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Friday, February 24, 2012

Vivus: a first weight-loss drug to be approved in a decade?

Vivus (VVUS), the small biotech company developing a weight-loss drug Onexa, got an extreme upbeat last Wed. An FDA advisory panel voted 20 to 2 to recommend agency approval for the drug. VVUS immediately jumped with the news up almost 100% instantly. If the drug is truly approved, it will be the first new weight-loss medication approved in a decade. You can imagine what kind of hype the market has for it. Some bulls see the stock surging to between $30 and $45 in the next 12 months from the current $20 or so.
But before jumping into this euphoria, I think you need to be very cautious and think twice. The market is essentially saying that FDA will for sure approve the drug, which is expected by Apr 17. While FDA is indeed usually following the advice of the panel, it does not always do. This is especially true when evaluating weigh-loss drugs. In the past  year, 3 new drug applications of this class (including Onexa) have been turned down. FDA is very cautious about the potential side effects of this class of drugs. I think it is far from a done deal. But I must say that the chance of approval has been significantly enhanced with the panel's backing up. If I will set up a speculative position, I will organize in such a way that I may make some money either way, up or down following FDA's decision. The reaction is likely huge which will make such kind of trading possible. One way of doing so is to buy call and put options of the same strike price simultaneously. This strategy is especially effective in this type of violent price action.

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