3 Reasons to Sell: VIVUS

As investors, it is our job to look at both sides of a story. We must carefully weigh the pros and cons of a given company to decide whether or not its stock is worth the appointed risk. The key is to find the right balance between risk and reward. Earlier this month, I offered investors three advantages to owning shares of VIVUS (Nasdaq: VVUS  ) . Today, I'll round out the series by giving you three reasons to steer clear of this biotech company.  

1. Patent problems
Last month, the FDA approved VIVUS' new anti-obesity drug, Qsymia, for sale in the United States. The decision came on the heels of another newly accepted weight-loss treatment, Belviq, from Arena Pharmaceuticals (Nasdaq: ARNA  ) . However, for VIVUS the good news didn't last long.  

Shortly after regulators granted VIVUS the green light, patent concerns surfaced around the company's new drug Qsymia. The problem is that Qsymia is simply a combination of two generic drugs known as topiramate and phentermine. Citron Research first exposed this disconnect in a report last month: "For a drug with purported 'multi-billion dollar market potential,' Citron is astounded by the weakness of Vivus' intellectual property protection."

This is a serious problem for VIVUS, considering generic competition poses the greatest threat to biotech companies. Worse still, Yahoo! reported that in one clinical trial a combination of the two off-patent drugs proved to be as effective as Qsymia. As a result, analysts slashed their price targets and shares of VIVUS plummeted on the news.

2. Risky side effects
It is true that in clinical trials VIVUS' Qsymia pill appeared more effective in treating obesity than Arena's Belviq. However, that advantage comes at a potentially dangerous price. Patients prescribed Qsymia risk serious heart conditions, and pregnant women can't use the drug given possible birth defects. Comparably, cardiovascular issues have held back Orexigen Therapeutics' (Nasdaq: OREX  ) anti-obesity drug, Contrave. Orexigen will have to wait until next year before it can resubmit new clinical data to the FDA, with hopes of proving that its medical weight-loss treatments are safer than previously demonstrated.

Meanwhile, VIVUS must still jump through some safety hoops of its own. In fact, the FDA is requiring that the drugmaker carry out 10 additional safety studies once Qsymia is available to patients. Of course, there's always a chance that VIVUS' drug gets pulled late in the game over such safety concerns. Just look at what happened two years ago to Abbott Labs' (NYSE: ABT  ) popular diet medication, Meridia. The drug was pulled from the market after increasing the risk of heart attacks and strokes in patients taking it.

For VIVUS, a more immediate setback is the restricted use of its drug for potential female patients. In order to qualify for the treatment, women must first take a pregnancy test to prove they are not with child, and will be required to do so each month thereafter while prescribed Qsymia. That's a serious obligation that may drive many would-be Qsymia users into the arms of the competition -- namely Arena's Belviq, which does not require such testing. 

3. A questionable drug launch
VIVUS plans to launch its drug in the fourth quarter of 2012, but chances are that sales will be slow at the start. While there is a potentially profitable market for prescription weight-loss drugs, VIVUS currently has no clear path to those profits. At this point, the company plans to launch Qsymia on its own. That's a risky and expensive burden, which is typically shared with a big pharma partner. For example, Arena is already matched up with Japanese pharmaceutical maker Eisai for the marketing of Belviq.   

Without the help of a major pharmaceutical company to share some of the costs, VIVUS' stock could take a hit in the quarters to come. On top of marketing its own drug, VIVUS faces substantial costs related to the in-market studies it must still conduct for the FDA. Another problem is the fact that VIVUS has not yet worked out insurance coverage for the drug. This means that patients will be forced to pay for the treatment in full.

A better alternative
Together these challenges create a compelling case against the stock. While I'd love to believe in the full potential of VIVUS and its new drug, the inherent risks largely outweigh the possible rewards. At the same time, the market potential for anti-obesity drugs is tremendous. The climbing rate of obesity in this country and the world at large means big bucks for worthy biotech companies.

That's why investors should still keep watch on VIVUS' rival, Arena Pharmaceuticals. In fact, I encourage you to check out this new premium research report on Arena Pharmaceuticals. In it you will get an inside look at key opportunities and risks facing the company, as well as a full year of timely updates on the stock. Click here to get your copy now, while it's still available.

Fool contributor Tamara Rutter owns shares of VIVUS and Arena Pharmaceuticals. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish insights and investing advice. 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 (12) | Recommend This Article (9)

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 August 22, 2012, at 8:39 PM, genesis667 wrote:

    Qsymia is DOA....

  • Report this Comment On August 22, 2012, at 8:54 PM, cdstrader wrote:

    "Shortly after regulators granted VIVUS the green light, patent concerns surfaced around the company's new drug Qsymia. The problem is that Qsymia is simply a combination of two generic drugs known as topiramate and phentermine. Citron Research first exposed this disconnect in a report last month.."

    What??

    The patent issues and the fact that Qsymia is made up of two generic drugs has been known since Qsymia has been in development.

    "Worse still, Yahoo! reported that in one clinical trial a combination of the two off-patent drugs proved to be as effective as Qsymia."

    The author quotes "Yahoo!" as a source. Ummm ok. Then she claims "Yahoo!" reported the two generics were proven to be just as effective as Qsymia in "one clinical trial." What? Did she think about that sentence before writing it? Qsymia is made up of two generics. Is it a surprise that the two generics would be effective? And who is conducting this "clinical trial"?

    "As a result, analysts slashed their price targets and shares of VIVUS plummeted on the news."

