In this article, I am reviewing several new treatment options for obese patients. I do this from the patients' perspective to better understand which treatment(s) will likely capture significant market share and be worth my investment dollars. I use experiences and feelings of members of our extended family who are pretty overweight or are struggling to maintain. (Isn't this a growing problem in most every family?) Clearly, the U.S. obesity market can support several highly successful products.
VIVUS, Inc. (VVUS) and Arena Pharmaceuticals, Inc (ARNA) each had a diet pill approved last year. Within the investment community, each has fervent followers. Ultimately, the patients and doctors will decide. A more expensive solution, still in clinical trials, from EnteroMedics, Inc. (ETRM) requires an operation and a device to electrically stimulate the vagus nerve. Naturally, an obese patient has other options. The most drastic is gastric surgery (Bypass and Banding). Least invasive are the portioned meals that companies such as Medifast, Inc (MED) provides using a multilevel marketing sales model. As I review these options, place yourself in the role of obese patients who have unsuccessfully tried many diet plans and cannot lastingly reduce their weight to a healthy level. Now they are evaluating the available options.
Gastric surgery seems a last resort, but it is effective. The 12 month Excess Weight Loss (EWL) is 76% for gastric bypass with 78% diabetes resolution after two years. (I'll mostly ignore gastric banding as it is medically considered a less optimum choice with 48% EWL and 50% diabetes resolution). With these numbers why do only 1% of the morbidly obese (220,000 operations in 2008) choose this option? It is expensive ~$25,000 and between 0.6% and 1.1% of the patients die from the operation. The reduced stomach size can lead to severe nutritional deficiencies, and strict diet compliance is required. Several of our acquaintances needed repeat surgeries as they weren't able to stick to this diet either and their stomachs soon expanded. No wonder most shy from this option.
Next in price is the vagus nerve stimulation device from EnteroMedics, which is completing a repeat clinical trial. Their VBLOC device, used as directed for >=9 hours / day provided a 23% EWL (overall 16.6%) in a prior clinical trial (EMPOWER). VBLOC periodically electrically stimulates the vagus nerve to provide a sense of satiation. Interestingly, the placebo arm was almost as effective as the clinical device, since the company allowed the placebo device to be attached to the nerve with a low voltage enabled. Oops! In the current trial, the placebo isn't attached to the vagus nerve and presumably won't cause an effect. If VBLOC is approved, will it be successful and would I use it? It is expensive, estimated $15-20,000, but can be used over an extended period of time and has few side effects (no special diets or change to GI tract). VBLOC use decreases Hba1c from 7.7 to 6.9 after basically a month and hypertension by 10-13 mmHg from a baseline of 99.5 mmHg. My question with VBLOC is whether 23% EWL is sufficiently meaningful. (See comparisons below)
There are two recently approved diet pills. VIVUS has Qysmia which produced a 10% total weight reduction in twelve months and Arena's Belvig produced a 5.9% loss. Qysmia's launch, so far, appears disappointing. Both of these drugs have side effects and at least initially will have strong restrictions on prescriptions. In addition, there is the likelihood that after the prescription runs out many of the patients will continue to cycle their weight. This is similar to many patients' disappointing experience with diet plans (neither pill is expected to be used over about a year and the patient is then on their own again).
Weight loss comparison:
Initially, I had difficulty comparing the weight losses of each approach since EWL is not the same as total weight loss. I convert EWL into total weight loss by using Body Mass Index ((BMI)) Prime = BMI / 25 (Ideal BMI). Excess weight = (BMI Prime - 1.0) * Current weight
Thus a 5'6'' person with BMI 42 will weigh 260 pounds and have EWL of 105 pounds. A person with BMI 54 will weigh 334 pounds and the EWL will be 179 pounds. (BMI = 703 * lbs / height squared in inches)
Below are the 12 month weight losses by each approach made comparable for a 5'6" person - assuming total weight loss (TWL) figures from the diet pill studies are constant with varying BMI numbers.
