As the title suggests, I've noticed that the obesity drug stocks have been surprisingly weak this year given the strength of the broader market and the biotech sector in general. The iShares Biotech Index (NASDAQ:IBB) is up almost 7% this year. Arena (NASDAQ: ARNA) is down 3.3% this year, while Vivus (NASDAQ: VVUS) is only up about .2%.
In my previous article on the company, I noted that ARNA had a little "stumble" in mid January caused by concern from the European Medicine Agency ((EMA)) regarding the safety profile of Belviq (lorcaserin), which was FDA approved in 2012 for obesity.
This event wasn't all that surprising to those who have been following the obesity drug sector as a whole, because it's increasingly apparent that EMA simply does not like these obesity drugs. At the very least, they will make Arena jump through hoops to receive approval in the EU (and I'm not sure if they will ever allow Vivus to market its Qsymia over there).
We should also pay attention to the third major player in this space Orexigen (NASDAQ: OREX), which is heavily discounted relative to ARNA and VVUS in valuation. Here are the company's market capitalizations as of the time of writing:
|Market Cap||$1.88 B||$1.30 B||$492 M|
As you can see, Orexigen and the potential behind its obesity drug Contrave is trading at a steeply discounted rate relative to its peers. The only issue with OREX is that Contrave has not received FDA approval, and still has to include results from the Light trial (its phase III trial for cardiovascular outcomes of Contrave) to submit an NDA and receive approval. The trial seems to be progressing faster than initially expected, and should provide some early results later this year.
It's difficult to say exactly when we can expect to see an FDA approval for Contrave due to the whole clinical trial situation, but it's pretty clear that the market is worried about Arena and Vivus' potential to "saturate" the market and leave Orexigen with a half-eaten obesity drug market by the time it arrives.
There is clearly some merit to that argument, although it's not something that can be quantified that easily. On top of it all, we are having trouble gauging the intrinsic worth of Vivus after a weak launch for Qsymia. The same goes for Arena, which is expected to have a much better launch for Belviq (since it was finally scheduled by the DEA in December 2012).
For Vivus, we seem to be putting a value of $1.30 billion on a combination of our previous expectations for Qsymia's performance measured up against what we've seen so far of Qsymia prescription numbers. If you look at an 8-K the company filed at the start of the year, you can see that growth has been steadily increasing.
|4 weeks ending...||10/26/12||11/23/12||12/21/12|
Note that December figures were boosted substantially by "free Qsymia trials"
Vivus had a sudden jump resulting from a press release on February 5th, stating that the company might be selling at a rate as high as 11,400 per month. I don't find the numbers nearly impressive enough to build a long case for VVUS, which has already priced in hundreds of millions in annual revenue. I can also understand why VVUS has lagged the broader market.
Attention now turns to Arena, which has also been weak this year but is about to execute a highly anticipated launch. It is expected to outperform Qsymia by a wide margin, although there is heavy debate on just how wide that margin will be.
Qsymia was (and is) severely hindered due to the fact that it is only sold through mail-order pharmacies which have gone through a "training program". Qsymia has also had big problems with Healthcare reimbursement, which is making the price of the pill a very big factor in its success. On the bright side for VVUS, its drug usually has superior efficacy in obese patients (at the cost of safety).
Belviq will not have either of these restrictions, although it remains to be seen how the healthcare insurance situation will pan out.
Although Qsymia seems to be gaining traction, I find the growth too modest to justify an investment. I agree with the slightly bearish way that the market has been moving VVUS this year. Investors who want to buy into the obesity drug space should generally prefer ARNA, which I feel has much more upside potential based on the notion that it will take the lion's share of the obesity drug market.
Last but not least is OREX, which is the play for those who want to invest in the obesity drug space but don't want to hold a company's stock through a drug launch.
These stocks are a gamble, although it's easier to get excited about the financial prospects of their obesity drugs when you remind yourself how high obesity rates are in the United States (almost 1/3 of adults). I don't think Arena, Vivus, or Orexigen even need the European market to bring in the kind of revenue that could justify their high valuations.
Additional disclosure: I am long ARNA via the selling of cash-covered February '13 put options. I am technically not long at this point though.