Weight Loss Craze To Benefit Arena And Vivus Throughout First Year

Includes: ARNA, GSK, VVUS
by: Brian Nichols

The World Health Organization estimates that 1.4 billion people are overweight and 500 million are obese, therefore the market is more than large enough for two successful weight-loss drugs to achieve a large level of success. In fact, both Arena's (ARNA) and Vivus' (VVUS) weight-loss drugs could easily create billions in revenue, but unlike most investors who are looking at one-or-the-other as a long-term play I believe both stocks are well-positioned and are poised to trade considerably higher in the next 16 months.

I think it is safe to say that both VVUS and ARNA are high-profile stocks with massive expectations. As a biotechnology investor, I typically avoid such stocks with high expectations in the first year following an FDA approval, because they almost always trade lower due to expectations that are too high. For example, when a biotechnology stock trades with a $2 billion valuation following an FDA approval the expectations are always high, however growth is usually slow as it takes time to market, manufacture, and hire a team that can persuade physicians to prescribe the high-profile drug. Yet ARNA and VVUS have a very rare opportunity, with demand being so high, that sales could actually be at its highest within 16 months, then it is possible that only one drug will stand alone at the top.

In America, our society will do just about anything in order to lose weight. If I told someone they could lose 20 pounds by eating a tire you better believe that some would act on the suggestion. The problem is that we also have a tendency to want quick and easy results and are not willing to exercise or change eating habits in order to lose the additional weight. Therefore, in our search for a "quick fix" it creates an environment where weight loss drugs have the potential to experience early success on an unprecedented level, yet also present the chance to lose market share very quickly if proven to be less effective than expectations.

For those of you who don't remember, GlaxoSmithKline's (GSK) Alli was one of the most anticipated drugs of the last decade. I remember when it first hit stores, and retailers found it hard to keep the high-priced drug in stock, with sales reaching $12 million in the first three days on the market. In 2007 the drug reached sales of $247.2 million, but then consumers began to realize that it wasn't as effective as advertised, and that behavioral changes must occur in order to lose weight. Therefore, its sales began to plummet, and in 2008 (one-year after approval) the drug's sales fell to $131 million, almost half of the year prior.

Both Lorcaserin and Qnexa are better than Alli, and although I won't begin with the subject of which is better, I do expect that many Americans will try both drugs and that each will be very successful in its first year, blowing away all expectations. The question is what will happen in year two or three? Both drugs have strengths and weaknesses that will contribute to its success or failure. Vivus' Qnexa is the better drug in terms of average weight loss with 10%, however phentermine is not the most accepted ingredient among Americans, as safety concerns could become a question. Therefore the safety of a drug such as Lorcaserin could be the big winner, seeing as how its primary function is as a serotonin receptor agonist, however with only 4% weight loss some may believe that it's not enough of a "quick fix".

As a result of our "quick fix' mentality I believe both stocks will trade higher by a considerable margin over the next 16 months, but that we could see a clear favorite following the initial craze of two weight-loss drugs to hit the market. At this point I believe both companies are equal, as I purchased shares of ARNA at $10 and just recently bought shares of VVUS at $22.30, after concerns over patents caused the stock to fall lower. I believe both companies have significant upside during the next 16 months throughout the initial craze, and that because ARNA only earns 31.5-36.5% of revenue that each are fairly valued. The bottom line is that as of now we don't know which will emerge as the winner, but with a consumer craze that is sure to occur, it could be a very fun year for investors who have bought at these low levels.

Disclosure: I am long VVUS, ARNA.