VIVUS INC, 10-Q, 1999-08-11

VIVUS INC
10-Q, 1999-08-11
SURGICAL & MEDICAL INSTRUMENTS & APPARATUS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------

FORM 10-Q

----------------

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM ____________ TO ____________ .

COMMISSION FILE NUMBER: 0-23490

VIVUS, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE 94-3136179
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)

605 EAST FAIRCHILD DRIVE MOUNTAIN VIEW, CA 94043
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)

(650) 934-5200
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)

N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No

At JUNE 30, 1999, 32,137,458 shares of common stock were outstanding.

EXHIBIT INDEX ON PAGE 25

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PART I: FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

VIVUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(Unaudited)

<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------------ ----------------------
JUNE 30, MARCH 31, JUNE 30, JUNE 30, JUNE 30,
1999 1999 1998 1999 1998
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Revenue
US Product $ 5,239 $ 4,538 $ 6,142 $ 9,777 $ 30,693
International Product 1,572 1,716 9,841 3,288 11,812
Milestone -- 4,000 -- 4,000 1,000
-------- -------- -------- -------- --------

Total revenue 6,811 10,254 15,983 17,065 43,505

Operating Expenses
Cost of goods sold 3,072 3,603 10,704 6,675 21,186
Research and development 1,762 1,786 5,359 3,548 9,239
Selling, general and administrative 1,554 1,352 17,576 2,906 34,634
Settlement of shareholder lawsuits 600 -- -- 600
Other restructuring costs -- -- 6,522 -- 6,522
-------- -------- -------- -------- --------

Total operating expenses 6,988 6,741 40,161 13,729 71,581
-------- -------- -------- -------- --------

Income (loss) from operations (177) 3,513 (24,178) 3,336 (28,076)

Interest and other income 484 479 597 963 1,508
-------- -------- -------- -------- --------

Income (loss) before taxes 307 3,992 (23,581) 4,299 (26,568)

Income tax provision (15) (200) (597) (215) --
-------- -------- -------- -------- --------

Net income (loss) $ 292 $ 3,792 $(24,178) $ 4,084 $(26,568)
======== ======== ======== ======== ========

Net income (loss) per share:
Basic $ 0.01 $ 0.12 $ (0.76) $ 0.13 $ (0.83)

Diluted $ 0.01 $ 0.12 $ (0.76) $ 0.13 $ (0.83)

Shares used in the computation of
net income (loss) per share:
Basic 32,066 31,934 31,752 32,000 31,938

Diluted 32,889 32,211 31,752 32,600 31,938
</TABLE>

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VIVUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS)
(Unaudited)

Net Income (loss) $ 292 $ 3,792 $(24,178) $ 4,084 $(26,568)

Other comprehensive income (loss):
Unrealized gain (loss) on securities 231 (65) 31 166 (91)

Income tax benefit (provision) (12) 3 -- (9) --
-------- -------- -------- -------- --------
219 (62) 31 157 (91)
-------- -------- -------- -------- --------

Comprehensive income (loss) $ 511 $ 3,730 $(24,147) $ 4,241 $(26,659)
======== ======== ======== ======== ========
</TABLE>

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VIVUS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)

<TABLE>
<CAPTION>
JUNE 30, MARCH 31, DECEMBER 31,
1999 1999 1998
----------- ----------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Current assets:
Cash $ 5,152 $ 4,428 $ 2,989
Available-for-sale securities 33,542 31,950 20,903
Accounts receivable 2,518 3,514 5,197
Inventories 4,093 4,337 5,272
Prepaid expenses and other assets 1,155 673 534
--------- --------- ---------
Total current assets 46,460 44,902 34,895
Property and equipment 17,633 18,424 19,213

Total $ 64,093 $ 63,326 $ 54,108
========= ========= =========

Current Liabilities:
Accounts payables $ 1,804 $ 2,194 $ 3,277
Accrued and other liabilities 29,295 29,014 21,294
--------- --------- ---------
Total current liabilities 31,099 31,208 24,571
Accrued and other long-term liabilities 6,052 6,555 7,860
--------- --------- ---------
Total liabilities 37,151 37,763 32,431

Stockholders' equity:
Common stock; $.001 par value; shares
authorized 200,000; shares outstanding -
June 30, 1999, 32,137; March 31, 1999, 31,947;
December 31, 1998, 31,890 32 32 32
Paid in capital 132,481 131,625 131,466
Accumulated other comprehensive income 135 (96) (31)
Accumulated deficit (105,706) (105,998) (109,790)
--------- --------- ---------

Total stockholders' equity 26,942 25,563 21,677
--------- --------- ---------

Total $ 64,093 $ 63,326 $ 54,108
========= ========= =========
</TABLE>

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VIVUS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)

<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
------------------------
1999 1998
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,084 $ (26,568)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 1,654 1,656
Stock compensation costs 182 256
Issuance of common stock for lawsuit settlement 600 --
Changes in assets and liabilities:
Accounts receivable 2,679 3,621
Inventories 1,179 (7,688)
Prepaid expenses and other assets (621) (822)
Accounts payable (1,473) 796
Accrued and other liabilities 6,193 (2,484)
--------- ---------
Net cash provided by (used for) operating activities 14,477 (31,233)
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment purchases (75) (12,072)
Investment purchases (52,817) (67,743)
Proceeds from sale/maturity of securities 40,345 129,201
--------- ---------
Net cash provided by (used for) investing activities (12,547) 49,386
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of common stock options 133 277
Sale of common stock through employee
stock purchase plan 100 413
Repurchase of common stock -- (23,584)
--------- ---------
Net cash provided by (used for) financing activities 233 (22,894)
--------- ---------

NET INCREASE (DECREASE) IN CASH 2,163 (4,741)

CASH:
Beginning of period 2,989 6,161
--------- ---------
End of period $ 5,152 $ 1,420
========= =========

NON-CASH INVESTING AND FINANCING ACTIVITIES:
Unrealized gain on securities $ 166 $ (91)

SUPPLEMENTAL CASH FLOW DISCLOSURE:
Income taxes paid $ 36 $ 71
</TABLE>

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VIVUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1999

1. BASIS OF PRESENTATION

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 Regulations 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. Operating results for the three-month and six-month periods
ended June 30, 1999 are not necessarily indicative of the results that may be
expected for the year ending December 31, 1999. For further information, refer
to the financial statements and footnotes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998.

2. RESTRUCTURING RESERVE

During 1998, the Company experienced a significant decline in market demand
as the result of the introduction of a competitor's product. As a result, the
Company took significant steps to restructure its operations in an attempt to
bring the cost structure in line with current and projected revenues. (See Notes
1 and 6 to the Consolidated Financial Statements for the year ended December 31,
1998 included in the Company's Annual Report on Form 10-K). The reserve balance
at June 30, 1999 was $10.1 million, a decrease of $2.8 million from $12.9
million at March 31, 1999. The decrease was primarily related to payments made
for employee retention obligations ($1.5 million), the return of expired product
from wholesalers ($1.0 million), and lease commitments ($158,000) as follows (in
thousands):

<TABLE>
<CAPTION>
SEVERANCE AND INVENTORY PROPERTY
EMPLOYEE AND RELATED AND RELATED MARKETING
COSTS COMMITMENTS COMMITMENTS PROGRAMS OTHER TOTAL
------------- ----------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Balance at December, 1998 .......... $ 1,910 $ 5,384 $ 4,664 $ 1,307 $ 1,793 $ 15,058
Incurred in first quarter 1999 ..... (108) (128) (309) (1,076) (500) (2,121)
-------- -------- -------- -------- -------- --------
Balance at March 31, 1999 .......... 1,802 5,256 4,355 231 1,293 12,937
Incurred in second quarter 1999 .... (1,502) (48) (158) (131) (1,000) (2,839)
-------- -------- -------- -------- -------- --------
Balance at June 30, 1999 ........... $ 300 $ 5,208 $ 4,197 $ 100 $ 293 $ 10,098
======== ======== ======== ======== ======== ========
</TABLE>

The Company expects that over the next twelve months, it will make cash
payments of approximately $4.0 million related to the restructuring, with the
remaining $6.1 million in cash payments to occur after this period.

