Arena Vs. Vivus: What's The Best Way To Play The Expanding Human Waistline?

| About: Arena Pharmaceuticals, (ARNA)

Almost a year ago, the FDA approved two new obesity drugs to much fanfare. Belviq from Arena Pharmaceuticals (NASDAQ:ARNA) was approved June 27th, 2012, and Qsymia from Vivus (NASDAQ:VVUS) was approved July 17, 2012. Now almost a year after these two weight loss drugs were approved, it's time to take an analytical look at how these two companies are doing relative to each other and relative to analyst expectations from a year ago.

Effectiveness in Clinical Trials: Advantage Vivus

First, it's important to take a look at the clinical data to see how effective these drugs were in the trials. In Arena's studies of Belviq, in conjunction with counseling about diet and exercise, about 47 percent of patients without type 2 diabetes lost at least 5 percent of their body weight compared with about 23 percent of patients treated with placebo. In patients with type 2 diabetes, about 38 percent of patients treated with Belviq and 16 percent treated with placebo lost at least 5 percent of their body weight. The approved labeling for Belviq recommends that the drug be discontinued in patients who fail to lose 5 percent of their body weight after 12 weeks of treatment, because continued treatment is unlikely to result in meaningful weight loss. However, the average weight loss of patients on Belviq after a year in the study was only 3.0 to 3.7 percent compared to placebo, so it's far from being a wonder drug, and according to labeling recommendations, there should be a high number of patients (over half) that discontinue treatment.

The results from Vivus's Qsymia clinical trials looked better. Again, in conjunction with counseling about diet and exercise, 70% of patients receiving Qsymia lost 5% or more of their body weight and after a year, the average weight loss was 8.9% compared to placebo. That means that the average percentage of weight loss from Qsymia was about two and a half times higher than the average percentage of weight loss from Belviq. Also, given the same labeling recommendations as Belviq, far fewer patients taking Qsymia should stop taking the medication due to ineffectiveness. So under the category of clinical trial effectiveness Vivus has a clear advantage.

Safety: Advantage Arena

In the clinical trials, both of these drugs performed well when it came to safety. However, safety concerns still remain for both drugs because of the poor safety record of previous weight loss drugs. The FDA approval of both drugs is conditional. Arena and Vivus will both be required to conduct post-marketing studies, including a long-term cardiovascular outcomes trial to assess the effect of the drugs on the risk for major adverse cardiac events such as heart attack and stroke. Even though both drugs had similar safety profiles in the clinical trials and both are subject to post-marketing studies, there is a public perception that Qsymia is less safe. This is because Qsymia is actually a combination of two drugs: phentermine and topiramate, and phentermine is one half of the infamous drug combination of fenfluramine and phentermine, commonly known as fen-phen, which was linked to an increased risk of pulmonary hypertension and heart valve problems. It was later shown that fenfluramine was the cause of these increased risks and that phentermine alone was not harmful.

Even though it was determined that phentermine was not the cause of pulmonary hypertension or heart valve problems, there is still a stigma attached in the public eye, and fair or not, Qsymia's label contains more warnings than Belviq's. As a result, there is a perception that Arena's Belviq is safer even in the absence of supporting data, so Arena has the advantage here.

Market Share: Advantage Vivus

These two drugs were approved by the FDA just weeks apart from each other. However, Belviq had to be scheduled by the DEA in order to rate its abuse potential, which caused a delay of several months that could not be avoided. Because of this delay, it took Arena almost an entire year to launch Belviq after approval. In contrast, Qsymia is a combination of two already approved drugs that have already been scheduled by the DEA . As a result Vivus was able to launch Qsymia only two months after approval in mid-September of 2012. Qsymia has an advantage being the first drug to get to the market, and it shows in the most recent script numbers. For the week ended June 21st, IMS Health reported 4689 scripts for Qsymia and 1829 scripts for Belviq. Some would argue that sales of Qsymia should be much further ahead of Belviq given the amount of time it's been on the market, but market share is what it is, and Qsymia has about two and a half times the market share of Belviq, so at least for now, the advantage goes to Vivus.

Performance Relative to Analyst Expectations: No Winners Here!

