Nothing gets the blood of an ardent biopharma investor pumping like the prospect of a new drug with huge market potential. The US has gone thirteen years without "diet" drugs. With obesity becoming a national issue of supposedly epidemic proportions, it is little wonder the stock prices of two companies with diet drugs having passed the FDA gauntlet have taken their investors for a wild ride. The companies are Arena Pharmaceuticals (NASDAQ:ARNA) with the drug Belviq and Vivus Inc. (NASDAQ:VVUS) with Qysmia, formerly Qnexa.
Although Belviq was the first to gain FDA approval, the second-comer to the party, Qysmia, was the first to make it to market with Belviq expected to reach pharmacy shelves in 2013. Now investors are scurrying about looking for any clues they can find as to which of the two will be the ultimate winner. In this article, we will first consider the question of whether or not there will be a clear cut winner as well as signs to look for to assess which is leading.
First, based on the history of other blockbuster drugs, there may be room in the obesity market for both of these entries to be successful. Viagra was the first erectile dysfunction drug treatment to come to market but within a decade there was competition and all entrants were making money. Early betting on the obesity drug wars has some investment advisors giving a nod to Belviq due to its perceived safety advantage. However, Arena will share revenues with a marketing partner while Vivus has 100% control of revenues. There is little debate about the size of the potential market. The Center for Disease Control (NASDAQ:CDC) estimates a full 35.7% of adults in the US suffer from obesity leading to $147 billion in cost to the health care system from related conditions like diabetes, stroke, and heart trouble.
As of right now, Vivus has the market to itself. However, availability is limited to mail order drug operations. Vivus is petitioning the FDA for approval to offer the drug in traditional pharmacies. They were denied approval for entry into the European market but will reapply. Arena's distribution schedule is yet to be determined but their marketing partner, Japanese firm Eisai Pharmaceuticals, will be picking up the associated launch costs while Vivus is building its own sales force.
The early reaction to Qysmia is now in and it has provided added ammunition for the short sellers now circling the stock. One of the problems average investors have with evaluating stocks like Arena and Vivus is separating bullish or bearish arguments that are long on hype and short on fact. With that in mind, here is what company officials had to say in the Vivus conference call:
"In the following 4 weeks of October, up to, and including week of 10/26, an additional 4,904 Qysmia prescriptions were shipped to patients, bringing the total actual Qysmia prescriptions shipped to patients since launch to 5,560. These total prescriptions represent 3,504 unique patients on Qysmia to date. We are now seeing refill prescriptions in the last 2 weeks of our pharmacy beta."
The slow start at Vivus is adding to the short rationale for Arena as well. The truth is there is a different market that will ultimately decide the issue - the free market where products and services, not stocks, are bought and sold. There are three players in that market to watch for signs of which of these competitors will emerge with greater market share; recognizing there may be no clear winner. The players are:
- Insurance Companies
Physicians are the gatekeepers here. The FDA pulled diet drugs off the market in 1997 and very many physicians remember well the heart problems associated with earlier obesity drugs. It is likely they will be slow to accept and prescribe the drug and may give an edge to Belviq due to its perceived superior safety compared to Qysmia. However, the differences in side effects are hard to quantify until the follow-on studies required by the FDA are completed. Popular medical websites like WebMd make no reference to one drug being safer than the other, but an FDA Consumer Update does state that women who are pregnant or thinking of becoming pregnant should not take either of these medications because weight loss offers no potential benefit to a pregnant woman and can cause fetal harm. Qsymia carries a risk for birth defects (cleft lip with or without cleft palate) in infants exposed during the first trimester of pregnancy.
Consumers looking for a miracle pill will be surprised to learn both Belviq and Qysmia need to be used in conjunction with exercise and improved dietary habits. There is some evidence that Qysmia is the more effective of the two when it comes to weight loss. Studies showed that Belviq users lost between 3% and 3.7% weight loss while Qysmia users lost between 6.7% and 8.9%, according to the FDA. While doctors may prefer to start with Belviq, it is hard to imagine consumers who have done their homework will not begin requesting the drug with the higher weight loss results. Both the safety and efficacy issues may change as the FDA has required both Arena and Vivus to do follow up research on the drugs.
The bears will tell you insurance companies will never pay for this drug and in fact Vivus said a significant percentage (30%) of consumers who got prescriptions for Qysmia failed to fill them, presumably because the cost was not covered by insurers. However, insurers paid for obesity drugs in times gone by and in the first two weeks Qysmia hit the market 33% of prescriptions received some form of insurer reimbursement . According to Vivus management that has now slowed to 20%.
Qysmia is off to a slow start but one cannot deny some physicians are prescribing the drug and some consumers are using it. If anecdotal evidence of success begins to build, Arena is likely to have a more successful launch.
Picking stock market winners boils down to balancing reality against perception. Stocks in all sectors are subject to valuations that outstrip the realities of market fundamentals but few approach the cult-like following biopharmaceutical stocks like Arena command. The free market players will provide an unfolding reality in the coming months and Arena finds itself in the enviable position of following a path carved out by Vivus.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.