3. DEFERRED REVENUE

The Company invoices its international partners based on an agreed billing
price per unit, that is subject to revision based on contractual formulas either
up or down upon periodic reconciliation's. Final pricing for product shipments
to international partners is subject to contractual formulas based on the
partners' net realizable price to their customers and the Company's cost of
goods among other things. At the time of product shipment, the Company
recognizes revenue at the lowest possible price in accordance with contractual
formulas and will recognize additional revenue, if any, upon finalization of
pricing with its international partners. As of June 30, 1999, the Company had
deferred revenue of $5.3 million representing amounts billed in excess of
revenue recognized, unchanged from March 31, 1999.

During the second quarter of 1999, the Company received $2.5 million from an
international partner representing pre-payment for product shipments to occur in
future periods, bringing total pre-payments at June 30, 1999 to $10.4 million.
The Company recorded these payments as unearned revenue and will record revenue
from product shipments in future periods as they occur.

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VIVUS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999

4. ACCRUED AND OTHER LIABILITIES

Accrued and other liabilities as of June 30, 1999, March 31, 1999, and
December 31, 1998 consist of :

<TABLE>
<CAPTION>
June 31, March 31, December 31,
(in thousands) 1999 1999 1998
----------------------------------------------------------------------------------
<S> <C> <C> <C>
Unearned revenue 15,677 13,158 5,040
Restructuring 10,098 12,937 15,058
Research and clinical expenses 2,549 2,429 2,337
Income taxes 2,263 2,247 2,082
Royalties 2,100 2,014 2,133
Employee compensation and benefits 1,132 1,006 902
Manufacturing expenses 615 251 368
Sales and marketing expenses 301 941 664
Other 612 585 570
------- ------- -------

$35,347 $35,569 $29,154
======= ======= =======
</TABLE>

5. NET INCOME (LOSS) PER SHARE

Net income (loss) per share is calculated in accordance with Statement of
Financial Accounting Standards No. 128, "Earnings per Share" which requires a
dual presentation of basic and diluted earnings per share. Basic income (loss)
per share is based on the weighted average number of common shares outstanding
during the periods. Diluted income per share is based on the weighted average
number of common and common equivalent shares, which represent shares that may
be issued in the future upon the exercise of outstanding stock options and
warrants. Certain options and warrants are excluded from the diluted income per
share for income periods presented because they are anti-dilutive. All options
and warrants are excluded from the diluted loss per share for all loss periods
because they are anti-dilutive.

6. SETTLEMENT OF SHAREHOLDER LAWSUITS

On February 18, 1998, a purported shareholder class action entitled Crain et
al. v. Vivus, Inc. et al., was filed in Superior Court of the State of
California for the County of San Mateo. Five identical complaints were
subsequently filed in the same court. These complaints were filed on behalf of a
purported class of persons who purchased stock between May 15, 1997 and December
9, 1997. The complaints allege that the Company and certain current and former
officers or directors artificially inflated the Company's stock price by issuing
false and misleading statements concerning the Company's prospects and issuing
false financial statements. On March 16, 1998, a purported shareholder class
action entitled Cramblit et al. v. Vivus, Inc. et al. was filed in the United
States District Court for the Northern District of California. Five additional
complaints were subsequently filed in the same court. The federal complaints
were filed on behalf of a purported class of persons who purchased stock between
May 2, 1997 and December 9, 1997. The federal complaints asserted the same
factual allegations as the state court complaints, but assert legal claims under
the Federal Securities Laws. The federal court cases were consolidated, and a
lead plaintiff had been appointed and the plaintiff filed a consolidated and
amended complaint in 1998.

On May 4, 1999 the Company reached a settlement with plaintiffs of the
shareholder class action lawsuits described above. The aggregate settlement
amount is $6 million. The settlement will be funded by insurance proceeds of
$5.4 million and by the Company contributing 120,000 shares of VIVUS Common
Stock, with a market value of $0.6 million on the date of settlement, to the
settlement fund. The settlement is subject to approval by the Court. This
settlement was recorded in the Company's income statement for the three months
ended June 30, 1999.

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7. SEGMENT INFORMATION

During 1998, the Company adopted Statement of Financial Accounting Statement
SFAS No. 131, "Disclosure About Segments of an Enterprise and Related
Information." SFAS 131 requires a new basis of determining reportable business
segments, i.e. the management approach. This approach requires that business
segment information used by management to assess performance and manage company
resources for information disclosure. On this basis, the Company primarily sells
its product through wholesale channels in the United States. International sales
are made only to the Company's two international partners. All transactions are
denominated in U.S. dollars, therefore, the Company considers the arrangement as
operating in a single segment.

During the first six months of 1999, five customers accounted for 24%, 20%,
13%, 13%, and 10% of total product revenue, as compared to five customers
accounted for 35%, 13%, 11%, 11% and 10% of total product revenue for fiscal
year 1998.

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This Quarterly Report on Form 10-Q contains forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ from
those set forth in such forward-looking statements as a result of certain
factors, including those set forth in this Risk Factors section starting on page
13 of this document.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

OVERVIEW

VIVUS, Inc. ("VIVUS" or the "Company") is the developer and manufacturer of
MUSE(R) (alprostadil) and ACTIS(TM), two advancements in the treatment of men
with erectile dysfunction ("ED"), also known as impotence. The Company's
objective is to become a global leader in the development and commercialization
of innovative therapies for the treatment of sexual dysfunction and urologic
disorders in men and women. To this end, the Company utilizes its expertise and
patent portfolio by focusing its R&D activities on male and female sexual
dysfunction, incontinence and premature ejaculation. VIVUS focuses on the
development of new indications or delivery systems for pharmacological agents
that have pre-existing data. The Company believes that such agents present a
lower development risk profile and may progress more rapidly through the
clinical development and regulatory process than agents without pre-existing
data.

The Company intends to market and sell its products worldwide through
distribution, co-promotion or license agreements with corporate partners. To
date, the Company has entered into licensing and distribution agreements with
ASTRA AB, now ("AstraZeneca") and Janssen Pharmaceutica ("Janssen") for certain
international markets. The Company is currently seeking a major pharmaceutical
partner(s) to market, distribute and sell its products in the U.S. and Japan.
(SEE RISK FACTORS ON PAGE 13)

The Company supports MUSE sales in the U.S. through physician and patient
information/help lines, sales support for major accounts, product education
newsletters and participation in national urologic and sexual dysfunction forums
and conferences, such as the American Urological Association annual and regional
meetings and the International Society for Impotence Research. In addition, the
Company supports ongoing research and clinical investigation of MUSE and the
publication of data in peer-reviewed journals.

In November 1996, the Company obtained marketing clearance by the U.S. Food
and Drug Administration (the "FDA") to manufacture and market its first product,
MUSE and commercially introduced MUSE in the United States beginning in January
1997. The launch of MUSE went on to become one of the top 25 most successful
drug launches in the U.S. and the Company recorded a net profit of $36.6 million
and product revenue of $129.3 million for the year ended December 31, 1997.

During 1998, the Company experienced a significant decline in market demand
for MUSE as the result of the introduction of a competitor's product in April
1998. Since the launch of this competitive product, MUSE prescriptions have
declined approximately 80% in the US. During the second and third quarters of
1998, the Company took significant steps to restructure its operations in an
attempt to bring the cost structure in line with current and projected revenues.
As a result, the Company incurred a net loss of $80 million and had negative
operating cash flow of $26 million for the year ended December 31, 1998. For
further information, refer to the financial statements and footnotes thereto
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1998.

During the first quarter of 1999, the Company received approval to market
MUSE in Germany and France. To date, MUSE has been approved by regulatory
agencies in 44 countries, including all of European Union countries except Spain
and Italy. The Company expects to receive regulatory approval to market in Spain
and Italy in the second half of 1999.

On May 17, 1999, the Company signed an agreement with Bio-Medic Institute,
Inc. ("BMI"). The agreement would have given BMI exclusive rights to act as
VIVUS' agent to establish an agreement with a Japanese pharmaceutical company
for the registration and commercialization of MUSE in Japan. On July 9, 1999,
the Company terminated its agreement with BMI due to BMI's failure to make a $5
million up-front payment as required by the agreement. The Company continues to
seek major pharmaceutical partners to market, distribute and sell its products
in the U.S. and Japan.

