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By Brian Tracz

Shares of Vivus Inc (VVUS) have been in free-fall mode since the beginning of July, with shares down more than 60 percent since then. However, this has not discouraged QVT Financial, run by managing partners Daniel A. Gold and Tracy Fu, from buttressing their activist stake in the company with 8.3 million shares, up from 8 million at the end of June (see QVT's portfolio here). This gives them an 8.3 percent stake in this popular pharmaceutical company.

We have detailed Vivus' story before. Vivus recently began the sale of its weight-loss drug Qsymia, a hot-cake drug in an eager weight loss market. However, based on its third quarter earnings loss of 40 cents per share, compared to an expected loss of 32 cents, Vivus' alleged blockbuster drug still has a ways to go before being labeled a sales success. Andrew Barens, senior analyst with Bloomberg Industries, noted that "the street expects the drug to be a blockbuster, but it looks like a very slow launch." This is leading some investors to question whether "their strategy makes any sense."

And then there's Arena Pharmaceuticals, Inc. (ARNA) and a few other competitors. Belviq is the major competition to Qsymia, and with far fewer contraindications, Belviq is more likely to be the first-prescribed drug between Qsymia and Bevliq. What's more, Belviq is yet to hit the market, so we could very well see a surge of optimism in the second quarter from Arena's end. The product will be marketed by Eisai Co., Ltd (OTCPK:ESALY). Arena recorded a 7 cent loss this quarter, in comparison to 16 cents last quarter. However, the company has returned over 350 percent year-to-date, and management expects between $91 and $97 million in revenues for the coming year.

If QVT wants to strengthen its activist position, the present post-earnings dip seems like as good a time as any. At the present price levels, QVT has, in effect, bought shares that have given it the power to initiate talks regarding the sale of the company. Talk of selling the company comes along with highly promissory analyst comments-Credit Suisse analyst Lee Kalowski claims that the company will deliver $12 million in revenue for the fourth quarter 2012. Though Kalowski has an outperform rating on the stock, his revenue estimates for the drug are at around half that of consensus analyst estimates.

What should investors do with these players in the weight-loss race? As is the case with small-cap pharmaceutical companies with only a small number of drugs, classic value metrics are not particularly helpful; Qsymia is Vivus' flagship product. Thompson Reuters assigned a $32 price target to the stock, and other analyst firms have targets in the upper $20s. It is somewhat hard to see the company realizing this in the face of regulatory friction in Europe (Qsymia was turned away due to side effects), increasing competition from Arena, and the lack of sales and marketing momentum present in larger companies like GlaxoSmithKline plc (GSK) and AstraZeneca plc (AZN).

However, we view the activity by QVT as a positive indicator for Vivus, and it is also reassuring to see that John Burbank's $3.4 billion hedge fund Passport Capital also has a significant stake in the company (view the fund's newest holdings here). Moving the sales of its market-ready products Qsymia and Stendra (a drug for erectile dysfunction) to companies like GlaxoSmithKline plc or AstraZeneca plc would provide the sales momentum required to compete with Arena. With shares trading at near their 52-week low, Vivus is an interesting investment idea, assuming a sales catalyst.

Source: Vivus Inc: This Hedge Fund Just Went Activist