Let's cut to the chase. No matter how many scripts are filled, what the clinical trial data looks like, and which drug is perceived to be safer, investors ultimately care about one thing: performance. Actually, more specifically, investors care about performance relative to expectations. For both of these drugs, the expectations were extremely high at the time of their approval. Even though the clinical trials of both drugs showed just modest weight loss, analysts were predicting that both drugs would achieve blockbuster status, which is the term used for a drug that has over $1 billion in annual sales. The general consensus among analysts in the summer of 2012 was that both drugs would achieve $1 billion in annual sales in either 2016 or 2017. However, that's a long time from now, so let's just focus on what the analysts predicted for Qsymia in the fourth quarter of 2012, and what they predicted for both drugs in 2013. As late as the fall of 2012, the analysts' consensus for Qsymia 2012 Q4 sales was $25 million. Unfortunately, the actual sales fell far short, coming in at only $2 million, 92% lower than expectations.

Qsymia sales did double to $4.1 million in Q1 of 2013, but this still leaves sales well behind the pace that analysts expected for 2013. In the summer and fall of 2012, analyst sales estimates for 2013 were mainly in the range of 130 million to 165 million. When the script numbers from the end of 2012 were disappointing, these analysts cut their estimates almost in half. Now, these lowered estimates seem too optimistic as well. Even if Qsymia sales double each consecutive quarter (which seems highly unlikely based on the script numbers), total sales for 2013 will only amount to $61.5 million, less than half of the lowest estimates from a year ago.

What about Belviq? In the summer of 2012, analysts had estimated that Belviq sales for 2013 would be between $100 million and $240 million. However, these optimistic estimates started being cut along with the Qsymia estimates when the early Qsymia script data from Q4 of 2012 turned out to be far weaker than expected.

Since Belviq was launched on June 11th of 2013, sales will essentially come from only the 3rd and 4th quarters. There are no sales figures yet for Belviq, but top end sales figures can be calculated from script data. Using 1829 scripts per week as a starting point and $200.00 per script for a month's supply as the maximum price charged per script, Belviq would see 2013 sales of about $10 million if all patients pay full price, but the number of scripts does not grow.

What happens if we factor in some growth for Belviq? If we give Belviq the benefit of the doubt and assume that the average number of scripts will double to 3660 per week in the third quarter and double again to 7320 per week in the fourth quarter, then Belviq would see sales of $28.5 million for 2013. However, Arena and its marketing partner Eisai are offering a 15-day free trial, effectively cutting the first month's cost down to $100 and offering it at a discounted price of $125 per month after that. If the actual average sales price turns out to be $125, then 2013 sales would only be $17.8 million, even with a growth rate of 100% per quarter factored in. This is only about 10% of the original estimates for Belviq.

Given how badly both of these drugs are selling compared to the analyst expectations when they were approved, it's impossible to pick a winner for this category. Instead, it is clear that neither drug is in high demand and both are on pace to achieve only a very small fraction of the original 2013 sales estimates. Both companies are spectacular losers in this category.

Burn Rate and Available Cash: Advantage Arena

Let me start by saying that the future of both of these companies is completely dependent on how well these weight loss drugs sell. However, these companies took two different approaches, which dramatically affect how long they can sustain themselves without significant revenues from these drugs and what their future profitability will be.

Vivus took the go-it-alone route. Vivus didn't partner Qsymia. It paid for all of the expensive clinical trials and took on all marketing for the drug as well. This means that Vivus doesn't have to share any revenue with anybody else, but it also means that it doesn't share any risk either. This approach would have worked out well if the analyst estimates from July of 2012 had been accurate and Qsymia had $25 million in revenues in 2012, and another $150 million for 2013. Instead, Vivus is burning through its cash at an alarming rate, and the paltry sales from Qsymia aren't even close to making up the difference yet. In Q1 of 2013, Vivus had total operating expenses of $58 million, which were offset by only $4.1 million in revenue from Qsymia. Vivus recently entered into a new $110 million financing agreement, which brings its total cash and available financing to $259.2 million. Without this financing, Vivus could have run out of money by the end of the year. Even with the financing, Vivus has to double revenues quarter over quarter for the next five consecutive quarters before it can turn a profit just before it runs out of money, assuming that expenses don't increase more than 10% each quarter. Vivus has a very narrow window for success and it needs spectacular Qsymia sales growth to make it without further funding.

Arena took a different approach and partnered with Eisai to market Belviq. As a result of this partnership, Arena received $50 million upfront from Eisai as well as milestone payments, but the big difference here is that Arena doesn't have to pay the huge marketing costs that threaten to bankrupt Vivus.

The result of this difference can be clearly seen in Arena's burn rate. Arena's total operating expenses were only $21.3 million for Q1 2013. Arena also had $2.4 million in revenue for the quarter resulting in a net loss of $18.9 million for the quarter with $136.3 million in cash and cash equivalents still available. At this burn rate, Arena still has almost two years of operating cash available, and unlike Vivus, Arena is seeing expenses fall rather than increase because Eisai is paying for all of the marketing.

