By Brian Nichols
After being crushed over the last five months (more than 60%) shares of VIVUS Inc. (NASDAQ:VVUS) bounced 14% on Monday following a bullish report in regards to its weight loss drug. The company had lost its value due to concerns over consumer interest combined with restrictions placed on its drug, Qsymia. However, with its recent news there are now some who believe the excessive loss was premature. Therefore, is VIVUS now a buy or is there a better option?
Qsymia Sales Rising!
According to data from Symphony Health Solutions, prescriptions for VIVUS’ weight loss drug Qsymia rose 46% week-over-week. Up until this point, sales have been slow and disappointing. However, the company had recently initiated a free three week trial, which most likely negatively affected its sales.
VIVUS’ weight loss product has faced its fair share of adversity, and because of this adversity a slow start might be explained. The drug is only available through mail-order pharmacy; VIVUS can not market nor advertise the product on billboards, TV, or radio; and it is a bit pricey considering that the components can be obtained alone for a cheaper price.
As a result of the marketing problems for Qsymia I have been quite critical of its chances for success. After all, if no one knows of the product no one will want it. Therefore, the company is almost relying solely on a word-of-mouth strategy, which is by nature much slower than having a variety of channels.
The good news for VIVUS investors is that now the stock is priced considerably cheaper than it was following its FDA approval, with a $1.34 billion market cap. However, the company does have some competition and its upside might be dependent on its ability to utilize its position as the only weight loss product available for use, at this moment.
Is VIVUS a Buy or is there a Better Choice?
Eventually, all beat down stocks will see a short squeeze or will bounce from the bottom. At that point, after bouncing, it can either trend higher or it can fall considerably lower. VIVUS’ performance on Monday did show conviction; however one must not deny or ignore the concerns of its “46%” rise in sales.
Almost all headlines are advertising VIVUS’ 46% rise in sales, but what’s strange is that another research firm, IMS Health, stated that sales were only higher by 15% during the same period. Therefore, which report is true? A 46% rise would be fairly aggressive, especially after the company had disappointed in early November sales. But if the gains were only 15% then investors would not have responded with such optimism. Therefore, how do you play it or know what’s true?
In order to be safe investors might want to assume that sales growth is somewhere in the middle. Therefore you have to determine if a 30% rise in prescriptions would be worthy of such a move? Honestly, I don’t think so. You have to remember that sales were already weak, and this is now a $1.4 billion company. Also, VIVUS is not selling high priced cancer therapeutics, but rather weight loss products, some of which are not covered by insurance. Therefore, it has to be competitive with pricing, and higher sales are needed to achieve large profits.
Overall, I just don’t think a 30% rise in prescription sales for one week is enough to justify a $160 million premium on the company’s market cap. Sure, the company could see continued success with its word of mouth strategy, but not this quickly. Instead, I prefer its competitor Arena Pharmaceuticals, Inc. (NASDAQ:ARNA).
Arena Pharmaceuticals (ARNA): A Far Superior Choice
From a valuation standpoint, both are similar, but there are countless advantages to an investment in Arena. First, Arena is not restricted to the marketing limitations of VIVUS. Once Arena’s product comes to market we will see every piece of marketing material available. Also, Arena’s product is safer and is more likely to be accepted by consumers who have long-lasting memories of the deaths and lawsuits created by weight loss products of the past. Furthermore, Arena Pharmaceuticals has a partner to limit costs, its product has multiple health benefits, and finally it has global marketing potential. Therefore, with the restrictions placed upon VIVUS combined with the unknown of its progress, I don’t believe it is worth the risk that comes with a $1.3 billion market capitalization.
Brian Nichols is a blogger, author, and investor. Brian studied in the field of psychology and has researched extensively into behavioral finance, which include fear, emotional reaction, and all other emotions and or decisions that are clouded from an investor’s thought process as a result of money making (or losing) decisions. Brian uses his knowledge of psychology as a way to find value in the market and capitalize on the fear and irrational thinking that creates value in fundamentally strong companies. Brian is neither a long or short-term investor but invests with a system that includes selling once certain price targets are reached. The strategy can take weeks, months, and sometimes years but if the company is truly undervalued it will almost always return sizable gains. Brian explains this process in detail in his upcoming book “Taking Charge With Value Investing: How to Choose the Best Investments According to Price, Performance, & Valuation to Build a Winning Portfolio” which will be released in January 2013 by McGraw-Hill.