Is Arena or VIVUS the Better Obesity Drug Stock?

Investors had high hopes for Arena's (NASDAQ: ARNA  ) Belviq and VIVUS' (NASDAQ: VVUS  ) Qsymia when in 2012 they became the first new obesity drugs in 13 years to receive FDA approval. Yet by looking at how Arena and VIVUS have fared over the past year, it's clear that those hopes faded away quickly.

ARNA Chart

Source: Ycharts.

Considering those steep stock-price drops, it might be time to take the contrarian view and check if Arena and VIVUS are viable investments. Let's compare Arena to VIVUS in three key categories -- past sales, future sales growth, and fundamental valuations -- to see whether either stock is worth buying.

Past sales growth
Arena is partnered with Eisai (NASDAQOTH: ESALY  ) in marketing Belviq, and receives 31.5% of Eisai's worldwide sales of the drug. VIVUS doesn't have a marketing partner for Qsymia.

VIVUS launched Qsymia in September 2012, and Arena and Eisai launched Belviq in June 2013. Analysts had originally expected both drugs to generate annual peak sales over $1 billion.

Arena only reported $5.7 million in Belviq revenue in 2013 -- $5.3 million of which represented 31.5% of Eisai's net product sales ($16.8 million), along with $0.4 million from redemptions of free trial vouchers. Sales notably accelerated in the second half of the year: Arena's Belviq revenue rose 35% (excluding voucher redemptions) to $2.3 million between the third and fourth quarters of 2013. However, that surge is slowing -- leaving aside redemptions of vouchers, Arena's share of Belviq sales only increased 17% to $2.7 million in first quarter 2014.

VIVUS reported $23.7 million in Qsymia sales in 2013. Sales rose 20% sequentially in the fourth quarter to $7.7 million. But like Belviq, Qsymia's growth ramp began flattening out, as sequential sales growth was 18% in the first quarter, to $9.1 million.

That trend raises a troubling question: will demand for both drugs peak earlier than anticipated?

Future sales growth
Arena hopes that increased sales and marketing efforts with Eisai will pay off. On May 9, Arena announced that Eisai would boost its Belviq sales force by 50%, to approximately 600 sales representatives, and launch a television advertising campaign. Eisai had previously doubled its sales force from 200 to 400 representatives last October.

Arena has also been working with insurers and pharmacy benefits managers, or PBMs, to increase coverage. In February, Arena and Eisai signed a deal with CVS Caremark -- the second-largest PBM in the United States -- to help its drug reach more than half of Americans with insurance.

VIVUS secured a similar deal with Express Scripts, the nation's largest PBM, in late 2012. VIVUS also released a fitness app for smartphones, which provides information about Qsymia, last March.

In addition, health insurer Aetna has been evaluating both Belviq and Qsymia in a pilot weight-loss program, which could lead to better insurance coverage and availability for both drugs.

Fundamentals and financials
Comparing the fundamentals between Arena and VIVUS can be tricky for two reasons: both companies are currently unprofitable, rendering P/E and PEG ratios moot, and year-over-year sales growth isn't meaningful due to the recent commercial launches of Belviq and Qsymia.

Therefore, let's simply compare the two companies' price-to-sales, price-to-book, and cash/debt positions instead.

 

Price-to-sales

Price-to-book

Cash and equivalents

(mrq)

Total debt

(mrq)

Operating cash flow (ttm)

Arena

16

11

$257 million

$72 million

$72 million

VIVUS

5

4

$316 million

$217 million

($98 million)

Source: Yahoo Finance, May 29.

VIVUS appears to be the "cheaper" stock based on its price-to-sales and price-to-book ratios, but it's cheaper for a reason -- the company has a much higher debt-to-equity ratio than Arena and a negative operating cash flow.

Arena clearly has the upper hand financially, thanks to Eisai handling the heavy lifting in marketing and commercialization of Belviq. Although VIVUS lacks a major partner for Qsymia, its erectile dysfunction drug Stendra could help it bounce back financially. VIVUS has already secured three major licensing deals for Stendra with Menarini, Auxilium, and Sanofi to market the drug worldwide, which will boost VIVUS' revenue with up-front payments, royalties, and milestone payments.

