An Obese Proxy Fight

Proxy fights are like the demolition derby of the investment world. Pitting management desperately trying to keep their jobs against passionate rich investors always makes for an entertaining fight. Unfortunately, even if management makes it to the finish line, it's likely to limp across, beaten up in the process.

The latest entertainment comes from VIVUS (NASDAQ: VVUS  ) and First Manhattan, owner of 9.9% of the biotech.

First Manhattan dealt a blow on Monday, laying out its case for how the company is "hemorrhaging cash," urging shareholders to vote for its slate of board members.

Source: First Manhattan.

VIVUS' management struck back Tuesday, refuting many of First Manhattan's claims in a step by step approach.

Lies, damn lies, and statistics
First Manhattan points to VIVUS' large short interest as a sign that investors aren't confident in the management team. Management counters, pointing out that its most direct competitor, Arena Pharmaceuticals (NASDAQ: ARNA  ) , has a comparable short interest. I'm not sure that's the best counter argument -- maybe investors hate Arena's management, too? -- but the point is that it's clear many investors are betting that companies continue to struggle to sell obesity drugs.

The chart above, management insists, shows a "lack of understanding that investment is needed for the commercial launch of Qsymia and the work necessary to build the market during the time when the restricted mail-order only REMS distribution was in place." You've got to spend money to make money and all that jazz.

In First Manhattan's letter, Sam Colin, senior managing director at First Manhattan, quotes famed investor Warren Buffett multiple times. Management's retort? "Sam Colin is certainly NO Warren Buffett." Does that imply they'd step down if the real Warren Buffett was willing to take over VIVUS' board?

What's an investor to do?
I think investors are best off giving management a little more time. First Manhattan makes it sound all too easy. Changing the obesity space, where no drug has ever been a blockbuster, isn't exactly going to happen overnight.

But investors are in a bit of pickle because it's entirely possible that First Manhattan will dump its shares if it doesn't win the proxy battle. That won't be pretty.

Management might be best off looking at how Biogen Idec (NASDAQ: BIIB  ) handled its proxy fight with investor Carl Icahn, giving him a seat on the board -- filled by one of his appointees, Eric Rowinsky -- to get Icahn to remove his slate of proposed board members.

A little bit of compromise could go a long way toward grabbing the checkered flag with enough gas to fight against Arena.

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