Which Is the Best "Obesity" Bet?

Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The last year was an interesting one in the Biotechnology industry, with a number of different drugs receiving the FDA’s approval. In an unusual move, the body gave its nod to two drugs aiming to control the growing concern of obesity. As can be expected, after the approval of their respective drugs, the stock price of both Vivus (NASDAQ: VVUS) and Arena (NASDAQ: ARNA) skyrocketed. The analysts started churning out sky high valuations and blockbuster sales estimates.

As could be expected of most single drug companies, the company’s stocks have plummeted significantly since the approval has come through. Smart investors followed the motto of buying on the rumor and selling on the news, everyone else lost money. The chart below shows the dramatic rise and fall of both stocks.

Orexigen (NASDAQ: OREX) is another player trying to enter the obesity market. The company has still not been able to get FDA approval for its primary candidate Contrave. The FDA rejected the application in February 2011 and asked investigations in to effects of Contrave on cardiovascular health. The valuations of Orexigen are also tied to the commercial success of Qsymia and Belviq.

According to company website:

‘Contrave is currently being evaluated in the Light Study, a multicenter, randomized, double-blind, placebo-controlled long-term research study. The Light Study is designed to assess the cardiovascular health outcomes of Contrave.’

<img src="http://media.ycharts.com/charts/a34e5202cc3d5fef21dd990af16f2b9a.png" />

data by YCharts

The aim of this article is to find the best obesity control best in the stock market. I will undertake this task in two different steps. The first step is to analyze the two drugs and then take a look at the stock.

Belviq vs Qsymia

There has been a lot of debate on which drug is better. During trials, subjects using Qsymia went from an average weight of 227 pounds to 204 pounds, 10% loss in body weight. On the other hand subjects using Belviq went from 220 to 207, losing approximately 5.9% of their body weight. This shows that Qsymia is almost twice as effective as Belviq.

There are side effects of both Belviq and Qsymia. The drugs are prohibited to pregnant women. Qsymia can cause birth defects if taken in the first month of pregnancy i.e. even before a woman knows she is pregnant. The FDA has strict guidelines in place for women interested in a Qsymia prescription. Belviq on the other hand had been flagged by FDA for having the potential for abuse.

A recent ruling by DEA has put such concerns to rest as according to the DEA Belviq is a Schedule IV drug. This classifies Belviq as having a low risk for abuse and allows physicians to prescribe a 3 month prescription for Belviq through local Pharmacies. Despite this ruling there is a long list of side effects on the drug and it would come down to individual judgment of a physician if they consider Belviq safe for their patient.

Therefore, if I sum up my argument, Belviq is safer while Qsymia is more effective.

Bottom Line

As we can see below, Vivus has a much high return potential but the large discount to 52-week high shows us that the stock also has a higher risk. If we look at analyst’s opinion on Vivus, there is almost a unanimous buy rating. The stock has suffered in recent months due to lackluster sales data on the drug. The primary obstacle remains the limited distribution of Qsymia due to stricter safety guidelines.

The primary drawback of the Arena investment is the lesser effectiveness of Belviq at only 5.9%. The better reach to consumers due to a safer rating gives it an edge on Qsymia in terms of sales potential. The next month launch of Belviq will be a major event and the stock can appreciate on positive sales data.

I believe at these levels both drugs are a buy. The obesity market is big enough for both players. If Vivus is able to get a better distribution channel, it will become the winner in this battle. Until then, both companies have upside potential.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Discount to Sell Side Estimates</p> </td> <td> <p>Discount to 52-Week High</p> </td> </tr> <tr> <td> <p>Arena</p> </td> <td> <p><strong>-1%</strong></p> </td> <td> <p><strong>28%</strong></p> </td> </tr> <tr> <td> <p>Vivus</p> </td> <td> <p><strong>41%</strong></p> </td> <td> <p><strong>59%</strong></p> </td> </tr> </tbody> </table>


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