During the second quarter of 1999, the Company has conducted a Phase III
clinical trial for ALIBRA, the Company's second generation transurethral
approach to treat ED. ALIBRA is expected to submit the New Drug Application
("NDA") in the latter part of 1999. The Company expects to initiate a Phase II,
proof of concept, clinical study for a premature

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<PAGE> 10

ejaculation product this year. In addition, the company is developing a product
for female sexual dysfunction and expects to enter clinical testing next year.

The Company has seen the domestic demand for MUSE stabilize at current levels
during the first half of 1999. The Company anticipates that demand will remain
at current levels and may increase modestly as the Company's investments in
marketing programs begin to produce results.

RESULTS OF OPERATIONS

THREE MONTHS ENDED JUNE 30, 1999 AND MARCH 31, 1999

Product revenues for the quarter ended June 30, 1999 were $5.2 million in the
United States and $1.6 million internationally compared to $4.5 million in the
United States and $1.7 million internationally for the quarter ended March 31,
1999. U.S. revenues increased 16% in second quarter 1999 compared to the first
quarter 1999. Demand for the first six months of 1999 has remained relatively
flat as measured by retail prescriptions. Lower shipments in the first quarter
of 1999 were primarily the results of balancing of inventory levels in the
wholesale channel. As of June 30, 1999, wholesale inventory levels represent
approximately one months sales. International product revenue decreased by
$144,000 from first quarter 1999 as a result of the Company's international
marketing partners, Janssen and AstraZeneca, having sufficient inventory for
their markets. The Company anticipates that international revenues will decline
further in the third quarter of 1999, as our partners continue to deplete
existing inventories. International product revenues are expected to increase
significantly in the fourth quarter of 1999 over the second quarter 1999 as
reordering begins to occur.

Total revenues during the first quarter of 1999 also included milestone
revenue of $4.0 million from AstraZeneca related to regulatory approval of MUSE
in Germany and France. The Company anticipates that regulatory approval in Spain
and Italy will occur in the second half of 1999. These approvals will trigger
milestone revenue of $2.0 million for each country approved from AstraZeneca.

Cost of goods sold was $3.1 million for the second quarter 1999 compared to
$3.6 million for the first quarter 1999. This decrease was primarily the result
of improving yields and continued cost conservation efforts.

Research and development ("R&D") expenses for the second quarter 1999 were
$1.8 million consistent with the spending in the first quarter 1999. The Company
anticipates that R&D expenses will increase in the second half of 1999 from the
first half levels, as the Company progresses in the development of its R&D
pipeline.

Selling, general and administrative expenses for the second quarter 1999 were
$1.6 million compared to $1.4 million in the first quarter of 1999. Higher
expenses in second quarter of 1999 were primarily the result of increased
investment in U.S. marketing in the second quarter. The Company anticipates that
US marketing and sales expenses will increase in the second half from the first
half levels, as the Company continues to invest in sales and marketing programs.

During second quarter 1999, the Company reached a settlement of the
shareholder class action lawsuits, in which the company incurred a non-cash
expense of $600,000 for the issuance of 120,000 shares of Vivus, Inc. common
stock.

Interest and other income for the second quarter 1999 were $484,000 compared
with $479,000 in the first quarter 1999. The increase was primarily the result
of higher interest resulting from higher average invested cash balances in the
second quarter 1999.

The Company recorded a tax provision of $15,000 or five percent of income
before taxes for the second quarter 1999. This five percent rate is consistent
with the rate recorded in first quarter of 1999, and includes the effect of net
operating loss ("NOL") carried forward from prior periods. The tax rate would
have been substantially higher if the NOLs were not available to offset current
income.

THREE AND SIX MONTHS ENDED JUNE 30, 1999 AND 1998

Product revenues for the quarter ended June 30, 1999 were $5.2 million in the
United States and $1.6 million internationally compared to $6.1 million in the
Unites States and $9.8 million internationally for the quarter ended June 30,
1998. Product revenues for the six months ended June 30, 1999 were $9.8 million
in the U.S. and $3.3 million internationally compared to $30.7 million in

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<PAGE> 11

the U.S. and $11.8 million internationally for the same periods in 1998.
Underlying demand for MUSE domestically, as measured by retail prescriptions,
has declined approximately 80% since the commercial launch of a competitive
product in April 1998. Internationally, the decrease in product revenue for the
three and six month periods is attributed to the Company's partners, Janssen and
AstraZeneca, having accumulated sufficient inventory in 1998 for their
respective markets.

Total revenues for the six month ended June 30, 1999 include milestone
revenue of $4.0 million received in the first quarter 1999 related to regulatory
approval of MUSE in Germany and France, compared with milestone revenue of $1.0
million in the first quarter of 1998 related to regulatory approval of MUSE in
South Korea.

Cost of goods sold was $3.1 million for the second quarter 1999 compared to
$10.7 million for the second quarter 1998. For the six months ended June 30,
1999, cost of goods sold was $6.7 million compared to $21.2 million for the
first six months of 1998. The Company's has made significant progress in
manufacturing projects improving yields and continued cost conservation in the
first half of 1999. As a result, the higher unit cost caused by lower economies
of scale has been partially offset by the ongoing improvements.

Research and development expenses for the second quarter 1999 were $1.8
million compared to $5.4 million in the second quarter 1998. For the six months
ended June 30, 1999 and 1998, research and development expenses were $3.5
million and $9.2 million, respectively. Lower spending for three and six month
periods ended June 30, 1999 was primarily the result of the Company's efforts to
bring its cost structure in line with current and projected revenues. Higher
spending in 1998 was mainly associated with a significantly larger R&D
organization.

Selling, general and administrative expenses for the second quarter 1999 were
$1.6 million compared to $17.6 million in the second quarter 1998. For the six
months ended June 30, 1999, expenses were $2.9 million compared to $34.6 million
for the same period in 1998. The lower expenses in three and six month periods
ended June 30, 1999 were primarily a result of Company's effort to bring overall
cost levels in line with the Company's projected future demand for MUSE.
Included in the three and six month periods ended June 30, 1998 were significant
expenses for a direct-to-consumer advertising campaign as well as a direct sales
force, which are not included in 1999.

In the second quarter 1999, the Company reached a settlement of shareholders
class action lawsuits, in which the company recorded a non-cash expense of
$600,000 for the issuance of 120,000 shares of Vivus, Inc. common stock. In the
second quarter of 1998, the company incurred a restructuring charge of $6.5
million, primarily associated with the Company's agreement to facilitate the
transition of its direct U.S. sales force to ALZA Corporation, as well as
terminating the contract sales agreement with Innovex, and personnel reductions.

Interest and other income for the three and six month periods ended June 30,
1999 were $479,000 and $963,000, respectively, compared with $597,000 and $1.5
million in the three and six month periods ended June 30, 1998. The decrease was
primarily the result of lower average invested cash balances in 1999.

The Company recorded a tax provision of five percent of net income before
taxes for the six month ended June 30, 1999. This compares to no tax provision
recorded during the first six-months period 1998. The zero tax provision
recorded in the first half of 1998 was calculated based on an expected loss for
the fiscal year ended 1998. The 1999 effective tax rate calculation includes the
effect of NOLs carried forward from prior periods. The tax rate would have been
substantially higher if the NOLs were not available to offset current income.

LIQUIDITY AND CAPITAL RESOURCES

Since inception, the Company has financed operations primarily from the sale
of preferred and common stock. Through June 30, 1999, VIVUS has raised $153.6
million from financing activities and has an accumulated deficit of $105.7
million at June 30, 1999.

Cash, cash equivalents and available-for-sale securities totaled $38.7
million at June 30, 1999 compared with $36.4 million at March 31, 1999 and $23.9
million at December 31, 1998. The $14.8 million increase in cash from December
31, 1998 primarily resulted from the prepayments received for product shipments
to occur in future periods, collection of accounts receivable and the receipt of
milestone payments related to approval of MUSE in Germany and France. These
increases were partially offset by payments made related to the restructuring
reserve established in 1998 (See Note 2 to the Condensed Consolidated Financial
Statements on page 6).

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<PAGE> 12

Accounts receivable at June 30, 1999 were $2.5 million compared with $5.2
million at December 31, 1998, a decrease of $2.7 million due primarily to lower
sales and improved collection of accounts receivable.

