Insider Sales at Vivus: Sign of Things to Come?

By Reza Ganjavi - July 4, 2012 | Tickers: ARNA, VVUS | 0 Comments

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With two weeks to go before the PDUFA date for Qnexa, the heavy selling of shares by the CEO of Vivus (NASDAQ: VVUS) has raised a few eyebrows among some investors. One would normally assume that if Vivus gets FDA approval for Qnexa the company should be worth more than today given Qnexa is the company's most important drug. So why have institutions sold more shares than they bought, and why is the CEO selling before PDUFA? There are a number of reasons discussed among investors (for example, in this thread), besides the classic explanation that insider sales are automatic/pre-planned sales:

1) Vivus has been in discussions with the FDA over a REMS program for some time. Many investors believe the REMS program and the label could put heavy restrictions on access to Qnexa (e.g., limitation on women in child-bearing age due to risks of birth defects, which is a major concern).

2) The company might not be able to do any marketing and promotion, or at least a highly restrictive one, for an extended period of time.

3) The company wants to set up its own sales organization and "go it alone" in the US. Shorting these types of launches is a favorite of some short sellers because many self-launches fail.

4) Competitive pressure from Arena Pharmaceutical (NASDAQ: ARNA) is huge. Arena is in the game with a boutique drug, Belviq, which is safer than Qnexa; a strong partner, Eisai, which already has hundreds of sales people in the US, ready to hit the ground running; and an FDA label that is better than what most folks could dream about.

5) Quiet period: perhaps after approval insiders enter a quiet period, which would prohibit sales. 

6) Vivus' current valuation seems to be over-hyped and many retail investors are predicting a bubble burst. The reasons behind this inflated valuation could be related to several analysts and hedge funds who were proven wrong in their predictions on Arena and were caught with their pants down. Their consensus about a negative AdComm was wrong, then they did a backwards tap-dance by begrudging Arena a small chance of final FDA approval. This—no surprise—was followed by inaccurate predictions of REMS. To top it off, some analysts further promoted Vivus, perhaps a last ditch effort to save face. A good synopsis on this idea can be found here.

Some speculate that the CEO may be selling because Vivus may be overhyped and overpriced, for no other reason than to contain Arena's momentum because there are around 40,000,000 shares of Arena shorted.

Whatever the reason for the insider sales, PDUFA date of July 17 will bring a lot of clarity to this so-called obesity drug race. My predictions are:

a) I give Qnexa's approval a 50/50 chance. Some argue that due to safety issues it should not be approved. On the positive side, it may limit use of unsafe generics.

b) If approved, a very strict label and REMS program will be demanded by the FDA.

c) If approved, Qnexa will have a slow launch.

d) Most doctors will prefer Belviq due to its better safety profile.

e) If approved, Qnexa's launch will be "shorted" and the valuation will drop to a much more realistic level (perhaps half of what it is today).

f) As sales numbers roll in, analysts will have no choice but to acknowledge the facts vs. the "fiction making," to paraphrase Jim Cramer, which has dominated the obesity drug race so far.

g) Arena will get a boost from a restrictive approval of Qnexa and claim the biggest piece of this huge pie.

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