Since October 17, shares of Vivus (VVUS) have fallen 35%. In the past, shares have been volatile, but never have they fallen to this degree since the FDA approval of Qsymia. The stock is still trading with a 50% gain in 2012, but in light of all that's occurred, it's becoming obvious that Arena Pharmaceuticals (ARNA) will be the clear winner in the weight loss sweepstakes. As a result, let's take a look at a timeline of events that have led shares of VVUS lower and how it benefits ARNA.
October 15 - VVUS gains momentum as Qsymia sees early success and strong demand. In the third week following its launch, Qsymia prescriptions rose 150% sequentially. This data also showed that 53% of the scripts were paid for by commercial insurers versus 36% in the week prior. This was the last round of positive news that the company has seen; which did appear encouraging as insurers were covering the drug and sales were booming. However, it all went south from here.
October 17 - Vivus asks the FDA to allow wider pharmacy sales of its weight loss drug. The company can not advertise or market its drug to the fullest extent, and the product is only available through certified mail order pharmacies. This has been a daunting concern for investors, as the simple fact is that some consumers don't know that Qnexa exists. Some believed that this may be a sign of desperation, or that VVUS now realizes its demand will be weak after the initial push.
October 19 - Vivus fails to win European Agency backing. This was no real surprise. Earlier this year Vivus prepared investors for the fact that the EU would not support its weight loss drug. However, the concerns of cardiovascular and nervous system effects brought back bad memories, and were the start of a vicious downtrend.
November 2 - Credit Suisse analyst noted that initial sales for Qsymia may be slower than expected due to a more cautious distribution method. This has been the number one concern among investors, and has become a significant problem for the company. The sales guidance of $12 million for Q4 was way below the consensus.
After the company's drug being rejected in the EU and sales projections continuing to fall, the stock has been crushed in anticipation of earnings on November 6. It appears as though no one wants to hold this stock ahead of the announcement, in fear of weak sales and lower guidance.
I should probably begin by saying that it's really too early to tell if Qsymia will be a long-term failure. I have said time-after-time-after-time that the best time to buy a biotechnology stock, following an approval, is right after its launch. Almost always, companies with excessive valuations and high expectations do not live up to high expectations during the initial launch. It takes time to build a network, market, and distribute the product. However, the threat of looming competition and a very strict distribution/marketing policy is making it very difficult for Vivus to succeed.
All of the problems facing Vivus are a non-issue for Arena Pharmaceuticals. Its FDA approved drug Belviq is safe, effective, and will most likely launch sometime early in 2013. In fact, the company's only visible problem has been a slower than expected launch. But the good news is that the launch and all of the marketing will be handled by a third-party partner, and is expected to be one of the largest launches to date.
Arena will only receive up to 35% of the sales from its product, however EU approval is not expected to be a problem. The company is awaiting DEA scheduling, but it will have a much more favorable marketing program compared to Vivus. Belviq will be marketed by reps, it will be advertised, it will be covered by insurers, it will be safe, and it will not in any way be hidden from the public like Qsymia as a result of strict regulations.
Despite Vivus' early problems there is one thing that has not changed, the size of the weight loss market, which is still one of the largest unmet medical needs in healthcare. Aside from Vivus' valuation, there is something else that has changed: The valuation of Arena Pharmaceuticals. The stock has declined 22% since October 18.
The market for weight loss products is huge, there are two approved products, and at least one is going to benefit mightily from the pure size and demand within the industry. In my opinion, the restrictions placed on Vivus and its inability to properly market is going to be a blessing for Arena, a company that is also valued for a worst case scenario.
A few months ago I purchased shares of both companies, a small position. My reason was because I thought both would see an early pop during the first year but then only one would emerge as the clear winner. I thought that Vivus' product was more effective but that Arena's was safer, and I wasn't sure which the consumer would prefer. However, if consumers aren't aware of Qsymia's existence then there isn't much competition, because although the FDA did approve Qsymia, it seems almost evident that it was only to quiet the critics who wanted an effective weight loss product approved. It almost seems as though the FDA set Vivus up to fail, and so far I think they succeeded, meanwhile Arena looks to benefit. As a result, I think Arena's valuation is attractive and that it presents solid upside potential from this point forward.