Buy Vivus: Restrictions On Qsymia Are Already Priced In

| About: Vivus, Inc. (VVUS)

Vivus's (VVUS) weight-reduction drug, Qsymia, received FDA approval yesterday, albeit with restrictions and warnings attached to it owing to serious side effects from using the drug. Although Qsymia has greater efficacy than its competitor Belviq, produced by Arena (ARNA), the prescribing restrictions will be advantageous for ARNA, which has less serious side effects attached to its drug, like headaches and fatigue.

According to Bloomberg, $1.2 billion is expected in revenues from Qsymia by 2016. ARNA's Belviq, on the other hand, is expected to bring in revenues of $1.5 billion at its peak, according to Barclays, and $2 billion by 2020 according to a Piper Jaffray & Co.'s analyst. Qsymia's approval will benefit Orexigen (OREX) because it can be perceived as a positive step towards an approval of OREX's drug, Contrave. It can be argued that this benefit will be temporary, as Contrave is not expected to come out till 2014, long after Belviq and Qsymia will have become established names in the market.

Vivus showed a drop of 7% in its stock price after trading hours yesterday, when it received approval. In intraday trading, the stock was down 8%, although at one point, the price had risen as high as $29.9. The volatility experienced yesterday can be seen in the graph below.

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This drop in VVUS is not surprising, as ARNA showed similar trends when its drug was approved. The graph below shows ARNA's stock price performance after approval was acquired for its obesity drug, Belviq. It was down 10% the day after the approval, only to recover a week later. Yesterday, ARNA saw a decline of 0.5% following news of Qysmia's (formerly known as Qnexa) FDA approval.

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Investors might have gotten worried about the restrictions attached to the approval, so the stock fell in late day trading yesterday. Below is a list of the Qsymia restrictions that we think have already been priced in, as stated in the FDA press release:

  • Qsymia should not be used during pregnancy because of the birth defects it may cause. Women of child bearing age are supposed to have a negative pregnancy test before they start taking Qsymia. The test has to be negative every month during their Qsymia treatment, in addition to using contraception.
  • No usage of Qsymia for patients with either hyperthyroidism (one of its symptoms is heart racing) or glaucoma. Increased heart rate by using Qsymia can be dangerous for heart patients. Heart rate monitoring has been recommended for all people taking Qsymia.
  • Qsymia comes with a Risk Evaluation and Mitigation Strategy (REMS). It comprises of a guide for medication that tells the safety issues and usage of the drug, including pharmacy certification and prescriber training. Qsymia will be distributed through particular certified pharmacies only.

These restrictions are not a surprise, and were expected by the market. We maintain our buy rating for ARNA and VVUS, the latter now has two approved drugs; Stendra and Qsymia. Furthermore, JPMorgan puts the chances of a European approval for Qsymia at 80% at present, with a target price of $38. VVUS is up 19% in pre-market trading as we expected.

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

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