Avoid This Biotech Stock

Editor's note: This article is a stock pitch made by a member on CAPS, The Motley Fool's free investing community. The pitch is published UNEDITED and is the opinion of the CAPS member whose pitch it is, in this case, TSIF.

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Company VIVUS (Nasdaq: VVUS  )
Submitted by TSIF
Member Rating 99.95
Submitted on 7/17/2012
Stock Price at Underperform Recommendation $27.02
VIVUS Profile
CAPS Star Rating (out of 5) **
Headquarters Mountain View, Calif.
Industry Biotechnology
Market Cap $2.26 billion

Sources: S&P Capital IQ, Yahoo! Finance, and Motley Fool CAPS.

This Week's Pitch:
I put my downthum in on Vivus, INC late in the trading day of July 17th. A date that will remain in memory for many Vivus workers and stock holders as the long awaited results for the FDA's decision for its newly named obesity drug now named Qsymia. The delay in announcing results saw a gut wrenching see-saw with swings of 10% out the gate as investors tried to determine if it was a "bear raid" or leaked bad news. I saw similar activity on Dendreon, so I waited and lurked with a potential downthumb should they receive a CRL or onnerous labeling requirements. With a 20-2 favorable decision by the advisory board in February, the smarter play would have probably been a wait until the approval and "sell the news". My thoughts on the delay was that labeling was indeed going to be restrictive and the PR needed careful analogy. Even a "leaked' or was it just a pre-written press release, supported passing.

Since Qsymia was approved, I'll have to settle for a "sell the news". The labeling on pregnancy requiring monthly tests, cardiological monitoring, and restrictions on pharmacies adds to the concern. A piece written by Citron, a known player of shorts, especially around option time potentially added to the selling this past Friday and we "may bounce up".

The patent issues are possibly old news, but the formulation question, whether doctors/clinics will continue to off-label the two common components remains. I had heard similar from a doctor interviewed who runs a clinic. KV-A is an example of a company that has competition from its own product.

Add in the following factors, and I'll hold my downthumb.

1. Arena's drug just approved has fewer issues with prescription and similar results. (I won't debate the generalities, just noting that there is similar competition).

2. Vivus has no MFG capabilities/experience and planned to "ramp" up slowly.

3. Vivus, is hoping for a buyout. The Feb 20-2 decision by the advisory board should have given them some time to shop.

4. Less a buyout, companies with single products, going it alone have generally faired poorly, [Dendreon (Nasdaq: DNDN  ) , Savient, Somaxon], etc.

5. Many biopharma followers have little patience. It's always time to look for the next multi-bagger. Loyalty of the holders is dim when you have a 400% gain in a year. Only the last ones in don't have a profit to protect/bank.

Overall, I felt my downthumb before the FDA announcement had the best CAPS edge as it covered me against a sudden drop due to bad news afterhours. If I was "wrong" about the immediate "sell the news" on an approval and difficult labeling, I was/am pretty sure this one's growth to a $2.5 Billion company with a bit "Obese" for this stage in the game.

Hold down and watch. A buyout could still materialize, but I think unlikely. Stronger, institutional hands with more patience could relieve the nervous retail traders of their decision burden holding this up. My likely scenario is a slow drift back to $18 or so. Then it depends on Vivus.

Foolish bottom line
While this CAPS All-Star thinks you should avoid VIVUS, for a stock you don't have to avoid, check out this free report on "The Motley Fool's Top Stock for 2012."

The Motley Fool is investors writing for investors. Dan Dzombak did not have a position in any of the companies mentioned in this article. Pitches must be compelling, made in the past 30 days, and be at least 400 words. The Motley Fool owns shares of Dendreon. 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 (4) | Recommend This Article (6)

Comments from our Foolish Readers

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  • Report this Comment On August 08, 2012, at 7:20 PM, AlanPithy wrote:

    Pretty fair synopsis of the challenges facing this company. Though you did forget to mention they have another drug for Erectile Dysfunction. I always thought that drug had a better shot even if the market is crowded but the company and wall street all seem to be convinced that their weight loss concoction is the money maker. I just don't see it. Putting two pretty annoying generic drugs in one capsule and calling it a breakthrough will probably be underwhelming to the medical community. The world already knows phentermine causes weight loss, so why add topiramate to it? It may work a little better but at so much additional risk its not worth it imho. And I don't think the doctors are going to think so either.

  • Report this Comment On August 08, 2012, at 10:34 PM, Foreeverlong wrote:

    I think that your article is honest and right!!

  • Report this Comment On August 08, 2012, at 10:39 PM, Foreeverlong wrote:

    I am long ARNA, but if I was in Vivus, I would do whatever is possible to get out. Many reasons, as we both know, Qsymia is not going to be a success, assuming it gets to market. I just don't see a BP stepping up to take this on.

  • Report this Comment On August 10, 2012, at 11:16 AM, TSIF wrote:

    AlanPithy, you are correct, I did omit Stendra (avanafil) approval in April. The market is bloated (with both presciption and over the counter Non-FDA approved "remedies") and there are few reasons for the market penetration to be meaningful to Vivus.

    Companies such as Vivus, (Dndn, SVNT etc) with no MFG experience/facilities and salesforce hope to be acquired. If they have to grow MFG and sales, the expenses in the early stages will stymie, if not prevent meaningful revenue growth.

    Foreverlong, thanks, I agree.

    This was intended as a CAPS pitch, notes, not an article. I am NOT short Vivus, nor do I recommend shorting it as that market is already crowded.

    I am considering Arna (if it drops below $6.80 or so), but do not hold nor ever held a position. Anything there, short an acquirer, is also long term.

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