Total liabilities were $37.2 million at June 30, 1998, compared with $32.4
million at December 31, 1998, an increase of $4.8 million. The increase
primarily relates to the prepayment for product shipments, included in deferred
revenue, partially offset by payments made related to the restructuring reserve
established in 1998 (See Notes 2, 3 and 4 of the Condensed Consolidated
Financial Statements on page 6 and 7).

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RISK FACTORS

LIMITED SALES AND MARKETING EXPERIENCE; DEPENDENCE ON THIRD PARTIES

The Company intends to market and sell its products through distribution,
co-promotion or license agreements with corporate partners. To date, the Company
has entered into marketing agreements with AstraZeneca and Janssen for certain
international markets. The Company is currently seeking a major pharmaceutical
partner(s) to market, distribute and sell its products in the United States and
Japan. There can be no assurance that the Company will be able to successfully
enter into additional agreements with corporate partners upon reasonable terms,
if at all. To the extent that the Company enters into distribution, co-
promotion or license agreements for the sale of its products, the Company will
be dependent upon the efforts of third parties. These third parties may have
other commitments, and there can be no assurance that they will commit the
necessary resources to effectively market, distribute and sell the Company's
product.

In 1996, the Company entered into a distribution agreement with CORD
Logistics, Inc. ("CORD"), a wholly owned subsidiary of Cardinal Health, Inc.
Under this agreement, CORD warehouses the Company's finished goods for U.S.
distribution, takes customer orders, picks, and packs and ships its product,
invoices customers and collects related receivables. The Company also has access
to CORD's information systems that support these functions. As a result of this
distribution agreement with CORD, the Company is heavily dependent on CORD's
efforts to fulfill orders and warehouse its products effectively in the U.S.
There can be no assurance that such efforts will be successful.

In 1996, the Company entered into an international marketing agreement with
AstraZeneca to purchase the Company's products for resale in Europe, South
America, Central America, Australia and New Zealand. The marketing agreement
does not have minimum purchase commitments, and AstraZeneca may take up to
twelve months to introduce a product in a given country following regulatory
approval in such country. As a result, the Company is dependent on AstraZeneca's
efforts to market, distribute and sell the Company's products effectively in the
above mentioned markets. There can be no assurance that such efforts will be
successful, or that AstraZeneca will continue to support the product.

In 1996, the Company entered into a distribution agreement with Integrated
Commercialization Services ("ICS") a subsidiary of Bergen Brunswig Corporation.
ICS provides "direct-to-physician" distribution, telemarketing and customer
service capabilities in support of U.S. marketing and sales efforts. As a result
of this distribution agreement with ICS, the Company is dependent on ICS's
efforts to distribute, telemarket, and provide customer service effectively.
There can be no assurance that such efforts will be successful.

In 1997, the Company entered into an international marketing agreement with
Janssen to purchase the Company's products for resale in China, multiple Pacific
Rim countries (excluding Japan), Canada, Mexico, South Africa, the Middle East,
Russia, the Indian sub-continent, and Africa. The marketing agreement does not
have minimum purchase commitments and the Company is dependent on Janssen's
efforts to distribute and sell the Company's products effectively in the above
mentioned markets. Janssen may take up to twelve months to introduce a product
in a given country following regulatory approval in such country. There can be
no assurance that such efforts will be successful or that Janssen will continue
to support the product.

INTENSE COMPETITION

Competition in the pharmaceutical and medical products industries is intense
and is characterized by extensive research efforts and rapid technological
progress. Certain treatments for ED exist, such as oral medications, needle
injection therapy, vacuum constriction devices and penile implants, and the
manufacturers of these products will continue to improve these therapies. The
most significant competitive therapy is sildenafil, an oral medication marketed
by Pfizer, which received regulatory approvals in the U.S. in March 1998 and in
the European Union in September 1998. The commercial launch of sildenafil in the
U.S. in April 1998 dramatically increased the number of men seeking treatment
for impotence and significantly decreased demand for MUSE. Since the launch of
sildenafil, MUSE prescriptions have declined approximately 80% in the U.S.

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Additional competitive products in the erectile dysfunction market include
needle injection therapy products from Pharmacia Upjohn and Schwartz Pharma,
which were approved by the FDA in July 1995 and June 1997, respectively. Other
large pharmaceutical companies are also actively engaged in the development of
therapies for the treatment of ED. These companies have substantially greater
research and development capabilities as well as substantially greater
marketing, financial and human resources than the Company. In addition, many of
these companies have significantly greater experience than the Company in
undertaking pre-clinical testing, human clinical trials and other regulatory
approval procedures. There are also small companies, academic institutions,
governmental agencies and other research organizations that are conducting
research in the area of ED. For instance, Zonagen, Inc. has filed for FDA
approval of its oral treatment and has received approval in Mexico; TAP
Pharmaceuticals, Inc. has submitted an application to the FDA for approval of
its oral treatment; ICOS Corporation has an oral medication in clinical testing;
and Senetek has a needle injection therapy product approved recently in Denmark
and has filed for approval in other countries. These entities may market
commercial products either on their own or through collaborative efforts. For
example, Zonagen, Inc. announced a worldwide marketing agreement with
Schering-Plough in November 1997; and ICOS Corporation formed a joint venture
with Eli Lilly in October 1998 to jointly develop and market its oral treatment.
The Company's competitors may develop technologies and products that are more
effective than those currently marketed or being developed by the Company. Such
developments would render the Company's products less competitive or possibly
obsolete. The Company is also competing with respect to marketing capabilities
and manufacturing efficiency, areas in which it has limited experience.

HISTORY OF LOSSES AND LIMITED OPERATING HISTORY

The Company has generated a cumulative net loss of $105.7 million for the
period from its inception through June 30, 1999. In order to sustain profitable
operations, the Company must successfully manufacture and market MUSE and adjust
its expenditures in conjunction with lower product revenues. The Company is
subject to a number of risks including its ability to successfully market,
distribute and sell its product, intense competition, and its reliance on a
single therapeutic approach to erectile dysfunction and its ability to secure
additional operating capital. There can be no assurance that the Company will be
able to achieve profitability on a sustained basis. Accordingly, there can be no
assurance of the Company's future success.

During 1998, the Company took significant steps to restructure its operations
in an attempt to bring the cost structure of the business in line with current
demand for MUSE. These steps included significant reductions in personnel,
closing the contract-manufacturing site located in PACO Pharmaceutical Services,
Inc., the termination of the lease for the Company's leased corporate offices,
and recorded significant write-down of property, equipment and inventory. As a
result of these and other factors the Company experienced an operating loss of
$80.3 million, or $2.52 per share, in the year ended December 31, 1998.

In September 1998, the Company significantly scaled back its manufacturing
operations as a result of lower demand domestically and internationally for
MUSE. Current production is significantly below capacity for the plant resulting
in a higher unit cost, and the Company expects that the gross margin from the
sale of MUSE will be less predictable in future periods, which may cause greater
volatility in the Company's results of operations and financial condition.

Management believes that these restructuring measures are adequate to bring
the cost structure in line with current and projected revenues, however, there
can be no assurance that product demand will not weaken further or that these
measures will result in sustained profitability in future periods.

FUTURE CAPITAL NEEDS AND UNCERTAINTY OF ADDITIONAL FINANCING

Cash, cash equivalents and available-for-sale securities totaled $38.7
million at June 30, 1999 compared with $23.9 million at December 31, 1998. The
Company anticipates that its existing capital resources combined with
anticipated future revenues might not be sufficient to support the commercial
introduction of any additional future products. The Company is currently seeking
other sources of financing to support the development of its R&D pipeline.

On October 5, 1998, the Company's lessor ("plaintiff") named the Company in a
civil action in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease requires that the Company
provide a removal security deposit in the form of cash or letter of credit. The
Company and the plaintiff have not been able to agree on the amount of the
deposit, and the plaintiff filed suit asking for specific performance in the
amount of $3.3 million. The Company believes the $3.3 million security deposit
is excessive and not mandated by the terms of the lease. However, if the Company
is required to post a certificate of deposit of $3.3 million, this will have a
material adverse effect on the Company's financial condition.

