Is Arena or VIVUS the Better Obesity Drug Stock?

Investors had high hopes for Arena's (ARNA) Belviq and VIVUS' (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.

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 (ESALY -1.95%) 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.

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.