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The Short Case for Vivus

July 20, 2012 | About:

Regular readers of my blog might think that I’m a long only value investor, but that’s not the case: I do sometimes take small short positions in companies that seem fraudulent, have a poor business model or are simply far too expensive. I always take a small position though: unfortunately the mechanics of short selling are such that the risk/reward ratio is not as favorable as taking a long position. You can get squeezed out of your position, and you have to find shares to borrow and pay to borrow them.

Another generic observation related to short selling: you often see emotional reactions from people who are long when short sellers make their case public. Instead of welcoming a critical view, a lot of longs prefer to ignore information that doesn’t confirm that they made an excellent decision buying the stock. This is fundamentally different than people who argue for the long case. You either get present longs to agree with you, because your view confirms with their view, or you have people without a position who are not emotionally invested, and don’t really care.

I think this behaviour might actually be one of the reasons why short selling opportunities can exist, even after research has been published that details everything that’s wrong with the company. There is always some voice that offers some kind of argument, no matter how poor, that discredits the short case. And believing something that fits with your view is way more convenient than looking into the possibility that you were wrong. It’s more common to see longs shout that the SEC should investigate the short sellers, than seeing longs investigating the short case.

The Vivus case

Ok, enough about short selling: time to talk about Vivus, a biopharmaceutical company. The company hit my radar after Citron Research released a report yesterday. Vivus’ future depends on one drug, a weight control pill, that got FDA approval earlier this year. The drug is simply a combination of two existing generic drugs, and the intellectual property protecting it is weak at best. And to make things worse the drug might be breaching IP from other big pharmaceutical companies. The IP-issue is discussed in a lot of detail on this blog, including plenty of links to publicly available documents to confirm the story.

Because of the IP issues the company might not be able to bring it’s product to the market, or just have a limited period of exclusivity. At the same time it has to compete with the two generic drugs, that are the basis for it’s own drug, that have been used for years for the same purpose. The questionable competitive position of the company is combined with insiders that are selling their shares as fast as they can. As a group they currently own just 0.29% of the >2.5 billion USD market cap company that is supped to own the next blockbuster drug. I always see what insiders are doing as a key element in any investment: can you really believe that the company is going to have a bright future if insiders don’t believe it?


I don’t have any particular additional insight in the company besides the information provided in the two links above, but I do think that they make a compelling argument, and that’s all there is to it. Guess we’ll find out how successful Vivus is going to be bringing it’s drug to the market next year.


Author is short VVUS

Rating: 1.9/5 (10 votes)


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