Arena Pharmaceuticals (NASDAQ:ARNA) and Vivus (NASDAQ:VVUS) are battling in the minds of investors as each promises a drug with the potential to cause weight loss- a sure moneymaker in a country in which many people are unhappy with their weight. Vivus’s drug, Qsymia (also known as Qnexa), was approved by the FDA earlier this month. Arena’s Belviq has also been approved, though it should come to market later than Qsymia if both drugs are released on schedule. At a basic level, the contest between the two drugs is between efficiency and safety concerns, while the contest between the two companies involves the marketability of their drugs and their ability to profit.
While Qsymia is somewhat more effective than Belviq, according to study data, the gap is not particularly large: Belviq trial subjects lost 3-4% of their body weight in one year, and some subjects saw much larger losses, compared to Qsymia’s average of 10% of body weight lost in the highest tested dose. In addition, one of Qsymia’s active ingredients has been shown to increase the risk of birth defects; again, the safety gap might not be particularly large in Belviq’s favor, with Arena attempting to rule out potential cancer and heart health risks from the drug. However, given these differences, even if patients might tend to prefer Qsymia physicians might encourage them to take Belviq, at least at first. Doctors might also spin the information provided in order to encourage their patients to go with Arena’s drug and therefore reduce the risk of complications and expensive legal disputes.
Clearly the strengths and weaknesses of the two drugs convert to advantages and disadvantages of each company relative to the other, but each has an additional drawback. Arena has an agreement to only receive a minority of the revenue from Belviq sales in the US, with the remainder going to a partner who will market the drug and also cover much of the costs of additional clinical trials; Vivus has no such agreement. Vivus's problem is less certain, but potentially more damaging. Citron Research, a group which publishes investigations of stocks which it believes have had their prospects tremendously overvalued by the Street, turned its sights on the company earlier this month. The stock has fallen about 13% since Citron claimed that one of the compounds used in Qsymia is under patent protection for weight loss treatment and that the drug is a combination of two widely available generics, among other accusations. Unless investors have the legal background to analyze and reject these claims, or are willing to take substantial financial risk, they may want to avoid the stock. Citron and many critics of Vivus also discuss insider selling activity at the company (see a history of insider selling at Vivus).
Between the two, hedge funds have generally bet on Vivus despite the dispute over the companies’ product offerings. According to 13F filings, Daniel Gold’s QVT Financial owned 8.2 million shares of VVUS at the end of March 2012. This made it the largest holding in his 13F portfolio, and made QVT the largest hedge fund holder of the stock. QVT is also the largest hedge fund holder of ARNA, according to the same filings, but only owned 3.3 million shares; taking the two stocks’ prices into account, QVT’s position in VVUS was 18 times larger (see the rest of QVT's portfolio). Passport Capital, managed by John Burbank, increased its holdings of VVUS in the first three months of 2012 to 7.4 million shares (find other stock picks from Passport Capital).
We think that the intellectual property issues and insider selling at Vivus are causes for concern, and our guess is that, barring any unforeseen developments, doctors will tend to recommend the somewhat safer Belviq to their patients, with Qsymia being a “plan B” in the event the first drug is not effective enough. This is particularly true for patients who are seeking to lose weight for cosmetic rather than purely medical reasons, a large segment of the market for a weight loss drug. While Arena would not fully benefit from Belviq's market opportunity, the stock may be a better buy than Vivus.
This article was updated to include information about Arena's marketing agreement for Belviq.