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On Friday, shares of Vivus, Inc. (NASDAQ:VVUS) fell to $21.00, a loss of 11.47%, following news that the company expects the European Commission to recommend disapproval of its weight-loss drug, Qsiva. With Friday's decline, the company traded with a market capitalization similar to Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), and the gap narrowed further following losses to both companies on Monday. Over the next year, I expect for both stocks to return market-leading gains, but at this point the big question: which stock presents the most upside?

First, for a little background information: In the U.S., it is estimated that nearly 36% of all adults are obese. The U.S. had a population of 311.59 million in 2011, which means that over 112 million people in the U.S. are considered to be obese. With that being said, does it really matter if Qsiva is approved in Europe? The obesity problem in Europe is nowhere near as severe as in the U.S., therefore the majority of upside for Vivus is in North America, or at least the immediate upside.

I'm sure Vivus would appreciate the opportunity to launch its product on a global level, but with a market cap of $1.90 billion, does it really matter at this point? The U.S. market alone is huge and there is more than enough opportunity for the company to succeed. Let's say that 2.5% of all the people in the U.S. (who are obese) use one of the two weight-loss drugs in the next 16 months. This means that roughly 2.8 million people would be taking one of the two drugs, maybe more or maybe less, everyday as part of a program, which is a huge market. But since the details of Arena's weight-loss product are still unknown, let's take a look at a speculative possibility for Vivus.

Vivus is selling its product in a range of $4-$6 per day depending on the dose. Therefore, if Vivus controls half the market, at $4 per day, it would return sales in excess of $2 billion. Now, of course, my "estimates" far exceed most expectations, and are most likely considered to be too high. However, this shows the size of the addressable market for both companies.

With just 2.5% of the market, or five people in a pool of 200 who are obese, the sales potential could be in the multi-billions! Therefore, this would represent significant upside in shares of Vivus, regardless if it earns a European approval. In fact, it may be better for the company to focus on one market at a time, as a European approval could affect margins, depending on future partnerships.

There are some who will read my "figures" and think I'm crazy for suggesting $2 billion in sales for VVUS, especially in the first 16 months. However, I think it's possible. I think the bulk of sales for both ARNA and Vivus will occur in the first year. I think it will be somewhat similar to Alli. Back when Alli was first approved, the supermarkets couldn't keep it on the shelves. It was highly anticipated, but then once results were slow, and the side-effects were unpleasant, the sales of the drug began to slide.

That said, I think consumers will try one if not both products in an attempt to obtain the "quick fix" of losing weight. Then I believe that one product will stand alone, and control the market. It will either be the better yet riskier results from Qsiva, or the slower but safer results from Belviq. Which one will stand at the top is anyone's guess. It will all depend on ratings, reviews, and consumer perception.

The debates on which product is better has been never ending throughout the last year, and has increased in intensity since both companies were awarded an FDA approval earlier this year. Both stocks have been volatile and opinions have been intense. However, I have chosen to take an unbiased stance and invest in both companies. But now with each company trading at similar valuations, the debate of which presents the most upside is really beginning to heat up.

Arena will receive between 31.5% and 36.5% of net sales, with 36.5% obtained if sales exceed $750 million. Therefore, most have argued (including myself) that VVUS is deserving of a higher valuation. VVUS' revenue will likely double that of ARNA since it is launching its product alone, but will also have higher costs.

To read detailed analysts of Arena's partnership with Eisai click here.

The more I think about which stock has the greatest upside, the more I arrive at the conclusion that both are of equal valuation in terms of upside. VVUS will post higher revenues, but will also trade with lower margins. ARNA will not have the costs associated with launching a product, as Eisai will pay nearly all of the expenses. Eisai is a proven leader in marketing products, and some have reported that Eisai plans to spend more on marketing than on any other product. With that being said, I think Arena's weight-loss drug will be more successful, but Arena will earn less than half of the total sales.

ARNA also has a better outlook in the global markets and may benefit from Qsiva being a controlled substance, but because of its debt will have to spend a large portion of its revenue on cleaning up its balance sheet. Therefore, without knowing for certain, I believe we can still assume that ARNA's margins will be more than double those of Vivus. As a result, net income should be similar, or ARNA could be slightly ahead in the first year since it does not have initial costs of marketing the product.

With Vivus, I am also concerned about the marketing strategy. The company has already launched its product, and by now I would have expected to see TV commercials, billboards, etc., but so far I've been disappointed with the company's lack of aggression. Vivus only has one chance to market this product right, and with Arena's launch right around the corner, Vivus must execute to perfection.

In a recent publication, it was estimated that by 2020 fat-fighting drugs should capture $3.5 billion in sales. I believe this figure to be conservative. The U.S. is a country that is growing rapidly in both population and in obesity. I don't know which product will stand the test of time, but I do know that there will be a craze for both products by consumers who seek the "magic pill", if the products are marketed correctly.

I believe it is realistic, even conservative, to suggest that five people from 200 obese Americans will use either product at any given time. And if so, the sales and upside potential for both Arena and Vivus is unprecedented, and will soon be realized.

Source: Obesity In America Likely To Set Up Arena And Vivus For Big Gains