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<PAGE> 15

The Company expects that it will be required to issue additional equity or
debt securities or use other financing sources including, but not limited to
corporate alliances and lease financing to fund the development and possible
commercial launch of its future products. The sale of additional equity
securities would result in additional dilution to the Company's stockholders.
The Company's working capital and additional funding requirements will depend
upon numerous factors, including: (i) results of operations; (ii) demand for
MUSE; (iii) the outcome of litigation; (iv) the activities of competitors; (v)
the progress of the Company's research and development programs; (vi) the timing
and results of pre-clinical testing and clinical trials; (vii) technological
advances; and (viii) the level of resources that the Company devotes to sales
and marketing capabilities.

DEPENDENCE ON KEY PERSONNEL

The Company's success is highly dependent upon the skills of a limited number
of key management personnel. To reach its business objectives, the Company will
need to retain and hire qualified personnel in the areas of manufacturing,
research and development, clinical trial management and preclinical testing.
There can be no assurance that the Company will be able to retain or hire such
personnel, as the Company must compete with other companies, academic
institutions, government entities and other agencies. The loss of any of the
Company's key personnel or the failure to attract or retain necessary new
employees could have an adverse effect on the Company's research, product
development and business operations.

DEPENDENCE ON SINGLE SOURCE OF SUPPLY

The Company relies on a single source, E-Beam Services, Inc., for
sterilization of its product. There can be no assurance that the Company will be
able to identify and qualify additional sterilization sources. The Company is
required to receive FDA approval for suppliers. The FDA may require additional
clinical studies or other testing prior to accepting a new supplier. Unless the
Company secures and qualifies additional sources of sterilization facilities, it
will be entirely dependent on E-Beam. If interruption in this services were to
occur for any reason, including a decision by E-Beam to discontinue service,
political unrest, labor disputes or a failure of E-Beam to follow regulatory
guidelines, the development and commercial marketing of MUSE and other potential
products could be delayed or prevented. An interruption in sterilization
services would have a material adverse effect on the Company's business,
financial condition and results of operations.

LIMITED MANUFACTURING EXPERIENCE

The Company has limited experience in manufacturing and selling MUSE in
commercial quantities. The Company initially experienced product shortages due
to higher than expected demand and difficulties encountered in scaling up
production of MUSE. The Company leased 90,000 square feet of space in New Jersey
in which it has constructed manufacturing and testing facilities. The FDA and
MCA authorized the Company to begin commercial production and shipment of MUSE
from its new facility in June and March 1998, respectively. In September 1998,
the Company closed its contract manufacturing site within PACO Pharmaceutical
Services, Inc. and significantly scaled back its manufacturing operations in the
New Jersey facility, as a result of lower domestic and international demand for
MUSE. Production is currently significantly below capacity for the plant.

DEPENDENCE ON THE COMPANY'S TRANSURETHRAL SYSTEM FOR ERECTION

The Company currently relies on a single therapeutic approach to treat ED,
its transurethral system for erection. Certain side effects have been found to
occur with the use of MUSE. MUSE is applied into the urinary opening and is not
for men with sickle cell trait, disease, or other blood disorders. One third of
men reported genital pain, causing some to stop use. A few men reported
dizziness and, less commonly, fainting. To date, the incidence of post-launch
adverse side effects is consistent with that experienced in clinical trials. As
a result of the Company's single therapeutic approach, the failure to
successfully commercialize the product will have a material adverse effect to
the Company's business.

The existence of side effects or dissatisfaction with product results may
impact a patient's decision to use or continue to use, or a physician's decision
to recommend, MUSE as a therapy for the treatment of ED thereby affecting the
commercial viability of MUSE. In addition, technological changes or medical
advancements could diminish or eliminate the commercial viability of the
Company's product.

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RISKS RELATING TO INTERNATIONAL OPERATIONS

The Company's product is currently marketed internationally. Changes in
overseas economic and political conditions, currency exchange rates, foreign tax
laws or tariffs or other trade regulations could have a material adverse effect
on the Company's business, financial condition and results of operations. The
international nature of the Company's business is also expected to subject it
and its representatives, agents and distributors to laws and regulations of the
foreign jurisdictions in which they operate or the Company's product is sold.
The regulation of drug therapies in a number of such jurisdictions, particularly
in the European Union, continues to develop, and there can be no assurance that
new laws or regulations will not have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, the laws
of certain foreign countries do not protect the Company's intellectual property
rights to the same extent, as do the laws of the United States.

GOVERNMENT REGULATION AND UNCERTAINTY OF PRODUCT APPROVALS

The Company's research, preclinical development, clinical studies,
manufacturing and marketing of its products are subject to extensive regulation,
rigorous testing and approval processes of the Food and Drug Administration
("FDA") and equivalent foreign regulatory agencies. In November 1996, the
Company received final marketing clearance from the FDA for MUSE. In November
1997, the Company obtained regulatory marketing clearance by the European
Medicine Controls Agency ("MCA") to market MUSE in the United Kingdom. To date,
MUSE has been approved in 44 countries.

After regulatory approval is obtained, the Company's products are subject to
continual review. Manufacturing, labeling and promotional activities are
continually regulated by the FDA and equivalent foreign regulatory agencies, and
the Company must also report certain adverse events involving its drugs to these
agencies. Previously unidentified adverse events or an increased frequency of
adverse events that occur post-approval could result in labeling modifications
of approved products, which could adversely effect future marketing of a drug.
Finally, approvals may be withdrawn if compliance with regulatory standards is
not maintained or if problems occur following initial marketing. The
restriction, suspension or revocation of regulatory approvals or any other
failure to comply with regulatory requirements would have a material adverse
effect on the Company's business, financial condition and results of operations.

The Company has submitted applications for approval of MUSE in several other
countries. These applications will be subject to rigorous approval processes.
There can be no assurance that approval in these or other countries will be
granted or that these approvals if granted, will not contain significant
limitations in the form of warnings, precautions or contraindications with
respect to condition of use. Any delay in obtaining, or failure to obtain such
approval would adversely affect the Company's ability to generate product
revenue.

The Company's clinical studies for future products will generate safety data
as well as efficacy data and will require substantial time and significant
funding. There is no assurance that clinical studies related to future products
would be completed successfully within any specified time period, if at all.
Furthermore, the FDA could suspend clinical studies at any time if it is
believed that the subjects participating in such studies are being exposed to
unacceptable health risks.

Failure to comply with the applicable regulatory requirements can, among
other things, result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution. In addition, the
marketing and manufacturing of pharmaceutical products are subject to continuing
FDA and other regulatory review, and later discovery of previously unknown
problems with a product, manufacturer or facility may result in the FDA and
other regulatory agencies requiring further clinical research or restrictions on
the product or the manufacturer, including withdrawal of the product from the
market. The restriction, suspension or revocation of regulatory approvals or any
other failure to comply with regulatory requirements would have a material
adverse effect on the Company's business, financial condition and results of
operations.

The Company obtains the necessary raw materials and components for the
manufacture of MUSE as well as certain services, such as testing and
sterilization, from third parties. The Company currently contracts with
suppliers and service providers, including foreign manufacturers that are
required to comply with strict standards established by the Company. Certain
suppliers and service providers are required by the Federal Food, Drug, and
Cosmetic Act, as amended, and by FDA regulations to follow current good
manufacturing practice ("cGMP") requirements and are subject to routine periodic
inspections by the FDA and certain state and foreign regulatory agencies for
compliance with cGMP and other applicable regulations. Certain of the Company's
suppliers were inspected for cGMP compliance as part of the approval process.
However, upon routine re-inspection of these facilities, there can be no
assurance that the FDA and other regulatory agencies will find the manufacturing
process or facilities to be in compliance with

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cGMP and other regulations. Failure to achieve satisfactory cGMP compliance as
confirmed by routine inspections could have a material adverse effect on the
Company's ability to continue to manufacture and distribute its products and, in
the most serious case, result in the issuance of a regulatory Warning Letter or
seizure or recall of products, injunction and/or civil fines or closure of the
Company's manufacturing facility until cGMP compliance is achieved.

PATENTS AND PROPRIETARY RIGHTS

The Company's policy is to aggressively maintain its patent position and to
enforce all of its intellectual property rights.

