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In recent trading, we saw some major weakness in shares of Vivus Pharmaceuticals (VVUS) which is one of three big names in the reborn market for prescription weight loss pills. To get a visual depiction of the performance of Vivus and its competitors Arena Pharmaceuticals (ARNA) and Orexigen (OREX), here is a simple chart made on Google Finance that spans October 15-25.


(Click to enlarge)

As you can see, there's nothing too interesting except the huge underperformance of Vivus relative to its peers. Vivus shares moved down nearly 22% while Arena dropped only 6%. Orexigen dropped just under 4% - why the discrepancy?

While we've seen these three stocks trade in sync for much of their history, I think the correlation/association between the three is beginning to wear thin. Yes, they are all targeting a supposedly giant and undiscovered drug market (obesity treatment), but can these companies be pooled into one homogeneous investment in the new market? The answer is more complicated than "no," although it really depends on the criteria we'd be using.

Let's first look at Vivus, which seems to be the odd one out of the pack lately.

Vivus actually hit the prescription drug market first, making Qsymia available exclusively through mail order as of September 18, 2012. Since then we haven't seen much about Qsymia sales, but we do know that the largest Pharmacy Benefit Manager (PBM) in the nation, Express Scripts, decided to join Qsymia's distribution chain as of October 8th. This signal alone sent Vivus, Arena, and Orexigen shares into a rally (with Vivus leading at the time), although the excitement diminished quite quickly.

For Vivus, the reason was obvious. The European Medicines Agency rejected Qsymia's Marketing Authorization Application (MAA) on October 18th after delays announced back in June. This wasn't really surprising, and Vivus intends to resubmit the application anyway. Still, it's confirmation (to some traders) that Qsymia's risk profile isn't so great. This implies that Arena's Belviq, or Orexigen's Contrave, might be better bets for the obesity drug market.

As you may also know, Belviq is still waiting on a classification by the DEA as a scheduled drug. This is preventing Arena from bringing their weight loss pill to compete with Qsymia (much to the annoyance of ARNA shareholders). There is a notion that Belviq is superior to Qsymia due to the big discrepancy in safety between the two drugs, although their efficacy in weight loss was never directly compared.

It's also worth noting that Qsymia may have hit the market first, but is only available through mail order since it's approved under a REMS (Risk Evaluation and Mitigation Strategy). Vivus just submitted an amendment to the Qsymia REMS to allow it to be sold in retail pharmacies, although this right is guaranteed to Arena's Belviq once it gets cleared by the DEA. Adding to the pro-Belviq side is the fact that its MAA was accepted by the EMA. Basically, this means that Belviq can hit the EU while Qsymia can't (unless things change.)

Orexigen is also developing a weight-loss drug market contender called Contrave, but it was previously dismissed due to the FDA decision to require interim data from "The Light Study" to prove that the drug was safe enough for patients with heightened risk to cardiovascular events. A very recent press release implied that the FDA was open to the possibility of an earlier NDA submission, which would get Orexigen into the competition earlier.

OREX trades at a steep discount (in terms of market cap) to VVUS and ARNA, which was explainable due to its late arrival to the prescription weight loss drug market. If this flaw disappears, or is significantly lessened, either OREX needs to move up or ARNA/VVUS need to move down.

One thing that these stocks do still have in common is that bears tend to target these three tickers all at the same time. Along with recent drops in share prices, short interest has implied that bears are confident about the overvaluation of these companies.

  • Short interest on Arena stayed around 44 million shares, which is >26% of float, despite lower volumes.
  • Short interest on Vivus is moving in a clear uptrend, now at 16.9 million shares (roughly 17% of float)
  • Short interest on Orexigen is moving up the fastest, although interest as % of float is the lowest at 11.5%

No matter which of the three you choose to play the weight loss pill market, I would be watching any hint of Vivus' progress with Qsymia. Even if Arena and Orexigen are future competitors, Qsymia can prove (or disprove) that bears are wrong about the obesity drug market and the supposed "overvaluation" of the trio of pharmaceutical companies involved.

Source: Bears Still Betting Strong Against Vivus, Arena And Orexigen