3 Biopharmaceuticals Weighed By Uncertainty

Includes: ARNA, OREX, VVUS
by: Cris Frangold

The American Journal of Preventive Medicine estimates that by 2030, 42 percent of U.S. adults could be obese, which would add approximately $550 billion to healthcare costs over that time frame. In 2012, the FDA approved two anti-obesity drugs: Arena Pharmaceuticals (NASDAQ:ARNA) with the drug Belviq and Vivus (NASDAQ:VVUS) with Qsymia, formerly Qnexa. Shares of anti-obesity drug makers received a major stimulus after the third largest health insurer in the United States, Aetna (NYSE:AET), said it will provide coverage for certain categories of patients for anti-obesity treatments. Analysts believe that Aetna's announcement could put pressure on other insurers to also add coverage.

Vivus' Qsymia is in phase 2 clinical development for the treatment of type 2 diabetes and obstructive sleep apnea. For the third quarter, the company recognized net product revenues of $41,000 from prescriptions shipped from certified pharmacies to patients. Because of the lack of history in selling Qsymia, it will recognize revenue on the sell-through method with revenue being recognized as prescriptions are shipped to patients. The prescription shipment data is collected directly from the pharmacies to determine the amount of revenue to recognize. For the three months ended September 30th, 2012, the company reported a net loss of $40.4 million, or $0.40 per share, as compared to a loss of $8.6 million, or $0.10 per share, for the same period of the previous year. The increase in net loss is primarily attributable to increased selling, general and administrative expenses related to pre-commercialization and commercialization activities for Qsymia. Net loss for the first nine months of 2012 is $83.2 million, or $0.85 per share, as compared to a loss of $34.7 million, or $0.42 per share, for the same quarter in the previous year. The increase is primarily due to higher selling, general and administrative expenses incurred for the Qsymia launch. Although Belviq was the first to gain FDA approval, Qsymia has been the first to make it to market.

Analysts expected Vivus' Qsymia to be a success with Bloomberg healthcare analyst Andrew Berens predicting that the drug could generate as much as $1 billion per year in revenues by 2016. Two months have passed since the drug was launched but there are as yet few signs the drug will become the blockbuster some had hoped for. There is no doubt that there is a huge market for obesity drugs, but Qsymia isn't the only one in the fray. Roche Holding's (OTCQX:RHHBY) Xenical has been on the market for years though it has not sold well because of unpleasant side effects from the consumption of fatty foods. Arena Pharmaceuticals' Belviq is probably going to be Qsymia's biggest competition. The drug has already been approved by the FDA, but has not yet been launched because it's waiting for clearance from the Drug Enforcement Agency. In the near future, there could be competition from Orexigen's (NASDAQ:OREX) Contrave. The FDA delayed the approval of Contrave because the agency was worried about heart complications and asked for an outcomes trial that measures heart attacks, strokes and so on. Vivus is required to run 10 post-approval studies as a condition of its FDA approval and, in theory, any adverse finding could create a problem. Moreover, consumers looking for a magic pill will be surprised to learn both Belviq and Qsymia need to be used in conjunction with exercise and better dietary habits.

The slow start for Qsymia means that much more evidence is necessary before we conclude that the drug is going to be a blockbuster. I would wait for further developments before buying Vivus.

No discussion on anti-obesity treatments could be complete without looking at Arena Pharmaceuticals and Belviq which shows all the signs of being another major new player in the market. Arena recorded third quarter revenues of $1.5 million compared with $3.5 million in the prior-year quarter and missed the consensus estimate of $4 million. The company maintains its 2012 revenue guidance in the band of $91-$97 million which would include $65 million which Arena Pharma will receive as milestone payments from Eisai following the DEA scheduling of Belviq in 2012. This payment will not be forthcoming if DEA scheduling is not accomplished by the end of 2012. Once again, I believe that further developments should be analyzed before I recommend a buy on the stock.

The best news for Orexigen is on the financial side where its cash position is somber. The company reported $108.3 million in cash, equivalents, and short-term investments at the end of September and with the addition of the stock offering proceeds after this, the company expects to have at least $130 million remaining at the end of 2012.The even better news is that enrollment in Orexigen's Light Study progressed more quickly than expected and the goal is to show that no cardiovascular risk exists with usage of its Contrave obesity drug. According to the company, Contrave was viewed by physicians as having advantages for certain categories of patients such as women of child-bearing age, patients with diabetes and patients with depression. Orexigen could well be the best of the anti-obesity drug companies because Contrave shouldn't require DEA scheduling, unlike Belviq and Qsymia. The anti-obesity drug market is huge and has room for more than one player, but I would not invest in any of these companies at the moment until more concrete market indications become available.

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.

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