In our earlier articles, we had highlighted the negativity surrounding Vivus's (VVUS) drug Qsymia, mainly relating to its safety profile and the probable red light from regulators in Europe. We remain of the view that Arena's (ARNA) obesity drug, Belviq, is a safer drug and has a larger market potential as compared to Vivus. However, Vivus's stock has moved up following the news of a deal with Express Scripts (ESRX). It was up 10% yesterday and is up 2% in the pre-market trading. Originally, the drug was available through mail order branches of CVS Caremark (CVS) and Walgreen Co. (WAG) But now with Express Scripts, the distribution has been broadened; however, investors must know that this will not be a game changer for Vivus. We continue to take a negative stance on Vivus following the news from Europe, and consider Arena to be the better-positioned drug.
By joining hands with Express Scripts, Vivus has widened its distribution network for Qsymia, which was launched last month. The deal comes as good news following the disappointing development in Europe because the drug is only available through mail order. Having said that, the news does not resolve the issue surrounding the drug's weak safety profile; for example, it should not be prescribed to pregnant women. Furthermore, there are many factors that bode well for Arena. For example, the FDA has only ordered REMS (risk evaluations and mitigation strategy) for Vivus, and not for Arena. Also, the ingredients of Qsymia are generics, which are available at much lower costs. With a negative outlook in Europe, Vivus will lose a potentially substantial market share. All of this in turn will only make Arena more likely for a buyout as compared to Vivus.
The FDA had recommended that Arena's Belviq be classified by the DEA as a scheduled drug, and the drug's launch will come about once the DEA schedules the product. Currently, ARNA trades at $8.76. News from the DEA will be a catalyst for the stock in the near term. We maintain our positive stance on Arena, and recommend the stock as a buy. The analyst mean price target is $11, with one analyst assigning a sell rating on the stock. On the other hand, with regards to Vivus, we believe the deal with Express Scripts will not compel doctors to prescribe the drug; a point that can only be looked into once the company releases some sales figures for the drug. Arena, with its better safety profile, seems the better drug, and is set to gain approval in Europe. It is also a likely candidate for a buyout. However, we do not recommend shorting Vivus, and hold the view that investors should wait for the relevant sales figures to be published, which would then shed some light on the acceptability of the drug in the medical profession. We had earlier presented a detailed valuation of both companies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.