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Buy, Sell, or Hold: VIVUS

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When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether it's possible upside outweighs its risks. Let's take a look at VIVUS (Nasdaq: VVUS  ) , a biotechnology concern, today.

The company has a market capitalization of $2.4 billion, and its stock has more than tripled over the past year. That leads many to wonder, is it best to buy, sell, or hold it?

First off, it's important to remember that while the field of biotechnology is a plus in itself, as it's bound to grow over time, serving our planet's booming and aging population, all biotech companies are not equally attractive.

Next up is the VIVUS drug that most interests investors: Qnexa, which seems to be effective in fighting obesity -- a growing problem in America and elsewhere. It's nearing FDA approval, which seems likely but not guaranteed. The drug is also in clinical trials to determine its efficacy against diabetes and sleep apnea, two other very prevalent conditions.

Some pin hopes on approval for Qnexa in Europe, which is seen as easier to obtain than in the U.S. But that's not a slam-dunk, either. For example, Europe called for Abbott Labs (NYSE: ABT  ) to pull its weight-loss drug Meridia off the market before the FDA did.

Another plus for VIVUS is that there's more to it than just Qnexa. It also has an erectile-dysfunction drug, Stendra, which has recently been approved by the FDA. Erectile dysfunction treatment currently tops $5 billion a year in sales, but competition is fierce, and generics will radically change the economic landscape.

You might want to sell the stock if you can't stomach volatility. After all, the stock surged 90% when approval of Qnexa was recommended, and fell some 15% when concerns arose over possible birth defects tied to Qnexa.

FDA approvals themselves are another issue for biotech companies. It's never guaranteed that a company will gain approval for some treatment it has spent many years and many millions (often hundreds of millions) of dollars on. Indeed, even Qnexa was initially rejected by a 10-6 vote, due to troubling side effects that accompanied demonstrated effectiveness against obesity.

With VIVUS, share dilution is another concern. Imagine being allocated a slice of a pizza cut into eight equal pieces. If it's announced that there will be 10 pieces instead, your piece just got smaller. That's what happens to the ownership stake of existing shareholders when a company raises money by issuing new shares. In 2009, VIVUS announced a secondary offering of 9 million shares, at a time when it had about 70 million outstanding. That amounted to a share increase of roughly 13%! Indeed, since 2007, the company's shares outstanding have risen from about 58 million to 99 million today.

VIVUS also has competition. Other companies making anti-obesity drugs include Arena (Nasdaq: ARNA  ) and Orexigen  (Nasdaq: OREX  ) .

The company's financial statements are not encouraging, either. It has been posting net losses for many years in a row now, instead of net gains. (On the plus side, though, it isn't dealing with mountains of debt, like some companies.) And to be fair, the company has just recently had a drug approved, and another nearing likely approval, so its future may well look different from its past.

And finally, there's the stock's valuation. It recently sported a forward P/E of 70, compared with just 13 for the S&P 500. Its market cap of $2.4 billion isn't modest, either, for an unprofitable company. It might end up rewarding investors handsomely from this point on, but there isn't much margin of safety -- the stock seems priced for great success, not for any further hiccups.

Given the pros and cons of VIVUS right now, it makes plenty of sense to just hold off. You might want to wait until the FDA's next decision about Qnexa in July. You might want to wait for VIVUS to have more products on sale or approved. You might wait to see several quarters of net income instead of losses.

The verdict
I think I'll be holding off on VIVUS, at least for now. After all, there are plenty of compelling stocks out there with more certain futures.

If you're looking for a blockbuster stock, our analysts think they've found a very promising company. Check out our special free report, "Discover the Next Rule-Breaking Multibagger," to learn more about it.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, holds no position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Abbott Laboratories. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 12, 2012, at 10:46 AM, JerryCT48 wrote:

    This article seems like a somewhat superficial treatment of VVUS. In particular the argument for "Hold" seems lacking as most readers would think of "Hold" as applying to existing shareholders versus someone who doesn't have a position. The other major area this article overlooks is the potential for VVUS to be acquired by a large cap Pharmaceutical company like PFE or JNJ especially once Qnexa is approved. JNJ already makes Topimirate which is one of the two drugs in Qnexa. Likewise PFE can extend its current patent position in ED drugs through Avanafil, while simultaneously moving into the obesity market through Qnexa. VVUS would be a relatively small acquisition for either of these companies.

  • Report this Comment On June 12, 2012, at 12:18 PM, TMFSelena wrote:

    Good point, JerryCT48! Its being an acquisition target is definitely another consideration. Thanks for sharing your thoughts.

    -- Selena

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