The Company is the exclusive licensee of United States and Canadian patents
originally filed in the name of Dr. Gene Voss. These patents claim methods of
treating ED with a vasodilator-containing ointment that is administered either
topically or transurethrally.

The Company is also the exclusive licensee of patents and patent applications
filed in the name of Dr. Nils G. Kock, in numerous countries. Three United
States patents have issued directed to methods and compositions for treating ED
by transurethrally administering an active agent. One additional United States
patent application is still pending, and patents have been granted in Australia,
Austria, Belgium, Canada, Finland, France, Germany, Great Britain, Greece,
Ireland, Italy, Japan, Luxembourg, the Netherlands, New Zealand, Norway, Spain,
Sweden and South Africa. Patent applications are pending in Denmark and Romania.
The foreign patents and applications, like the U.S. patents and applications,
are directed to the treatment of ED by transurethral administration of certain
active substances including alpha-receptor blockers, vasoactive polypeptides,
prostaglandins or nitroglycerin dispersed in a hydrophilic vehicle.

The Company is also the exclusive licensee of two United States patent
applications and one PCT application filed in the names of Jan Geliebter, Arnold
Melman, George Christ and Jamil Rehman. The patent applications are directed to
the use of gene therapy in the treatment of erectile dysfunction and in the
regulation of bladder smooth muscle tone. All three patent applications are
currently pending.

The Company is the sole assignee of three United States patents, one
divisional patent application and two continuation applications all deriving
from patent applications originally filed by Alza, covering inventions of Dr.
Virgil Place made while he was an employee of Alza. The patents and patent
applications are directed to dosage forms for administering a therapeutic agent
to the urethra, methods for treating erectile dysfunction and specific drug
formulations that can be delivered transurethrally for the treatment of erectile
dysfunction. The divisional and continuation applications were filed in the
United States on June 7, 1995. All patents issuing on applications filed before
June 8, 1995 will automatically have a term that is the greater of twenty years
from the patent's effective filing date or seventeen years from the date of
patent grant. Foreign patents have been granted in Australia, Europe (including
Austria, Belgium, Denmark, France, Germany, Great Britain, Greece, Italy,
Luxembourg, Norway, the Netherlands, Portugal, Spain, Sweden and Switzerland),
New Zealand, South Africa and South Korea, and foreign applications are pending
in Canada, Finland, Ireland, Mexico, and Japan.

The Company's license and assignment agreements for these patents and patent
applications are royalty bearing and do not expire until the licensed patents
expire. These license and assignment agreements provide that the Company may
assume responsibility for the maintenance and prosecution of the patents and
bring infringement actions.

In addition to the Voss, Kock, Geliebter et al. and Place patents and
applications identified above, the Company has ten issued United States patents,
seven pending United States patent applications, three Patent Cooperation Treaty
("PCT") applications, two granted foreign patents, and ten pending foreign
patent applications. Several of these patents and applications further address
the prevention, treatment and diagnosis of ED, while others are directed to
prevention and/or treatment of other types of sexual dysfunction, including
premature ejaculation in men, and female sexual dysfunction. One of the
Company's issued patents covers the Company's ACTIS(R) venous flow control
device. Other issued patents and pending patent applications focus on prevention
and/or treatment of conditions other than sexual dysfunction, including vascular
disorders such as peripheral vascular disease ("PVD"), prostate disorders such
as benign prostate hyperplasia ("BPH"), hormone replacement therapy, and
contraception.

One of the Company's issued United States patents is directed to a method for
treating female sexual dysfunction with a topical or intravaginal formulation
containing a vasoactive prostaglandin. Since issuance of that patent, another
U.S. patent has been issued that

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<PAGE> 18

claims a similar method wherein an "E-series" prostaglandin is administered
topically. That patent, U.S. Patent No. 5,891,915 to Wysor et al., derives from
a U.S. patent application that was filed after the Company's patent application
was filed. The Company believes that its patent is dominant, and that the Wysor
et al. patent will not have an impact on the Company's plans to develop and
market a prostaglandin formulation for treating female sexual dysfunction. At
this time, however, the issue has not been determined with certainty, and there
can be no assurance that the Company's patent is in fact dominant.

The Company's success will depend in large part on the strength of its
current and future patent position relating to the transurethral delivery of
pharmacologic agents for the treatment of erectile dysfunction. The Company's
patent position, like that of other pharmaceutical companies, is highly
uncertain and involves complex legal and factual questions. The claims of a U.S.
or foreign patent application may be denied or significantly narrowed and
patents that ultimately issue may not provide significant commercial protection
to the Company. The Company could incur substantial costs in proceedings before
the United States Patent and Trademark Office, including interference
proceedings. These proceedings could also result in adverse decisions as to the
priority of the Company's licensed or assigned inventions. There is no assurance
that the Company's patents will not be successfully challenged or designed
around by others.

The Company is presently involved in an opposition proceeding that was
instigated by the Pharmedic Company against a European patent, inventors Nils G.
Kock et al., that is exclusively licensed to VIVUS. As a result of the
opposition proceeding, certain pharmaceutical composition claims in the European
patent were held unpatentable by the Opposition Division of the EPO. The
patentability of all other claims in the patent was confirmed, i.e., those
claims directed to the use of active agents in the treatment of ED, and to a
pharmaceutical composition claim for prazosin. The Company appealed the EPO's
decision with respect to the pharmaceutical composition claims that were held
unpatentable. The Pharmedic Company appealed the EPO's decision with respect to
the claims that were held patentable, but has since withdrawn the appeal.
Despite the withdrawal of the Pharmedic Company from the appeal process, the
Company has continued with its own appeal in an attempt to reinstate the
composition claims. The EPO Appeals Board must make its own finding whether the
claims that were deemed unpatentable by the Opposition Division are indeed
patentable before it can reverse the Opposition Division's decision. There can
be no assurance that the appeal will be successful or that further challenges to
the Company's European patent will not occur should the Company try to enforce
the patent in the various European courts.

The Company was also the first to file a Notice of Opposition to Pfizer's
European patent application claiming the use of phosphodiesterase inhibitors to
treat erectile dysfunction. Numerous other companies have also opposed the
patent, and the Company will support these other entities in their oppositions
as necessary.

There can be no assurance that the Company's products do not or will not
infringe on the patent or proprietary rights of others. The Company may be
required to obtain additional licenses to the patents, patent applications or
other proprietary rights of others. There can be no assurance that any such
licenses would be made available on terms acceptable to the Company, if at all.
If the Company does not obtain such licenses, it could encounter delays in
product introductions while it attempts to design around such patents, or the
development, manufacture or sale of products requiring such licenses could be
precluded. The Company believes there will continue to be significant litigation
in the pharmaceutical industry regarding patent and other intellectual property
rights.

In addition to its patent portfolio, the Company also relies on trade secrets
and other unpatented proprietary technology. No assurance can be given that the
Company can meaningfully protect its rights in such unpatented proprietary
technology or that others will not independently develop substantially
equivalent proprietary products and processes or otherwise gain access to the
Company's proprietary technology. The Company seeks to protect its trade secrets
and proprietary know-how, in part, with confidentiality agreements with
employees and consultants. There can be no assurance that the agreements will
not be breached or that the Company will have adequate remedies for any breach
or that the Company's trade secrets will not otherwise become known or be
independently developed by competitors. In addition, protracted and costly
litigation may be necessary to enforce and determine the scope and validity of
the Company's proprietary rights.

UNCERTAINTY OF PHARMACEUTICAL PRICING AND REIMBURSEMENT

In the U.S. and elsewhere, sales of pharmaceutical products are dependent, in
part, on the availability of reimbursement to the consumer from third party
payors, such as government and private insurance plans. Third party payors are
increasingly challenging the prices charged for medical products and services.
With the introduction of sildenafil, third party payors have begun to restrict
or eliminate reimbursement for erectile dysfunction treatments. While more than
70 percent of prescriptions in the U.S. for MUSE have been reimbursed by third
party payors since its commercial launch in January 1997, there can be no
assurance that the Company's

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products will be considered cost effective and that reimbursement to the
consumer will continue to be available or sufficient to allow the Company to
sell its products on a competitive basis.

