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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.
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.
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.
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