    What? Its one thing to print opinions, but why make things up? Only one analyst has lowered his price target on Vivus since approval (due to generic substitution concerns). Several have raised it. But she won't print that. No, that's too factual and informed.

    This "report" is laughable at best. Its amazing to me how much craziness surrounds Arena and Vivus. There are so many Arena zealots who bash Vivus in the most obviously false ways and at every given chance. I've never seen anything like it. I don't get it..

  • Report this Comment On August 22, 2012, at 9:01 PM, mincasa wrote:

    Savy investors know that Qsymia is the biggest scam since Face Book..HF and WS guys can't live with their costly mistake and they are still trying to prove that VVUS will make it..Lets see how long it will take for the street to wake up and loose the millions they invested in VVUS..meanwhile, ARNA is being draged through the mud, but not for long..give it another couple of months, after EU and DEA approval, ARNA will dominate the stage again..Buy ARNA and sell VVUS before you loose your $$

  • Report this Comment On August 22, 2012, at 9:22 PM, whttrails wrote:

    wow!, what a poorly written article when it comes to research. I'd be embarrassed at this piece of work if you can call it that.

    1. Tell me how many analysts have downgraded VVUS due to generic competition?

    2. Won't other obesity treatments have to compete with those generics as well?

    3. Tell me how many diet drugs are used and would even be considered to be used by pregnant women?

    4. What are the dosages of Qsymias components compared to those currently used where tetragenocity has a warning? and did any of the pregnant women that took Qsymia during trials have children with birth defects?

    5. No obesity drugs or treatments are covered by insurance so all competitiors are facing the same issue.

    6. How big is the obesity market?

    I will only agree with your #3 point. Next few quarters could be tough on VVUS investors as cost grow. If they sell STENDRA then they should be able to handle it no problem.

  • Report this Comment On August 22, 2012, at 9:48 PM, whttrails wrote:

    I forgot to add, patent issues are nonexistent. VVUS has had patent lawyers review the issues several times and they stand by the strength of the current patents.

  • Report this Comment On August 23, 2012, at 12:12 AM, Vanmusicblues wrote:

    Very poor opinion piece with no back-up

    Heart issues? CV improves. What heart issues?

    Costs of the future tests are funded by patents taking the drug. Same issue for ARNA

  • Report this Comment On August 23, 2012, at 2:09 AM, chilawyer wrote:

    3 reasons to ignore Motley Fool's report on VVUS:

    1. Mostly old "news" from shorts;

    2. Poorly conceived and written;

    3. Driven by self-interest. The Fool slams VVUS, touts Arena, then invites the yokels to shell out 10 bucks for a copy of MF's glowing report on Arena.

    There's no fool like a Motley Fool.

  • Report this Comment On August 23, 2012, at 10:06 AM, phemale4ever wrote:

    I always thought Motley Fool was a legitimate research tool for stock information -- until now. The head of Citron, Andrew Left, has a record for conviction of fraud:

    http://www.investorvillage.com/smbd.asp?mb=16473&mn=23&a...

    Citron and others have uncovered some companies in China that played with their figures, however, VVUS has been around for over a decade legitimately conducting trials, gone through adcomms, and were properly approved by the FDA for their new diet drug Qnexa (Qsymia). This nonsense you spew is to manipulate and give ARNA a better foothold but bad news for investing -- period. Is it any wonder people believe the market is rigged and only fools invest.

    There is ulterior motives in your report as there was in Jefferies' downgrade of VVUS --- they just happen to have been underwriters for guess who? Oh yeah, Arena!!

    It appears whenever VVUS heads upward in price some article suddenly appears with "bad news" --- predictable as MF is now!

  • Report this Comment On August 23, 2012, at 10:34 AM, phemale4ever wrote:

    Ms. Rutter, since you are advising VVUS holders to "sell" how about you? Are you selling your shares?

  • Report this Comment On August 23, 2012, at 10:38 AM, rcf812 wrote:

    I agree some of the comments, all the concerns are valid.

  • Report this Comment On August 23, 2012, at 11:17 AM, CER4040 wrote:

    The point about VVUS patent protection is Legitimate don't call the article trash just because you VVUS bag holders didn't do your research or are in denial. Doctors can prescribe the combo alone without having to pay VVUS a dime. They are both available on the market separately as generics. Vivus has absolutely no legal protection against prescribing the generics separately!!!

    So as a patient and or a doctor what are you going to do... pay double for the same drug?? And that's assuming you want to risk your mortality with an unsafe drug.

    This is the first realistic article I have read exposing the collapsing house of cards known as VVUS.

    The only reason the stock has held any value at all is because the institutional investors keep propping it up - they own the majority of the float. Give it 2-3 quarters worth of reporting extremely low sales and huge loss's for supporting ongoing FDA mandated safety tests and VVUS stock will be in the low single digits filing for bankruptcy protection.

  • Report this Comment On August 24, 2012, at 10:02 AM, TMFSocialME wrote:

    Hi, All --

    Thank you for your comments. As you can see from the disclosure, I currently own shares of both Arena and VIVUS. However, the patent issues involving Qsymia should not be taken lightly. The fact that doctors can just as easily prescribe generic topiramate and phentermine as a cheaper alternative to Qsymia, could have a lasting negative impact on future sales and profitability of the treatment.

    It is also worrisome that VIVUS doesn’t currently have a marketing partner for the drug. I think these are substantial risk factors that investors should take into consideration.

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