In addition, certain health care providers are moving towards a managed care
system in which such providers contract to provide comprehensive health care
services, including prescription drugs, for a fixed cost per person. The Company
hopes to further qualify MUSE for reimbursement in the managed care environment.
However, the Company is unable to predict the reimbursement policies employed by
third-party health care payors. Furthermore, reimbursement for MUSE could be
adversely affected by changes in reimbursement policies of governmental or
private health care payors.

PRODUCT LIABILITY AND AVAILABILITY OF INSURANCE

The commercial launch of MUSE exposes the Company to a significant risk of
product liability claims due to its availability to a large population of
patients. In addition, pharmaceutical products are subject to heightened risk
for product liability claims due to inherent side effects. The Company details
potential side effects in the patient package insert and the physician package
insert, both of which are distributed with MUSE, and the Company maintains
product liability insurance coverage. However, the Company's product liability
coverage is limited and may not be adequate to cover potential product liability
exposure. Product liability insurance is expensive, difficult to maintain and
current or increased coverage may not be available on acceptable terms, if at
all. Product liability claims brought against the Company in excess of its
insurance coverage, if any, could have a material adverse effect upon the
Company's business, financial condition and results of operations.

UNCERTAINTY AND POSSIBLE NEGATIVE EFFECTS OF HEALTHCARE REFORM

The healthcare industry is undergoing fundamental changes that are the result
of political, economic and regulatory influences. The levels of revenue and
profitability of pharmaceutical companies may be affected by the continuing
efforts of governmental and third party payors to contain or reduce healthcare
costs through various means. Reforms that have been and may be considered
include mandated basic healthcare benefits, controls on healthcare spending
through limitations on the increase in private health insurance premiums and
Medicare and Medicaid spending, the creation of large insurance purchasing
groups and fundamental changes to the healthcare delivery system. Due to
uncertainties regarding the outcome of healthcare reform initiatives and their
enactment and implementation, the Company cannot predict which, if any, of the
reform proposals will be adopted or the effect such adoption may have on the
Company. There can be no assurance that future healthcare legislation or other
changes in the administration or interpretation of government healthcare or
third party reimbursement programs will not have a material adverse effect on
the Company. Healthcare reform is also under consideration in some other
countries.

POTENTIAL VOLATILITY OF STOCK PRICE

The stock market has experienced significant price and volume fluctuations
unrelated to the operating performance of particular companies. In addition, the
market price of the Company's Common Stock has been highly volatile and is
likely to continue to be so. Factors such as the Company's ability to increase
demand for its product in the U.S., the Company's ability to successfully sell
its product in the U.S. and internationally, variations in the Company's
financial results and its ability to obtain needed financing, announcements of
technological innovations or new products by the Company or its competition,
comments by security analysts, adverse regulatory actions or decisions, any loss
of key management, the results of the Company's clinical trials or those of its
competition, changing governmental regulations, patents or other proprietary
rights, product or patent litigation or public concern as to the safety of
products developed by the Company, may have a significant effect on the market
price of the Company's Common Stock.

ANTI-TAKEOVER EFFECT OF PREFERRED SHARES RIGHTS PLAN AND CERTAIN CHARTER AND
BYLAW PROVISIONS

In February 1996, the Company's Board of Directors authorized its
reincorporation in the State of Delaware (the "Reincorporation") and adopted a
Preferred Shares Rights Plan. The Company's Reincorporation into the State of
Delaware was approved by its stockholders and became effective in May 1996. The
Preferred Shares Rights Plan provides for a dividend distribution of one
Preferred Shares Purchase Right (a "Right") on each outstanding share of the
Company's Common Stock. The Rights will become exercisable following the tenth
day after a person or group announces acquisition of 20 percent or more of the
Company's Common Stock, or announces commencement of a tender offer, the
consummation of which would result in ownership by the person or group of 20
percent or more of the Company's common stock. The Company will be entitled to
redeem the Rights at $0.01 per

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Right at any time on or before the tenth day following acquisition by a person
or group of 20 percent or more of the Company's common stock.

The Preferred Shares Rights Plan and certain provisions of the Company's
Certificate of Incorporation and Bylaws may have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
attempting to acquire, control of the Company. The Company's Certificate of
Incorporation allows the Company to issue Preferred Stock without any vote or
further action by the stockholders, and certain provisions of the Company's
Certificate of Incorporation and Bylaws eliminate the right of stockholders to
act by written consent without a meeting, specify procedures for director
nominations by stockholders and submission of other proposals for consideration
at stockholder meetings, and eliminate cumulative voting in the election of
directors. Certain provisions of Delaware law could also delay or make more
difficult a merger, tender offer or proxy contest involving the Company,
including Section 203, which prohibits a Delaware corporation from engaging in
any business combination with any interested stockholder for a period of three
years unless certain conditions are met. The Preferred Shares Rights Plan, the
possible issuance of Preferred Stock, the procedures required for director
nominations and stockholder proposals and Delaware law could have the effect of
delaying, deferring or preventing a change in control of the Company, including
without limitation, discouraging a proxy contest or making more difficult the
acquisition of a substantial block of the Company's common stock. These
provisions could also limit the price that investors might be willing to pay in
the future for shares of the Company's Common Stock.

PART II: OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

On October 5, 1998, the Company was named in a civil action filed in the
Superior Court of New Jersey. This complaint seeks specific performance and
other relief in connection with the Company's leased manufacturing facilities,
located in Lakewood, New Jersey. The Company's lease agreement requires that the
Company provide a removal security deposit in the form of cash or a letter of
credit. The Company and lessor ("plaintiff") have not been able to agree on the
amount of such deposit and the plaintiff filed suit asking for specific
performance in the amount of $3.3 million. The Company believes that the amount
sought by the plaintiff is excessive and not mandated by the terms of the lease.
However, if the Company is required to post a certificate of deposit of $3.3
million, this will have a material adverse effect on the company's financial
condition.

On February 18, 1998, a purported shareholder class action entitled Crain et
al. v. Vivus, Inc. et al., was filed in Superior Court of the State of
California for the County of San Mateo. Five identical complaints were
subsequently filed in the same court. These complaints were filed on behalf of a
purported class of persons who purchased stock between May 15, 1997 and December
9, 1997. The complaints alleged that the Company and certain current and former
officers or directors artificially inflated the Company's stock price by issuing
false and misleading statements concerning the Company's prospects and issuing
false financial statements. On March 16, 1998, a purported shareholder class
action entitled Cramblit et al. v. Vivus, Inc. et al. was filed in the United
States District Court for the Northern District of California. Five additional
complaints were subsequently filed in the same court. The federal complaints
were filed on behalf of a purported class of persons who purchased stock between
May 2, 1997 and December 9, 1997. The federal complaints asserted the same
factual allegations as the state court complaints, but asserted legal claims
under the Federal Securities Laws. The federal court cases were consolidated,
and a lead plaintiff has been appointed and the plaintiff filed a consolidated
and amended complaint in 1998.

In the normal course of business, the Company receives and makes inquiries
regarding patent infringement and other legal matters. The Company believes that
it has meritorious claims and defenses and intends to pursue any such matters
vigorously. The Company is not aware of any asserted or unasserted claims
against it where the resolution would have an adverse material impact on the
operations or financial position of the Company.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

None

20
<PAGE> 21

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The annual meeting of stockholders was held June 8, 1999. Matters voted on
at that meeting were: (i) the election of six directors and (ii) the
confirmation of the appointment of Arthur Andersen LLP as independent public
accountants for the fiscal year ended December 31, 1999. Tabulation for each
proposal and individual director were as follows:

Proposal I. Election of Directors

<TABLE>
<CAPTION>
Director For Withheld
-------- --- --------
<S> <C> <C>
Virgil A. Place, MD 28,476,586 287,932
Leland F. Wilson 28,345,348 419,170
Mark B. Logan 28,514,046 250,472
Linda M. Shortliffe, MD 28,512,938 251,580
Mario M. Rosati 28,519,746 244,772
Joseph E. Smith 28,521,746 243,472
</TABLE>

Proposal II. Confirmation of the Appointment of Arthur Andersen LLP

<TABLE>
<CAPTION>
For Against Abstain No Vote
--- ------- ------- -------
<S> <C> <C> <C>
28,584,682 141,203 38,633 --
</TABLE>

