History repeats itself. Well, let's just say there is a good chance history will repeat itself. On Thursday, Vivus (VVUS) received a very bullish 20-2 vote from the FDA advisory panel to approve its obesity drug Qnexa but "stressed that the drugmaker must be required to conduct a large, follow-up study of the pill's effects on the heart." Since then, shares have doubled, hitting a high of $22.13.
The problem: Why would the FDA approve a drug before a safety study? Isn't the FDA's job to keep Americans safe from potential harmful drugs? There is no logic in approving this drug before a safety study.
Why I say that this repeats history: it is almost what exactly happened to Orexigen Therapeutics (OREX). In my previous article, I noted that OREX nearly doubled after the FDA advisory panel recommended approval for its weight loss drug candidate Contrave but also recommended the FDA "then require a follow-up safety study." The drug didn't get approved, and the stock plunged some 86%.
Lately, the FDA has placed safety as a #1 priority. Plus, an obesity pill has never been approved before, since the FDA does not see obesity as a disease. Contrave was a weight loss drug that got rejected for no safety study. Why won't Qnesa also be rejected?
And insiders might agree. On Friday, four insiders filed SEC Form 4 exercising options and selling the resulting 488,567 shares for $10.1 million. CEO Leland Wilson sold 150,000 shares, and VP & Chief Accounting Officer Lee Perry sold 171,832 shares. But insiders only sold about 620,000 shares in the past year. So the sale is about 2/3 of the total. The large selling by insiders could mean that they don't believe shares will head higher and probably think that shares will fall.
Thus, I would say that VVUS could be another "safe" short. The FDA PDUFA date is April 17th.