Arena Pressures Short Sellers as Hedge Fund Owner Pressures Vivus By Reza Ganjavi - December 8, 2012 | Tickers: ARNA,

SUPN, VVUS | 25 Comments Share on emailEmail Share on google_plusonePrint Reza is a member of The Motley Fool Blog Network -- entries represent the person al opinions of our bloggers and are not formally edited. Examining the top institutional holders of Arena Pharmaceuticals (NASDAQ: ARNA) vs. Vivus (NASDAQ: VVUS) reveals a stark difference in the quality of investors in these two obesity drug makers. Vivus top holders are two hedge funds: QVT, and Passport Capital. Arena s top two holders are among the world s largest investm ent management companies, Wellington Management and Vanguard; they manage $2.3 t rillion of assets. News was out recently that QVT is pressuring Vivus management to sell the compan y. On Twitter, investors had fun with a less significant point about QVT: their General Counsel & Partner, Fati Sadeghi-Nejad is a cousin of one of Jim Cramer s writers who s been bashing Arena (and has been consistently wrong). Just before Belviq was approved, in line with a streak of misrepresentations and disparagin g articles out of Jim Cramers bash machine, cousin Sadeghi-Nejad tweeted: "I just want to be right. I ve followed the FDA for 15 yrs. You are walking into a buzz saw. Sell". FDA proved him wrong. Following Belviq s approval an investor wrote: Adam Feuersteins FUD shook me out o f riding ARNA through the Advisory Committee meeting. But many investors didn t l isten to Cramer s group, held on to their shares, and saw their shares go throug h the roof. Cramer s team are still repeating the same weak bashing mantras that were proved false. With over 60 million shares shorted it s hardly surprising t hat the company is intensely bashed. Wall Street had very high hopes for Vivus. As early as about a month ago, analys ts were still insisting on price targets of around $50. Vivus insiders sold mass ive number of shares at much higher prices than todays $10.54. Shares of Vivus ha ve lost two-thirds of their value in the last few months as reality has set in. I know several investors who follow the obesity space very closely. We do a deep level of due diligence and consult with medical experts in the field. Similar t o what Wall Street analysts do but Main Street research seems to be a lot more f ocused and free from influences of investment banking, clients, etc. We follow a much smaller number of stocks so our research has more depth and accuracy than many of pros. Several of us saw through Vivus ridiculous valuation and unreasonab le analyst estimates when VVUS was over $30. At the core of our prediction for Vivus was the weak demand factor based on feed back we received from physicians about Qsymias risks and generic competition. Bot h these predictions seem to have come true. Qsymias sales have been weak and insu rance coverage is not boding well for Qsymia. Andy Baron, one of the thought leaders in the obesity investing space pointed ou t the problem for Vivus as follows: "The Blue Cross/Blue Shield, policy requiring doctors to try generic phentermine first, is significant bad news for VVUS. This will only get worse when Supernus Pharmaceuticals (NASDAQ: SUPN) starts selling their extended-release topiramat e, Trokendi, in June. It comes in 50 mg and 100 mg doses (among others), which i s pretty close to the 46 mg and 92 mg in Qsymia. With that and generic phentermi

ne, doctors will be able to prescribe almost the identical medications in Qsymia with no REMS, no pharmacy restriction, and a much lower cost." "It s also very interesting that they don t specify the dosage of generic phente rmine that must be tried (and fail) before they ll pay for Qsymia. The most comm on dose is 37.5 mg, which is more than twice the amount in the highest dose of Q symia. In fact the amount of phentermine in the recommended dose of Qsymia, 7.5 mg, is not widely available. So the initial choice is to try phentermine at a hi gher dose than is in Qsymia (with a likely increase in heart rate) or to try Bel viq, which many doctors would prefer anyway." Perhaps QVT wants Vivus to be sold because Big Pharmas may not be interested in the proposition Vivus offers. Arena s management on the other hand have expresse d that there is a high degree of interest globally in establishing relationships with Arena. Wall Street had it wrong with Arena just as it did about Vivus, but inversely. T his mistake resulted in an astronomical short interest which was confronted with the painful fact of a strong FDA approval of Belviq last June. Since then, Aren a short sellers were caught between a rock and a hard place with few options: 1) Cover and incur a potential billion dollar loss;

2) Short more shares in hope of a) increasing sales-basis b) spooking reta il holders to sell. As discussed in some of my previous MF articles, the demand for shares of Arena by the short interest is augmented by institutional interest which has been on a constant rise -- this second wave of demand does not bode well for shorts. Weve seen a recurring cycle of ARNAs shares dropping followed by big gains in a typica l consolidation pattern. At the end of one such cycle recently ARNA was naked sh orted and on the RegSho list. Selling what you don t have and what you have not borrowed should be criminal. Arenas business is developing rapidly. It recently announced a new partnership wi th a large South Korean pharma; Arena has indicated its in talks with lots of oth er companies across the globe for partnerships; European approval of Belviq is v ery likely and positive indication could come as early as Christmas if EU/EMAS CH MP doesnt ask for an oral hearing; DEA should finally complete its review of Belv iq any day; Arena/Eisai may be able to get an exception from the DEA to start ma rketing earlier than expected; strong initial sales numbers will result in upgra des; and start of combination therapies trials will get Belviq closer to the blo ckbuster status. These and other positive developments for Arena are putting pressure on short se llers whose time is running out. I see a very dangerous and explosive situation for Arena short sellers. Their sales basis may have risen by a dollar but they n eed more shares to cover the additional sales. As pressure builds they may have no choice but to be forced to cover which causes competition among different sho rt sellers and a short squeeze. There doesnt seem to be a reasonable chance that retail investors would sell 61,7 48,793 shares at current prices. Even then, shorts are looking at a loss of seve ral hundred million dollars. How many bashers can the shorts buy with that money to publish on Seeking Alpha? (The last article published there was met with fie rce reaction by top notch posters including medical doctors who countered the di sparagement with indisputable science.) A more likely scenario is that shorts wi ll chase the price in order to cover. Given the daily volume and price action I dont believe anybody can buy 60 million

shares without bidding the price up at least $5. That would put the loss at aro und $600,000,000. How many hedge fund traders will lose their job when they lose $600 million? Even that number is conservative and doesnt take into consideratio n a bidding war for Arena by Big Pharma whose patent pipelines are dwindling. A buyout offer could put the loss of short sellers well over a billion dollars. Sh ort of a major market crash, Arenas short sellers are in for what the band Banana rama would sing, "A Cruel, Cruel Winter. *** THE END ***