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By Ishtiaq Ahmed

The U.S. stock markets came back to life after the storm. Sandy has passed, but Vivus (NASDAQ:VVUS) slide has not slowed. The stock has lost value substantially in the previous three months. There are more than one factor contributing to the fall. At the moment, investors seem to be skeptical about the sales of Qsymia, which is the prime factor for the fall in price.

It seems that the street put too much burden on the company by projecting sales of $25 million in the first quarter. It is always difficult for a drug to achieve blockbuster sales in the first few months of its launch. Especially for Qsymia, it was always going to be a tough one. The drug is subject to side effects and a restrictive label. Let's look at the factors that contributed towards the recent sell off in the stock.

Price Trend:

(click to enlarge)

VVUS data by YCharts

Vivus stock hit $30 as the company received approval for its drug Qsymia. However, a number of negative factors have dragged the stock price to almost half. Over the past four months, the stock has had a bumpy ride, and small recoveries have been taken over by subsequent dips in price. Good news like increased coverage by insurers was followed by the bad news of rejection from EMA (European Medicines Agency). As a result, the stock has lost considerable value, and it closed at $14.90 on October 31.

Slow Sales:

As I said, the street saddled the company with optimistic sales expectations for the current quarter. As the prescription figures are coming out, the investors seem disappointed. However, it should be kept in mind that the company always maintained that sales will be slow at the start. Vivus acknowledged that the launch of Qsymia will be a massive task, and it may get limited success at the start. The company has been cautious in the marketing of the drug, and it has only targeted specialists. I believe the company has been extremely responsible in its marketing efforts. Vivus is putting emphasis on educating the doctors about the use of Qsymia.

Due to the targeted and cautious approach, the sales have been slow out the door. According to the new data by IMS Health, doctors have written 5,802 new prescriptions in the previous five weeks. At the moment, there are 2,901 patients on Qsymia. Based on these numbers, it is unlikely that the company will be able to achieve revenues close to $25 million for the quarter. The prescriptions will have to go up substantially for Qsymia to achieve revenues in excess of $25 million. However, the sales will pick up in the next quarter.

Sales Outlook:

Doctors and patients have welcomed the drug and the prescriptions are going up by the day. In addition, Vivus submitted an amendment to the (REMS) for Qsymia on October 17, 2012. The proposed modification will let the company to market Qsymia via certified pharmacies. Furthermore, the insurers have shown a willingness to cover Qsymia. The costs of obesity related conditions are enormous, and the insurance companies will be willing to provide coverage to avoid those costs. Doctors Expect Qsymia to have a major impact in diabetes, as the drug may help diabetes patients get off insulin.

Upcoming Earnings Announcement:

Vivus will report third quarter results on November 6. As Vivus launched the drug at the end of the quarter, sales figures are expected to be small. As a result, the company will miss analyst expectations, which can further put pressure on the stock. Low sales figures will certainly disappoint investors as they expected the sales to be much higher. However, I believe the pressure on the stock will be temporary, and the price will pick up as the sales increase in the next quarter.

Competition:

Arena Pharmaceuticals (NASDAQ:ARNA), the only other company with an approved drug for obesity also announced its earnings conference call. Arena will hold the conference call on November 6, the same day Vivus will report earnings. Arena Pharmaceuticals is currently working on its DEA scheduling for Belviq, and expects to launch the drug next year. At the moment, there is only one drug which will pose serious competition to Qsymia in 2013. However, Orexigen Therapeutics (NASDAQ:OREX) is trying to get its weight loss pill Contrave for approval earlier than expected. If, Orexigen becomes successful in its efforts, Vivus can have another product to compete with its own. Once all these drugs hit the market, the competition will be immense. However, I maintain my stance that the obesity market is big enough to accommodate all of its participants.

Summary:

Vivus is the first player in the obesity market to launch its drug. It is normal for the participants to have high volatility in the earlier phases of the launch. Although, the market is attractive; it is impossible to predict the sales with certainty. I expect Vivus to have high volatility in the short term, but the company will return handsomely to its investors in the long term. Obesity market is extremely attractive and has the capacity to accommodate all of its players. I believe the companies operating in the market will be winners as the focus turns to tackle this disease.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ishtiaq Ahmed, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.

Source: What Is Going On With Vivus?