There is high risk in trying to time the biopharmaceutical market. Companies can lose in excess of half their value in a single day if their new drug does not receive FDA approval. Two biotech companies that have worked long and hard in the anti-obesity drug development space already have FDA approval, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) and Vivus, Inc. (NASDAQ:VVUS). So the question becomes whether there is any more speculative value that can be extracted from either of these companies.
Of the 400 hedge funds that we track, none have more than 2% of their fund invested in Arena Pharmaceuticals (NASDAQ:ARNA). However, Vivus Inc (NASDAQ:VVUS) has attracted big bets from two top hedge funds. Vivus is Passport Capital’s third largest holding, representing 7.88% of the total $2.95 billion portfolio (you can see Passport’s entire portfolio here), and the $1.17 billion hedge fund QVT Financial has Vivus as their top holding, which represents 19.54% of their portfolio (you can see Qvt’s entire portfolio here).
It appears that both Arena and Vivus have hit home runs in the drug development space, and both of their anti-obesity drugs are set to hit the market within six months of each other. The only other major player in the anti-obesity drug market is Orexigen Therapeutics, Inc. (NASDAQ:OREX) with the drug Contrave, but it is still awaiting FDA approval. There is much hype surrounding the remarkability of an anti-obesity drug that helps individuals lose weight. The market potential is vast, especially given inability to address obesity in a noninvasive way until now. The CDC reports that 36% of U.S. adults and 17% of children meet the clinical definition of obese.
For investors looking to add a speculative play to their portfolio, there are indeed other biotech companies with a more diverse drug pipeline and positive earnings, such as the mega biotech companies, Amgen, Inc. (NASDAQ:AMGN) and AstraZeneca PLC (NYSE:AZN) who both pay dividends. However, it is unlikely any of the major biotech companies will have the opportunity to capitalize on such a vast customer base as Arena and Vivus currently have.
Neither Arena nor Vivus have had positive earnings over the course of their financial history, which is not uncommon for biotech companies. Arena and Vivus have higher than industry average multiples given their high profile drug approvals, with Arena trading at a price-to-sales multiple of 133 and Vivus currently having no sales. The worry is whether or not these companies will live up to the hype by meeting or exceeding expected market share. The biggest weakness to the anti-obesity hype is the overestimation of the market. There are also other risks to be considered. Many insiders have made key sales of Arena and Vivus of late, but we do not see this as a reason for concern. Many insiders are likely trying to lock in key returns provided by the share price increase due to FDA approval.
The case can be made that Vivus will outperform expectations and grow into its expected earnings. Analysts expect Vivus to increase EPS from -$0.98 for 2012 to $0.40 for 2013. However, the expectations for Arena are much less, with EPS increasing from -$0.25 for 2012 to -$0.15 for 2013. Arena has become much more of a household name, having had a very public fight and gained more media attention with its FDA approval. Arena is up almost 627% over the past year, while Vivus is up only 189%.
Obesity drugs have historically sold well in Europe, but both companies still await approval. This will be the second largest market for their drugs. Both Arena and Vivus will need to find marketing and sales channel partners to fully tap the European market. Vivus seems to have a leg up in this respect, with a larger sales force and not being held back by development partners. Another factor that gives Vivus an advantage over Arena is Vivus’ longer required duration period for taking the drug, which is around ten months, versus Arena’s six months, which could help with generating more revenue per customer.
Although Vivus did not receive FDA approval until a full month after Arena Pharmaceuticals (NASDAQ:ARNA), Vivus is expected to be the first to market with its anti-obesity drug. Vivus has been under pressure of late, down 8% over the last three months, given concerns around intellectual property and patents, but the issue has since been resolved, and could present a buying opportunity. Given this, Vivus likely has the most upside potential over the interim. Additionally, Vivus has a couple key approvals that are expected to be more of a formality, and should provide a bounce in the share price.