The Foolish takeaway
Both Arena and VIVUS are risky investments, but Arena appears the stronger of the two. Arena's backing from Eisai could help it marginalize VIVUS and extend its drug's reach to more patients. VIVUS has made some smart moves by signing licensing deals for Stendra to boost revenue, but it's unclear if Stendra will eventually outweigh Qsymia's importance to the company's top line.

Still, I'm not convinced that either stock will do well moving forward, unless Belviq and Qsymia sales can show some stronger growth. Otherwise, sales of both drugs could plateau at pretty low numbers and cause both stocks to fall even further.

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Read/Post Comments (7) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2014, at 2:59 PM, marp11 wrote:

    gee wonder why the shorts are slowly covering their ARNA shorts,,you would think they would double down here...right davey boy??

  • Report this Comment On May 31, 2014, at 4:53 PM, marp11 wrote:

    Bel/ Phen

    Phenteramine + Locaserin

    Patients this week seen in clinic on combo for 10-14 weeks.

    Weight loss 15-23%.

    Cut dose on two. Losing weight too fast.

    I think the debate about future of weight loss treatment will soon be over,.

    FROM A DR. in weight loss clinic.

    available now....both FDA approved.....

    stay short? like pain?

  • Report this Comment On May 31, 2014, at 4:57 PM, Vanmusicblues wrote:

    ARNA's [positive cash flow came from a one time payment for selling rights overseas. That doesn't happen again. ARNA has a much larger operating loss going forward. Very flawed analysis.

    you failed to mention VVUS ED drug Stendra who's revenues next year will likely be greater than the diet drug revenues of both co's.How can you ignore that in your analysis?.

    Very poor job here

  • Report this Comment On May 31, 2014, at 6:32 PM, marp11 wrote:

    mucous blue......another guy who bet big

    on the wrong horse

  • Report this Comment On June 01, 2014, at 10:24 AM, gazoo99 wrote:

    mucous blue..... loves VVUS.

    But you can see how THAT is going....

    All time record low share pricing...

    Big...PUMP.....&.....DUMP..... just done for HF's to bail

    Huge expenses with no real cash flow.....

    Stendra / Spendra... will NEVER pay enough to save VVUS from bankruptsy.

    And....On....And...On.....And.....On.....

  • Report this Comment On June 01, 2014, at 10:26 AM, gazoo99 wrote:

    mucous blue..... loves VVUS.

    But you can see how THAT is going....

    All time record low share pricing...

    Big...PUMP.....&.....DUMP..... just done for HF's to bail

    Huge expenses with no real cash flow.....

    Stendra / Spendra... will NEVER pay enough to save VVUS from bankruptsy.

    And....On....And...On.....And.....On.....

  • Report this Comment On June 05, 2014, at 9:28 PM, Foreeverlong wrote:

    Qsymia vs Belviq?

    Belviq is the hands down winner. It is already happening, and shows in the scripts to date. For those who do not respond to Belviq, their physician will combine it with a separate script for Phentermine (a generic drug that is cheap). Arena holds the patent for combining the two drugs, but no need, because physicians will write separate scripts to save the lives of obese and morbidly obese patients that otherwise have no solution open to them but bariatric surgery in the form of gastroplasty, belt or sleeve procedure. Jenny Craig is much more expensive at a rate of $350 to $650/month.

    Oh! And, don't forget that Belviq has shown remarkable efficacy to treat the co-morbidity of Type 2 diabetes! It is so effective that physicians are beginning to recognize it as a minimum of a second class drug for treatment of T2D with the potential of being a first class treatment drug for this purpose.

    Marp11 above has it right. I am in senior management in the health care field, and believe me while physicians are conservative, they want a solution for treating obese patients. If Belviq doesn't work for one patient, they will turn to Belviq/Phentermine. This has turned into a longer process than anyone expected, but it is a freight train, and you will not regret investing in Arena IMO.

    Best wishes.

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