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS (in accordance with Item 601 of Regulation S-K)

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
3.2(7) Amended and Restated Certificate of Incorporation of the
Company

3.3(4) Bylaws of the Registrant, as amended

3.4(8) Certificate of Designations of Rights, Preferences and
Privileges of Series A Participating Preferred Stock

4.1(7) Specimen Common Stock Certificate of the Registrant

4.2(7) Registration Rights, as amended

4.4(1) Form of Preferred Stock Purchase Warrant issued by the
Registrant to Invemed Associates, Inc., Frazier Investment
Securities, L.P., and Cristina H. Kepner

4.5(8) Second Amended and Restated Preferred Shares Rights Agreement,
dated as of April 15, 1997 by and between the Registrant and
Harris Trust Company of California, including the Certificate
of Determination, the form of Rights Certificate and the
Summary of Rights attached thereto as Exhibits A, B, and C,
respectively

10.1(1)+ Assignment Agreement by and between Alza Corporation and the
Registrant dated December 31, 1993

10.2(1)+ Memorandum of Understanding by and between Ortho
Pharmaceutical Corporation and the Registrant dated February
25, 1992

10.3(1)+ Assignment Agreement by and between Ortho Pharmaceutical
Corporation and the Registrant dated June 9, 1992

10.4(1)+ License Agreement by and between Gene A. Voss, MD, Allen C.
Eichler, MD, and the Registrant

</TABLE>

21
<PAGE> 22

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
dated December 28, 1992

10.5A(1)+ License Agreement by and between Ortho Pharmaceutical
Corporation and Kjell Holmquist AB dated June 23, 1989

10.5B(1)+ Amendment by and between Kjell Holmquist AB and the Registrant
dated July 3, 1992

10.5C(1) Amendment by and between Kjell Holmquist AB and the Registrant
dated April 22, 1992

10.5D(1)+ Stock Purchase Agreement by and between Kjell Holmquist AB and
the Registrant dated April 22, 1992

10.6A(1)+ License Agreement by and between Amsu, Ltd., and Ortho
Pharmaceutical Corporation dated June 23, 1989

10.6B(1)+ Amendment by and between Amsu, Ltd., and the Registrant dated
July 3, 1992

10.6C(1) Amendment by and between Amsu, Ltd., and the Registrant dated
April 22, 1992

10.6D(1)+ Stock Purchase Agreement by and between Amsu, Ltd., and the
Registrant dated July 10, 1992

10.11(4) Form of Indemnification Agreements by and among the Registrant
and the Directors and Officers of the Registrant

10.12(2) 1991 Incentive Stock Plan and Form of Agreement, as amended

10.13(1) 1994 Director Option Plan and Form of Agreement

10.14(1) Form of 1994 Employee Stock Purchase Plan and Form of
Subscription Agreement

10.17(1) Letter Agreement between the Registrant and Leland F. Wilson
dated June 14, 1991 concerning severance pay

10.21(3)+ Distribution Services Agreement between the Registrant and
Synergy Logistics, Inc. (a wholly-owned subsidiary of Cardinal
Health, Inc.)+ dated February 9, 1996

10.22(3)+ Manufacturing Agreement between the Registrant and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December 20,
1995

10.22A(11)+ Amendment One, dated as of December 11, 1997, to the
Manufacturing Agreement by and between VIVUS and CHINOIN
Pharmaceutical and Chemical Works Co., Ltd. dated December 20,
1995

10.23(6)+ Distribution and Services Agreement between the Registrant and
Alternate Site Distributors, Inc. dated July 17, 1996

10.24(5)+ Distribution Agreement made as of May 29, 1996 between the
Registrant and ASTRAZ AB

10.27(11)+ Distribution Agreement made as of January 22, 1997 between the
Registrant and Janssen Pharmaceutica International, a division
of Cilag AG International

10.27A(11)+ Amended and Restated Addendum 1091, dated as of October 29,
1997, between VIVUS International Limited and Janssen
Pharmaceutica International

10.28(7) Lease Agreement made as of January 1, 1997 between the
Registrant and Airport Associates

10.29(7) Lease Amendment No. 1 as of February 15, 1997 between
Registrant and Airport Associates

10.29A(10) Lease Amendment No. 2 dated July 24, 1997 by and between the
Registrant and Airport Associates

10.29B(10) Lease Amendment No. 3 dated July 24, 1997 by and between the
Registrant and Airport Associates

10.31(9)+ Manufacture and Supply Agreement between Registrant and
Spolana Chemical Works, A.S. dated May 30, 1997

10.32A(11) Agreement between ADP Marshall, Inc. and the Registrant dated
December 19, 1997

10.32B(11) General Conditions of the Contract for Construction

10.32C(11) Addendum to General Conditions of the Contract for
Construction

10.34(12)+ Agreement dated as of June 30, 1998 between Registrant and
Alza Corporation

10.35(12)+ Sales Force Transition Agreement dated July 6, 1998 between
Registrant and Alza Corporation

10.36(13) Form of, "Change of Control Agreements," dated July 8, 1998 by
and between the Registrant and certain Executive Officers of
the Company.
</TABLE>

22
<PAGE> 23

<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
10.37(13) Sublease agreement made as of November 17, 1998 between
Caliper Technologies, Inc. and Registrant.

10.22B(13)+ Amendment Two, dated as of December 18, 1998 by and between
VIVUS, Inc. and CHINOIN Pharmaceutical and Chemical Works Co.

10.31A(13)+ Amendment One, dated as of December 12, 1998 by and between
VIVUS, Inc. and Spolana Chemical Works, A.S.

27.1 Financial Data Schedule
</TABLE>
- ----------
* Confidential treatment requested.

+ Confidential treatment granted.

(1) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-75698, as amended.

(2) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Registration Statement on Form S-1 No. 33-90390, as amended.

(3) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1995, as amended.

(4) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Form 8-B filed with the Commission on June 24, 1996.

(5) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Current Report on Form 8-K/A filed with the Commission on June
21, 1996.

(6) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1996.

(7) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1996, as amended.

(8) Incorporated by reference to exhibit 99.1 filed with Registrant's Amendment
Number 2 to the Registration Statement of Form 8-A (File No. 0-23490) filed
with the Commission on April 23, 1997.

(9) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1997.

(10) Incorporated by reference to the same numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended September
30, 1997.

(11) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1997.

(12) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June 30,
1998.

(13) Incorporated by reference to the same-numbered exhibit filed with the
Registrant's Annual Report on Form 10-K for the year ended December 31,
1998.

23
<PAGE> 24

(b) REPORTS ON FORM 8-K

24
<PAGE> 25

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

VIVUS, Inc. Date:

August 11, 1999 /s/ RICHARD WALLISER
------------------------------------------
Richard Walliser
Vice President and Chief Financial Officer

/s/ LELAND F. WILSON
------------------------------------------
Leland F. Wilson
President and Chief Executive Officer

25
<PAGE> 26

VIVUS, INC.

INDEX TO EXHIBITS*

<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<S> <C>
27.1 Financial Data Schedule
</TABLE>

- ------------

* Only exhibits actually filed are listed. Exhibits incorporated by reference
are set forth in the exhibit listing included in Item 6 of the Quarterly
Report on Form 10-Q.

<ARTICLE> 5
<MULTIPLIER> 1,000

<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 5,152
<SECURITIES> 33,542
<RECEIVABLES> 2,706
<ALLOWANCES> (188)
<INVENTORY> 4,093
<CURRENT-ASSETS> 46,460
<PP&E> 36,531
<DEPRECIATION> (18,898)
<TOTAL-ASSETS> 64,093
<CURRENT-LIABILITIES> 31,099
<BONDS> 0
0
0
<COMMON> 32
<OTHER-SE> 26,910
<TOTAL-LIABILITY-AND-EQUITY> 64,093
<SALES> 6,811
<TOTAL-REVENUES> 6,811
<CGS> 3,072
<TOTAL-COSTS> 6,988
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 307
<INCOME-TAX> 15
<INCOME-CONTINUING> 292
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 292
<EPS-BASIC> 0.01<F1>
<EPS-DILUTED> 0.01
<FN>
<F1>For Purposes of this Exhibit, Primary means Basic
</FN>

</TABLE>