By: Ahmed Ishtiaq
Companies operating in the obesity market have had a lot of ups and downs in the past few months. Such is the volatile situation of the market that a small piece of news can cause massive swings in the stock price. Vivus (NASDAQ:VVUS) share price took a heavy beating after the company reported poor sales figures from its anti-obesity drug, Qsymia. These poor figures weighed heavily on the whole sector as Arena Pharmaceuticals (NASDAQ:ARNA) and Orexigen Therapeutics (NASDAQ:OREX) also fell. Investors react emotionally to the news in the BioPharma sector, especially with the development stage companies. As a result, wild swings in the prices of these stocks are expected. After the bad news of poor earnings, these companies recently received probably the biggest positive news after the approval of their drugs.
Aetna Inc (NYSE:AET), the third largest insurer in the country decided to provide coverage to these anti-obesity drugs. As a result, stock prices in the sector went up substantially. The decision by the third largest insurer in the country will have far reaching affect on the fortunes of these companies. Let's see how the decision will affect the companies.
Aetna Policy Bulletin:
In a recent policy bulletin, Aetna announced that it will provide coverage to the anti-obesity drugs manufactured by Vivus Inc and Arena Pharmaceuticals. In my previous articles, I have always maintained that the insurers will be inclined to provide coverage for anti-obesity drugs. There are two reasons why I felt the coverage will be provided- first, the cost from obesity related diseases is much higher than the cost of anti-obesity drugs. At the moment, total expenditure on obesity related drugs is over $140 billion in the country. In fact, these medical expenses were a major factor in the change of FDA's stance over the anti-obesity drugs. Diseases like diabetes and coronary heart disease are far more expensive to cover than the cure for obesity itself.
The second reason is the recognition of obesity as a disease rather than a mere choice of life style. FDA recognizes that obesity is a disease, and serious steps are needed to fight this epidemic. FDA accepted the problem, and their solution was the approval of anti-obesity drugs by Arena and Vivus. However, a solution to this problem will not be complete until the insurance companies back the FDA. In my opinion, most of the insurers would like to become a part of the solution rather than a problem. Aetna is the first to become a part of the solution.
Affect on the Participants:
In its most recent earnings announcement, Vivus announced that only 20% of the prescriptions received insurance. Low insurance coverage was the biggest factor in low sales of Qsymia. Approximately 30% of patients, who were prescribed Qsymia, did not pick up their prescriptions due to the excessive cost of the drug. Insurance coverage is extremely important for anti-obesity drugs as a lot of patients will not be able to afford these drugs. Aetna's decision is a particularly welcome sign for the anti-obesity drug manufacturers. Smaller insurers will now be inclined to provide coverage for Qsymia and Belviq.
The news had an instant impact on the stock prices of these companies. Vivus stock went up by 12.85% to $11.68 after hitting high of $12.59, shares of Arena also rose 3% to $9.19 on Wednesday. Third player in the market is Orexigen Therapeutics ; however, its drug is still in the trial phases. Orexigen is working on presenting its drug for approval in 2013. Shares of Orexigen went up by 9% to $4.73. As a result of increased insurance coverage, fourth quarter prospects are already looking bright for Vivus. I expect Qsymia sales to go up substantially during the current quarter. It can very well prove to be the first quarter when the company reports a profit. Although Aetna's decision is extremely positive news, further support is needed from other insurers.
All the pieces of the puzzle are falling into place nicely for anti-obesity drug manufacturers. Insurance coverage for these drugs is a massive event in this sector. We can expect a slight decrease in the volatility now that one of the biggest hurdles in revenues has been removed. I expect these stocks to move up in a steady manner now. Fourth quarter results will be hugely impressive for Vivus due to increased coverage. Arena will also go into the market with a lot more belief than before. All the players in the obesity sector will come out winners, and the patient investors will be rewarded handsomely.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.