VIVUS Chances of a Stock Double Shrinking

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VIVUS Inc. (NASDAQ: VVUS) is suffering from what looked like good news on the surface. The reality, and the catch about investing, is that things can often be much more complicated than an earnings summary and headline excerpts. Sometimes growth is simply not enough.

24/7 Wall St. recently featured VIVUS as one of nine stocks which could double in 2014. While VIVUS can still make a turnaround from its current post-earnings drop, the risks to this situation are becoming more prominent than the potential gains. It would seem that VIVUS is going to have a much more difficult time in becoming the next great biotech turnaround stock.

VIVUS beat its earnings estimates, but with a narrower loss – almost a 70% narrower loss. Qsymia prescriptions grew about 14% sequentially. Still, this is only about 124,000 prescriptions so far. Net product sales of Qsymia were up about 20% to $7.7 million in the quarter, and this was supposedly harmed by the holiday season. Total revenues were $44.1 million in the last quarter. VIVUS has so far generated about $61 million in total erectile dysfunction royalty payments, with the ability to generate close to $450 million total.

Two key analyst downgrades are driving the weakness further on Tuesday. Bank of America Merrill Lynch cut the already-cautious Neutral rating down to Underperform and J.P. Morgan cut its Overweight rating down to Neutral. The Merrill Lynch biotech downgrade said,

“We are lowering our rating to Underperform from Neutral and our price objective to $6 from $11. We do not expect VIVUS to secure a quality partner in the near term as the company is negotiating from a position of weakness. We expect the company to need to raise capital or secure a partnering deal that is front-end loaded with lower royalties.”

Zacks Investment research also remains cautious here, with a hold rating. Its report concludes,

“We are concerned about the competitive nature of the obesity market given the presence of Belviq among others, keeps us concerned. The successful commercialization of Qsymia is crucial for the financial performance of VIVUS as it can drive the company to profitability.”

The J.P. Morgan report was not as negative, but at the same time that downgrade took the price target down to $8 from $15 in the call. Arena’s Belviq is going to be formidable competition, and other weight loss drugs could compete strongly with Qsymia as well.

All of these issues, and the further loss of investor confidence, are going to make the chances of VIVUS doubling in 2014 significantly harder to achieve. One thing that may help fend off the bears from getting too much into attack mode is that the new $600 million market cap compares to a cash balance of $343.3 million. This may begin to act as a cushion, particularly if any would-be acquirers ever decide that they should start asking to see the company’s drug prospects.

Tuesday’s drop was more than 12.5% to $5.90, and the 10.2 million shares which had traded by 1:00 p.m. EST is already more than 4-times a normal day’s total trading volume.

When we named VIVUS as one of the nine stocks which could double in 2014, that was with the hope of better Qsymia prescription growth. It is hard to believe management that the holidays were such a major growth deterrent considering that the FDA approved the drug so late in the year, but we will leave that alone for now. We said that VIVUS was one of the emerging pharma stocks whose potential huge upside comes with great risks – and now those risks are currently outshining the opportunities.

The consensus price target was up at $11.30, but that is coming much further down. So, can VIVUS still double? Sure, if things get turned around faster. That just is not likely be from a stock price with a $7 handle now.