The Best Stock to Invest in Obesity Drugs

Considering the limited number of obesity drugs, it seems easiest to pick the best stock in the field by process of elimination.

Let's eliminate Roche and Novo Nordisk off the top. Both are large companies, so you wouldn't be investing for their obesity drugs so much as the rest of their stable of approved drugs.

And if that isn't enough, Roche's Xenical has been on the market for years without making much of a bang. Novo Nordisk's Saxenda is relatively new, but it has to be injected, so it'll primarily be used by obese diabetics since a lower-dose version of the drug -- marketed as Victoza -- is available for diabetics looking to control their blood sugar levels.

VIVUS's Qsymia and Arena's Belviq have been on the market for a couple of years, but they've failed to impress doctors or patients because of side effects and minimal efficacy, respectively. They might be able to mount a comeback someday, and Arena has potential with its drugs outside of obesity, but it's hard to call either of them the best obesity drug stocks.

That leaves Orexigen's Contrave and Zafgen's beloranib. Let's take a closer look.

Source: Takeda.

ContraveOrexigen and its marketing partner Takeda originally tried to get Contrave approved in 2011, but the Food and Drug Administration turned down the application, requesting the companies run a cardiovascular outcomes trial to eliminate the possibility that Contrave was causing heart problems.

After some negotiating, Orexigen complied with the FDA's request, the trial data was satisfactory, and the FDA signed off on its approval.

Contrave is often referred to as the Goldilocks of obesity drugs because it produces more weight loss than Belviq and has less extreme side effects than Qsymia. The drug has quickly taken share from both drugs in part because Takeda has been willing to spend more money on a sales force than VIVUS or Arena's marketing partner Eisai.

BeloranibRather than developing beloranib for general obesity, Zafgen has chosen to test the drug's ability to treat a couple of orphan diseases that cause patients to add pounds uncontrollably. Prader-Willi Syndrome is an inherited disease that causes patients to have an unrelenting hunger. And hypothalamic injury-associated obesity occurs after damage or removal of a patient's hypothalamus, often when removing a craniopharyngioma tumor.

Beloranib has shown promising results in both diseases, reducing body fat content in Prader-Willi Syndrome patients and producing weight loss in patients with hypothalamic injury-associated obesity.

Zafgen is running a phase 3 trial in Prader-Willi Syndrome, which should read out by the end of this year.

The biotech is also developing follow-on compounds that target the same pathway that could be used for general obesity, but we're years away from that drug being on the market.

Final verdictThe story of the best obesity drug stock is far from complete.

Zafgen clearly has the easier pathway to sales. Unlike general obesity, doctors don't need to be convinced that patients with Prader-Willi Syndrome and hypothalamic injury-associated obesity need additional treatment because diet and exercise isn't enough to control their obesity.

But Orexigen has the advantage in terms of potential market, with more than a third of Americans considered obese. Zafgen will be able to charge a premium for its obesity drugs since it treats orphan indications, but the upside is limited because there are a limited number of patients.

We can only declare a winner when one of them hits sales of a billion dollars annually, which is the hurdle for being labeled a blockbuster drug. Rather than trying to figure out which company will eventually win, the best move for investors interested in this space might be to buy both, especially since the two initially won't compete directly.

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