Now That the Vivus Dust Has Settled …

by James Brumley | January 10, 2013 11:45 am

Now That the Vivus Dust Has Settled …

Back in late July, when I suggested the possibility that Vivus (NASDAQ:VVUS[1]) shares may perform poorly[2] following the approval of its weight-loss drug Qsymia, I caught flack for the idea. And by “caught flack,” I mean I expected people to show up at my doorstep with pitchforks, looking to skewer me.

With the stock now trading 41% lower than it was then, however, I at least had the protection of being right.

I’m not revisiting Vivus to gloat, though. I’m looking at it now to publicly reverse my stance. Better still, I’m writing about VVUS today to pass along an important lesson.

Numbers Don’t Lie

A lot can happen in six months. For Vivus, it took that long to progress from a Food & Drug Administration approval of Qsymia to proven viability for the drug. And yes, while sales have been slow, they’ve at least been brisk enough — and for long enough — to say the drug has a market.

In December, Vivus reported prescriptions of Qsymia were up 68% compared to November, which was up 43% relative to October, when the company began offering the product in earnest. All told, Qsymia prescriptions ramped up from a count of 5,394 in October to 12,978 for December.

Don’t get the wrong idea: Those are still small numbers in the grand scheme of things (about $1.6 million worth of Qsymia, give or take), and given how Vivus was in the midst of a “Qsymia Get Started! Free Trial Offer” program during that time, at least some of the prescriptions were shipped gratis. So, the Q4 top line is still going to look anemic.

Nevertheless, it’s a strong indication of overall interest for a new drug that some onlookers said was unnecessary because its two core ingredients were available separately at a much lower cost.

Don’t assume that demand will dry up when and if the free-trial offer ends, either. As it turns out, about 30% of Qsymia prescriptions so far have been covered by insurers. That’s still not a huge number, but it’s more coverage than was expected. And more insurers may end up adding it to the list of prescriptions they’ll pay for.

Putting it all together, Vivus has adequately squelched its critics and proven that Qsymia is serviceable. The thing is, my bearish-then-but-bullish-now stance was never really about Qsymia’s revenue potential.

As I noted in July:

This isn’t a judgment on the merits of the company. This isn’t a judgment of Qsymia’s potential. This simply is a caution that there’s a huge disconnect between the stock’s price and any semblance of a plausible value right now, stemming from the fact that traders ran shares up too far in anticipation of Tuesday’s drug approval.

Sometimes that disconnect can work for a stock, and sometimes against it. With such high, hype-induced expectations surrounding this stock, though, that disconnect is more of a liability than beneficial for Vivus right now. The time to buy was months ago.

The good news is, these disconnects usually are short-lived. The bad news is, the odds favor a “reconnect” at prices considerably lower than where VVUS shares are priced now.

Well, the waiting period is over; VVUS is now reconnected to reason.

Perspective

That’s not to say the stock’s price is reasonable by broad market standards. It could be years before Qsymia sales reach levels that technically justify Vivus’ $1.45 billion market cap. After all, 2013’s sales outlooks for Qsymia are in the $80 million range.

But, as biotech-trading veterans can tell you, these stocks trade on potential value far more often then they trade based on current value. Those who are bullish on Vivus know that the entire obesity industry could be worth more than $50 billion by 2017[3], and a big chunk of that could be in prescription diet pills.

The naysayers will be quick to point out that consumers have only weakly embraced non-prescription diet pills and plans like Alli, despite selling at much more palatable prices. How could an expensive prescription diet drug do any better?

Actually, it can.

Though a tad self-serving, Vivus is right in saying the diet pill market is one that needs to be cultivated. Potential users need to be educated, not just about Qsymia but about the budding market in general.

And the industry still has some damage control that to do to overcome a black eye it received when the Fen-Phen diet drug and some of its copycats ended up being surprisingly dangerous. With time, however, those are all certainly surmountable challenges.

So, VVUS is certainly capable of climbing now, even if Qsymia sales aren’t flying through the roof yet.

Bottom line? The dust has settled, and the hype has faded. Now Vivus is trading like a biotech stock, free of euphoric whims. If you want in, now’s a much more sensible time, and it wouldn’t be a bad — even if still speculative — bet.

As of this writing, James Brumley does not have a position in Vivus.

Endnotes:
  1. VVUS: http://studio-5.financialcontent.com/investplace/quote?Symbol=VVUS
  2. may perform poorly: http://investorplace.com/2012/07/will-vivus-repeat-arenas-non-response/
  3. worth more than $50 billion by 2017: http://investorplace.com/2012/05/obesity-the-next-investment-driver/

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