As investors, it is our job to look at both sides of a story. We must carefully weigh the pros and cons of a given company to decide whether or not its stock is worth the appointed risk. The key is to find the right balance between risk and reward. Earlier this month, I offered investors three advantages to owning shares of VIVUS (NAS: VVUS) . Today, I'll round out the series by giving you three reasons to steer clear of this biotech company.
1. Patent problems
Last month, the FDA approved VIVUS' new anti-obesity drug, Qsymia, for sale in the United States. The decision came on the heels of another newly accepted weight-loss treatment, Belviq, from Arena Pharmaceuticals (NAS: ARNA) . However, for VIVUS the good news didn't last long.
Shortly after regulators granted VIVUS the green light, patent concerns surfaced around the company's new drug Qsymia. The problem is that Qsymia is simply a combination of two generic drugs known as topiramate and phentermine. Citron Research first exposed this disconnect in a report last month: "For a drug with purported 'multi-billion dollar market potential,' Citron is astounded by the weakness of Vivus' intellectual property protection."
This is a serious problem for VIVUS, considering generic competition poses the greatest threat to biotech companies. Worse still, Yahoo! reported that in one clinical trial a combination of the two off-patent drugs proved to be as effective as Qsymia. As a result, analysts slashed their price targets and shares of VIVUS plummeted on the news.
2. Risky side effects
It is true that in clinical trials VIVUS' Qsymia pill appeared more effective in treating obesity than Arena's Belviq. However, that advantage comes at a potentially dangerous price. Patients prescribed Qsymia risk serious heart conditions, and pregnant women can't use the drug given possible birth defects. Comparably, cardiovascular issues have held back Orexigen Therapeutics' (NAS: OREX) anti-obesity drug, Contrave. Orexigen will have to wait until next year before it can resubmit new clinical data to the FDA, with hopes of proving that its medical weight-loss treatments are safer than previously demonstrated.
Meanwhile, VIVUS must still jump through some safety hoops of its own. In fact, the FDA is requiring that the drugmaker carry out 10 additional safety studies once Qsymia is available to patients. Of course, there's always a chance that VIVUS' drug gets pulled late in the game over such safety concerns. Just look at what happened two years ago to Abbott Labs' (NYS: ABT) popular diet medication, Meridia. The drug was pulled from the market after increasing the risk of heart attacks and strokes in patients taking it.
For VIVUS, a more immediate setback is the restricted use of its drug for potential female patients. In order to qualify for the treatment, women must first take a pregnancy test to prove they are not with child, and will be required to do so each month thereafter while prescribed Qsymia. That's a serious obligation that may drive many would-be Qsymia users into the arms of the competition -- namely Arena's Belviq, which does not require such testing.
3. A questionable drug launch
VIVUS plans to launch its drug in the fourth quarter of 2012, but chances are that sales will be slow at the start. While there is a potentially profitable market for prescription weight-loss drugs, VIVUS currently has no clear path to those profits. At this point, the company plans to launch Qsymia on its own. That's a risky and expensive burden, which is typically shared with a big pharma partner. For example, Arena is already matched up with Japanese pharmaceutical maker Eisai for the marketing of Belviq.
Without the help of a major pharmaceutical company to share some of the costs, VIVUS' stock could take a hit in the quarters to come. On top of marketing its own drug, VIVUS faces substantial costs related to the in-market studies it must still conduct for the FDA. Another problem is the fact that VIVUS has not yet worked out insurance coverage for the drug. This means that patients will be forced to pay for the treatment in full.
A better alternative
Together these challenges create a compelling case against the stock. While I'd love to believe in the full potential of VIVUS and its new drug, the inherent risks largely outweigh the possible rewards. At the same time, the market potential for anti-obesity drugs is tremendous. The climbing rate of obesity in this country and the world at large means big bucks for worthy biotech companies.
That's why investors should still keep watch on VIVUS' rival, Arena Pharmaceuticals. In fact, I encourage you to check out this new premium research report on Arena Pharmaceuticals. In it you will get an inside look at key opportunities and risks facing the company, as well as a full year of timely updates on the stock. Click here to get your copy now, while it's still available.
The article 3 Reasons to Sell: VIVUS originally appeared on Fool.com.
Fool contributor Tamara Rutter owns shares of VIVUS and Arena Pharmaceuticals. Follow her onTwitter, where she uses the handle@TamaraRutter, for more Foolish insights and investing advice. The Motley Fool owns shares of Abbott Laboratories. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.