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After seeing relative underperformance of the two most prominent plays on the obesity drug space - Arena (NASDAQ: ARNA) and Vivus (NASDAQ: VVUS) - throughout the first quarter of 2013, there has been talk about a potential "overshooting of expectations" for this new drug indication. While Wall Street was more comfortable with its optimistic valuation of ARNA and VVUS last year after we saw semi-unexpected FDA approvals for Belviq (lorcaserin) and Qsymia (phentermine and topiramate ER), a dismal US launch of Vivus' Qsymia is leading many to believe that this drug market is much smaller than we thought.

Initially, many analysts made their sales projections based on the sheer number of Americans who are classified as "obese," which is technically defined through the BMI scale which simply divides someone's weight by their squared height. This was combined with arbitrarily defined penetration rates for the drug, which presumed that a certain percentage rate of physicians would prescribe a given obesity drug to their patients.

With something like 1/3 American adults being considered obese by the BMI scale, and with hundreds of thousands of deaths per annum being attributed to obesity by the most prominent government and physician organizations, it seemed like a no-brainer to imagine that the obesity drug space would also be enormous. Since Qsymia would be the first available prescription obesity drug available since the 1990s, wouldn't it be expected to become an instant blockbuster with multi-billion dollar sales potential each year?

The bullish thesis makes sense from a common sense perspective, but Qsymia's performance since its launch in September 2012 has really shaken the faith that investors once had in this emerging drug indication. In addition, the European Medicines Agency seems hesitant to introduce obesity drugs to its population.

In its Q4 2012 earnings release (which can be found here), Vivus reported only $1.97 million in revenues for the quarter ended December 31, 2012. This was offset by the company's $50.3 million budget for SG&A (selling, general and administration) expenses and ultimately brought Vivus' losses to $56.3 million.

It's not fair to make a final judgment call on Qsymia, but the initial results are far from impressive and favor the argument that the obesity drug space might be significantly smaller or more elusive than we expected. Qsymia's $1.97 worth of quarterly revenue needs to expand drastically to justify the current valuation of the company at ~$1.2 billion. Even after a recent rally, VVUS has been brought down an additional 12.2% since the start of 2013 on the modest performance of its flagship drug, and its dismal chances at European approval.

Having said that, there are other factors that could turn the obesity drug space around after the introduction of Arena's Belviq. While Qsymia's efficacy profile is considered top-notch in this space, it introduces cardiovascular risk factors on its label. Since obese patients are much more exposed to cardiovascular risk factors than most, I find it very possible that Qsymia sales are being thwarted by physician concerns on patient safety.

Due to this, I think Belviq (which is seeing a delayed launch due to some temporary government-related factors) will give us a better read on the market potential of the obesity indication due to its relative safety. I also believe that the differential between the market value of Arena and Vivus are directly attributable to the respective "physician-friendliness" of the Belviq and Qsymia alone.

So did we overshoot our expectations in the obesity drug space?

The answer seems to be yes based on what we know so far, although Belviq has a chance to disprove this conclusion given that it has a well-orchestrated launch.

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. I have no business relationship with any company whose stock is mentioned in this article.