Of course, partnering with Eisai does have drawbacks too. Arena only receives 31.5% of Belviq's sales, with this percentage increasing up to a maximum of 35.5% on sales above $750 million. Basically, Arena only gets about one third of Belviq's sales and bears the manufacturing costs. Eisai gets two thirds of Belviq's sales and is responsible for marketing and its associated costs. Arena is also eligible for various milestone payments from Eisai.

Arena partnered with a large pharmaceutical company, hoping that Eisai's large size, existing sales force, and previous experience marketing pharmaceuticals would maximize Belviq's sales. As a result, while Vivus is on shaky financial footing, Arena's financial situation is more stable and the company is in a better position to work through slow initial sales. The tradeoff, is that although Arena's expenses are lower than those of Vivus, it needs 3 times the sales to generate the same revenue for itself. Because of this, Belviq needs to generate about $270 million in annual sales for Arena to break even.

Overall Analysis:

Looking at the overall picture, Vivus has the advantage in efficacy from the clinical trials, but Arena has the advantage when it comes to safety concerns. Vivus also has the current advantage when it comes to market share, but Arena has the advantage when it comes to financial stability and cash burn rate. Unfortunately, in the most important category of meeting analyst sales expectations, both companies are failing miserably. Sales numbers for Qsymia are coming in at only 10% to 20% of what the analysts originally forecast. Analysts have repeatedly cut their estimates, but Qsymia can't even come close to meeting the reduced estimates either.

Although official sales numbers are not out yet for Belviq, the script data is forecasting similarly disappointing sales. Not only that, but both companies are finding it necessary to offer free trials of their drugs and cut their prices just to get patients to try the treatments that were supposed to have blockbuster potential. As it stands now, neither of these drugs will meet the lowered analyst expectations for 2013 even if they double their weekly sales numbers each consecutive quarter.

How to Make Money in the Obesity Market

So, what's the best way to profit from the growing obesity epidemic? Personally, I don't think that buying either of these stocks is worth the risk. Both stocks are down for the year, but neither one of them seems to have been punished as severely as one would expect for companies that are so badly disappointing the analysts.

Arena has traded in a range between $7 and $10 for most of the past year, with a couple of short-lived peaks above this range. It's currently trading around the $7 mark. Will it find support here again, or will it finally break below this support level as the numbers continue to disappoint? I cannot tell which way it will go, but if it does bounce off of this support and trades back up to the $9 level, I think it would be a great short opportunity. This is because the stock hasn't traded much above the $9 mark since January and I believe that the sales numbers for Belviq will not meet the lowered analyst expectations, which may be enough to finally break support for the stock at $7.

Vivus has fared worse than Arena this year. Its stock is down almost 57% for the year, and deservedly so given that it has only sold a small fraction of what was expected so far. Vivus is also burning through cash so fast that it would take extraordinary growth of Qsymia sales to break even before it runs out of cash or has to raise more money and dilute the current shares. Since the beginning of November the stock has mostly traded in a range between $10 and $15. It is currently in the middle of this range at twelve and change. If it starts trading close to the $15 level again, it would be an excellent short opportunity.

I know that most of you probably expected me to pick either Vivus or Arena as the eventual winner in the obesity market, but the fact is, they both look like losers to me. Apparently people have become wary of the claims of weight loss drugs or they don't believe that the benefits of these drugs are worth either the cost or the risk of side effects. So don't fight against the headwinds and buy one of these stocks just because they are an underperforming weight loss drug. There are much better opportunities if you look beyond the obvious plays that aren't working.

So what do you do if your investing thesis is that obesity is a growing medical problem that some biotech and pharmaceutical companies will profit from? You find a different way to play the trend, and hopefully you'll find a drug or device or technology that is being rapidly adopted by the medical community. I think that constant glucose monitoring, or CGM, for diabetics is a better way to play the growing obesity epidemic through the related diabetes market.

There is a growing realization that CGM allows for better glucose regulation and results in better health for diabetics. This change in patient care is in its early stages and is fueling rapid growth of CGM technology. In this market you can choose between three different companies: Abbott Labs (NYSE:ABT), which is a large-cap diversified healthcare company, Medtronic (NYSE:MDT), which is a large-cap medical device company, and DexCom (NASDAQ:DXCM), which is a small-cap medical device company. If you're interested in learning more about the CGM market, keep your eyes peeled for an upcoming article comparing these three companies and the best way to play the rapidly growing CGM market. Spoiler alert: I am long DXCM and have no positions in either of the other two companies, so you can probably guess which company I think has the best prospects!

Disclosure: I am long DXCM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.