Total Weight Loss (TWL) Comparison:
|BMI 42||BMI 54|
|Excess Weight||105 lbs||179 lbs|
|Gastric bypass 76% EWL||80 lbs or 30.5%||136 lbs or 40.7%|
|Gastric banding 48% EWL||50 lbs or 19.4%||86 lbs or 25.7%|
|VBLOC >=9hrs 23% EWL||24 lbs or 9.3%||42 lbs or 12.4%|
|VBLOC average 17% EWL||17 lbs or 6.7%||30 lbs or 8.9%|
|Arena's Belvig (5.9% TWL)||13 lbs||20 lbs|
|Vivus' Qysmia (10% TWL)||26 lbs||33 lbs|
From a prospective patient's perspective, which makes sense?
1. Gastric bypass is effective, but expensive and fraught with risk. If I'm going to have to follow a strict diet anyway and suffer significant risks and side effects, why wouldn't I just skip the surgery and the risks and take another approach. OK, OK I don't have enough self control, but it still doesn't appear worth it to me.
2. VBLOC, if approved, is also expensive, but can likely be used over long periods and doesn't have side effects. However, is a 30 pound reduction from my 179 pound excess enough of a weight loss to justify the expense and packing the device?
3. Diet pills will be tried by a significant population, but for a 20-33 pound weight loss, I won't have gotten anywhere close to my ideal BMI. For that I would need to lose from 105 - 179 pounds. Indeed, likely I will revert back to old habits when I go off the medication and will gain it back. In that case, diet pills will act for me just like another diet plan.
What is left? I haven't been successful with portion control and exercise on my own. Might Medifast, Inc 's approach work for me? Medifast is a multilevel marketing (MLM) company that could work for some patients. They sell 5 small (well tiny) packaged meals/snacks a day and the client cooks one lean green meal (portioned vegetables and lean meat). This plan has the advantage of making a decision to stick to the diet once and the weight indeed does come off. It is difficult for me not to have seconds when I know I shouldn't. This could reduce that desire, particularly if the whole family is on the plan. Medifast meals cost about the same as the diet pills per day and if continued long enough will likely provide similar weight losses and health benefits to gastric surgery without the risks. A relative has lost 50 pounds "just" by sticking to the plan for 3 months. He made it through the holidays! Willpower! So maybe worth a try.
Enteromedics, Inc. has a low market cap as they have no approved products. I went through an exercise of estimating their potential sales, if approved. When I was done, I did a gut check and had to laugh. There were too many gross assumptions. Can they get insurance coverage for their device? For the modest benefit will it be worth it to significant portions of the population? Currently, it is approved in Australia, but I haven't seen any sales yet. How sophisticated is the company given the issue with the placebo device in the EMPOWER trial? If they doubled the effective weight loss, I would really be interested, but at this point, I will pass.
How about the diet pill companies Vivus and Arena? Given the large population of morbidly obese patients \(22MM) and their desperation for a medical solution, I believe each company will have significant sales. However, given the side effects and restrictions on prescriptions, I do not consider either to have much chance of blockbuster status. So I will pass here too.
Medifast has revenue and is making money. It has a P/E around 22, revenue growth of ~20% and quarterly earnings growth ~42% (yoy). Medifast is a multilevel marketing company with some attendant issues. There is a current controversy that MLM companies are pyramid schemes. This has come to a head with Pershing Square Capital's Ackman trumpeting its significant short position with Herbalife, Ltd. (HLF) stock. Herbalife, Ltd., a more established, but similar company to Medifast. They may arguably be running out of new distributors. In any event, its revenue growth ~14% and earnings growth ~9% aren't as good as those of Medifast. Medifast appears less similar to a pyramid scheme in that the "coaches" don't stock product and only get paid when clients order meals. Herbalife definitely isn't for me and I will wait until the controversy is resolved before considering investing in Medifast. Of key importance with MLM companies is where are they in the growth curve, if early then possibly it would be worth investing in a quality MLM, for a time. Medifast has been using the MLM approach for three years. Before that their sales were through physicians. For now, I will hold off.
If followed, portion control and exercise will always work - similarly making good investments requires waiting for the proper timing and performing sufficient due diligence. In the obesity space, I feel that the risk is currently too high for the rewards that I can see. I will watch from the sidelines, for now.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.