Seeking Alpha
Long/short equity, deep value, growth, newsletter provider
Profile| Send Message|
( followers)  

There is no question that obesity is one of the leading causes of death in the U.S. and can be partly blamed for a slew of other diseases that kill. As such, the market potential for obesity aids has been viewed as very large. From diet pills to surgery to implants, there are various ways being sought to combat this. We will look at three stocks in the sector, Arena Pharmaceuticals, Inc. (NASDAQ:ARNA), Vivus Pharmaceuticals, Inc. (NASDAQ:VVUS) and EnteroMedics Inc. (NASDAQ:ETRM).

Last year saw the FDA finally approve diet drugs from Arena and Vivus. Arena's drug was approved on June 27th last year but is still awaiting FDA approval to begin sales. The Drug Enforcement Administration is proposing that Belviq be classified as a Schedule IV controlled substance, which means it has a relatively low potential for abuse. Arena and its partner Eisai Co. (OTC:ESALF) can't start marketing Belviq until that classification is approved. It's not clear when that will happen and this has left both the company and investors very frustrated. Arena has disclosed that the wholesale price for its anti-obesity drug Belviq is $199.50 for a 60 count bottle (a 1 month supply). At this time it appears Arena is pricing their product above the pricing for Vivus' Qsymia. The ARNA chart does not look too healthy here and could see a retrace to last November's price of $7.09.

Vivus began to sell its diet drug in September and sales have been considered disappointing thus far. As of February approximately 57,000 scripts have been written for the drug. For the four weeks ending February 15, 2013, total Qsymia dispensed prescriptions were 17,400, which represented a 34% increase versus the previous period ended January 18. Through February 15, Qsymia has been prescribed to over 27,000 unique patients. While the stock has seen its share price drop significantly over the last few months it is still valued at $1 billion in market cap with expected annual sales this year of $43m. The VVUS chart is also in danger of a breakdown here as well. A break of $9.86 could see a move to the $8s.

Both Arena and Vivus have approached obesity with the pills. Our next biotech has looked to enter the obesity market with an implant. This brings us to EnteroMedics Inc. and its Maestro System, which is used to limit the expansion of the stomach, control hunger sensations between meals, reduce the frequency and intensity of stomach contractions, and produce a feeling of early and prolonged fullness. Considered much safer than Lap-Bands, the weight loss implant experienced a setback in February when clinical trial results failed to meet the study endpoints. Average excess weight loss with the implant was 8.5% while the company expected 10% or more. As a result the stock lost 50% of its value on the news. Since then ETRM has continued to drop and is now down 70%. Patients implanted with the Maestro device lost 24.4 percent of their excess body weight on average. That was significantly better than patients who were implanted with a sham device, but it wasn't as good as EnteroMedics had hoped. The company said 52.5 percent of the Maestro patients lost at least 20 percent of their excess weight and 38.3 percent lost at least 25 percent of that weight. Both totals were lower than the company expected. The company, however, still plans to submit the implant for FDA approval within the next few weeks and news of this could cause a nice rebound in the stock price.

A recent financing was just completed at 95c for net proceeds of $12m. This coupled with the $22.5m in cash as of the last earnings report gives the company 18 months at their current cash burn. Also, now that financing is out of the way the risk of further dilution news is greatly reduced. As we have mentioned above, ETRM plans on seeking FDA approval based on the trial results reported last month. This is not uncommon for medical equipment device companies with a good safety profile and benefits as shown by the Maestro trial results. MELA Sciences (NASDAQ:MELA) saw similar missed endpoints that still ended up with FDA approval. ETRM has a market cap of approximately $50m with $34.5m of that in cash and the potential for FDA approval for an obesity aid this year. With both Arena and Vivus trading with market caps in excess of $1 billion, there appears to be some extreme value in shares of ETRM right now. ETRM's diet implant could be very appealing to those unwilling to go for the drastic Lap-Band surgery.

A quick look at the ETRM chart shows a positive MACD cross about to trigger, a bullish event. A break above 89c should lead to a gap fill move to $1.07, a 25% gain from current levels and then a move to $1.33. ETRM has yet to have a big bounce after its dramatic selloff and could be getting ready for that move. We mentioned a similar setup in our article, "Speculative Biotech Stocks That Could Bounce," when Celsion Corp. (NASDAQ:CLSN) was trading at $1.15 after its bad news sell-off. In the week following Celsion gained 40%.


(Click to enlarge)

Obesity is not only a deadly disease it is also a pain on the bottom line of insurance companies. With the decline in Lap-Band sales over the last year amid negative publicity regarding the high risks, there is a nice potential niche market for ETRM. Right now the market is not reflecting that potential in shares of ETRM. Allergan (NYSE:AGN), the maker of the Lap-Band, is looking to sell the Lap-Band business right now with annual sales of $132M. If ETRM were to gain FDA approval and grab this market, the market cap upside potential could be very large. VVUS expects annual sales this year of only $43m and trades in excess of $1 billion in market cap. ARNA has a $1.7 billion market cap. ETRM is currently trading at a market cap of $50m, with $34m of that in cash, giving it tremendous upside potential. As we have outlined in previous articles on bad news biotech stocks, the upside potential AFTER bad news drops can be very nice, especially when the trial data shows some positives. Also, the company is seeking FDA approval and plans to file for this approval in the second quarter. That news, from these depressed prices, could give investors some nice upside with minimal near term downside. Also, given the safety profile for the Maestro system, insurance coverage may be much easier to attain. Assuming ETRM is able to garner only half of the Lap-Band PEAK market sales of $250m, and ETRM is valued along the lines of ARNA and VVUS, we would be looking at a return to its 2009 price of $20 per share. This may sound outrageous but look at the lofty valuations for the other players in the obesity market. It's ETRM's turn to join the diet party!

Source: A Look At 3 Obesity Stocks