinetic studies.Ventrus does not expect to continue developing VEN 308 in the short term. VEN308 is covered by a patent that will expire in December 2017. If approved, VEN308 will receive seven years of data exclusivity in the U.S. under the OrphanDrug Act.FINANCING HISTORYVentrus was incorporated in October 2005 (as South Island Biosciences, Inc.)and began operations in April 2007.In October 2005, Ventrus issued a promissory note payable to ParamountBioSciences, LLC (Paramount), an affiliate of one of the company’s significantstockholders. A second promissory note was issued in July 2007. In 2008, bothnotes were voluntarily converted into shares of common stock and warrants topurchase additional shares.In April and July 2008, the company issued two additional promissory notes.During 2007 and 2008, the company issued approximately $5.3M of seniorconvertible notes in connection with a private placement. During 2009, Ventrusissued four separate promissory notes to Paramount Credit Partners, LLC (whosemanaging member is the same as Paramount BioSciences). The total principalamount borrowed was approximately $1.6M. In February, April and May of2010, the company issued approximately $5.6M of senior convertible notes thatprovided funds to hire its management team and undertake an initial publicoffering.The company’s IPO was completed in December 2010 and raised approximately$17.5M in net proceeds, including the underwriters’ over-allotment. The 2007,2008, and 2010 convertible notes and 2008 promissory notes were converted intoshares at the close of the IPO. Retail investors were the primary participants ofthe equity offering.The company raised additional equity financing in a follow-on that priced in July2011. For all intents and purposes, the transaction could be viewed as a “re-IPO,”and institutional investors participated in the offering. Including the underwriters’over-allotment, Ventrus raised net proceeds of $47.5M and issued 5.175M sharesof common stock. The company intends to use the capital to pay for the rights toVEN 309, pay down the 2009 promissory notes to Paramount, continuedevelopment of VEN 309, fund working capital requirements and other generalcorporate purposes. Ventrus Biosciences (VTUS) 15
    • VENTRUS MANAGEMENTRussell H. Ellison, M.D., M.Sc.Dr. Ellison joined Ventrus as a director, Chief Executive Officer and ChiefMedical Officer in June 2010. He was elected Chairman of the Board in January2011. Dr. Ellison’s prior experience includes positions at Paramount BiosciencesLLC, a global pharmaceutical development and healthcare investment firm;Fibrogen, Inc., a privately held biotechnology company; Sanofi-Synthelabo,USA, a pharmaceutical company; Roche Laboratories, Inc., USA, apharmaceutical company; and CorMedix, Inc. (NYSE Amex: CRMD), apharmaceutical company that went public in March 2010. He currently serves asa director of several privately held development stage biotechnology companies.Dr. Ellison holds an M.D. from the University of British Columbia and an M.Sc.(with distinction) from The London School of Tropical Medicine and Hygiene.David J. BarrettMr. Barrett joined Ventrus as Chief Financial Officer in July 2010. His priorexperience includes positions at Neuro-Hitech, Inc. (NHPI.PK), a publicly tradedcompany focused on developing, marketing and distributing branded and genericpharmaceutical products; Overture Asset Managers and Overture FinancialServices, which, at the time, was a start-up asset management firm thatassembled investment products and platforms to distribute turnkey andunbundled investment solutions to financial intermediaries and institutionalinvestors; and Deloitte & Touche, LLP. Mr. Barrett became a director ofCoronado BioSciences, Inc., a biopharmaceutical company, in May 2011. Mr.Barrett received his B.S. in Accounting and Economics in May of 1998 and hisM.S. in Accounting in May of 1999 from the University of Florida. He is acertified public accountant. Ventrus Biosciences (VTUS) 16
    • Exhibit 13. VEN 309 / Hemorrhoid Market Model, 2011E – 2020ESource: LCM Research Ventrus Biosciences (VTUS) 17
    • Exhibit 14. VEN 307 / Anal Fissure Market Model, 2011E – 2020ESource: LCM Research Ventrus Biosciences (VTUS) 18
    • Exhibit 15. Ventrus Income Statement, 2010 – 2015ESource: LCM Research Ventrus Biosciences (VTUS) 19
    • Exhibit 16. Ventrus Balance Sheet, 2010A – 2015ESource: LCM Research Ventrus Biosciences (VTUS) 20
    • Exhibit 17. Ventrus Cash Flow Statement, 2010 – 2015ESource: LCM Research Ventrus Biosciences (VTUS) 21
    • ANALYST CERTIFICATIONAll of the recommendations and views about the securities and companies in this report accurately reflectthe personal views of the research analyst named on the cover of this report. No part of this researchanalyst’s compensation was, is, or will be directly or indirectly related to the specific recommendations orviews expressed by the research analyst in this research report.IMPORTANT DISCLOSURESLazard Frères & Co. LLC has received compensation for investment banking servicesfrom VTUS within the past twelve (12) months.Lazard Capital Markets LLC has acted as manager or co-manager of a securitiesoffering on behalf of VTUS within the past twelve (12) months.Lazard Capital Markets LLC makes a market in VTUS securities. VTUS - Current Rating: BUY, Price Target: $24 24 22 20 18 16 14 12 10 8 6 4 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Apr 11 May 11 Jun 11 Jul 11 Data source: FactSet prices / LCM ratings and target prices DISTRIBUTION OF INVESTMENT RATINGS (AS OF 07/22/11) OVERALL DISTRIBUTION BANKING CLIENT DISTRIBUTION* BUY NEUTRAL SELL BUY NEUTRAL SELL 60% 38% 2% 22% 7% 0%* Indicates the percentage of each category in the Overall Distribution that were banking clients of Lazard Frères in the previous 12 months.RATING GUIDELINE (return targets may be modified by risk or liquidity issues)BUY Expected to produce a positive total return of more than 10% in the next 12 months.NEUTRAL Fairly valued; expected to product a total return of ±10% in the next 12 months.SELL Expected to product a negative total return of more than 10% in the next 12 months. Ventrus Biosciences (VTUS) 22
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