The American Medical Association voted Tuesday to classify obesity as a disease. The vote was heavily in favor of the classification but was not without debate and controversy. The move could have very positive impacts on the prospects of prescription drugs from Arena (ARNA), Vivus (VVUS), and Orexigen (OREX) that are either already on the market or in the pipeline for the FDA approval process.
The news from the American Medical Association (AMA) can also counteract the stance taken by Consumer Reports last week in that it helps to "legitimize" obesity and can perhaps remove a stigma from the condition of obesity. While the AMA decision does not carry any legal ramifications, the stances of the association are often considered in legislation at all levels of government. In my opinion, there are two fronts tied to this issue that could carry great positive influences for Arena, Vivus, and Orexigen.
The first impact that I see happening is in consumer psychology. When a "condition" gets recognized as a disease, it empowers those that are afflicted. With obesity, a common stigma is that all people that are obese have that condition because of lifestyle choices they made (i.e. not eating right and not exercising enough). Of course, we know that is not true of everyone, but indeed there are many for which the lifestyle choice did lead to the condition.
What I am going to say next may seem insensitive, but please remember that I am analyzing this news from an investment perspective. As of Tuesday's AMA decision, the whole class of obesity can essentially say, "It is not my fault...It is a medical condition." That is a powerful dynamic that should not be ignored. Suddenly, those that have gotten obese from lifestyle choices have an ally and can now feel free and more comfortable to discuss the subject with doctors. They no longer have to feel shame in the process because the condition is no longer blaming one's self, but instead blaming it on a disease (please accept my apologies for being straight to the point).
For those that are obese due to a genetic condition, an injury, or through things beyond their control, the stigma that they are simply lazy is removed. Essentially, the world of obesity now has a common front. No, the stigmas will not evaporate overnight, but they will over time. The bottom line is that both types of obese people can now have a common voice that is supported and backed up by the FDA.
From an investment perspective, the psychology of the consumer is very important. People are typically not comfortable talking about weight. Many people know that they should eat better and get exercise, but simply do not dedicate the time and energy to making it happen. Now, with AMA backing, and perhaps more confidence to open up about the subject, consumers will seek out their doctor to find solutions rather than wait until the next annual physical to hear those three words that they do not want to hear, " You are overweight," and then the ten minute lecture about eating right and being more active that many patients just answer with, "yes, I know...I know...I know." (code words for stop berating me).
There is a distinct difference between pull marketing and push marketing. Right now anti-obesity drugs are more in the push category where the drug companies are pushing the product onto the market. Empowered consumers can now pull the product by engaging their doctors about the subject.
The last part of the psychology victory in this news rests with doctors. Doctors are now more empowered than ever to broach a sensitive subject because they can frame the conversation in an entirely different manner. Doctors can now say things like, "Joe, you are overweight. The AMA recently classified obesity as a disease and there are steps we can take to mitigate the problems." Instead of the patient having a stigma about their condition they feel vindicated in that years of weight troubles are now accepted as a medical disease and not a case of laziness.
While insurance companies are still not required to cover drugs like Arena's Belviq, Vivus' Qsymia, or the yet to be approved Contrave from Orexigen, the pressure can now mount. It is currently estimated that 30% of those with insurance have coverage for these drugs. The goal of both Vivus and Arena is to get the number of insurers that cover these drugs to be more extensive. Arena partner Eisai (ESALY.PK) had targeted somewhere between 40% and 50% in the next year. Eisai has dedicated 50 specialists to engage the insurance industry.
With the AMA news the jobs of those 50 reps just got a lot easier. A rep can now say, "The AMA has classified obesity as a disease. As you know, obesity adds to many other health issues that carry great costs to the healthcare system. We offer a treatment for obesity that allows patients to lose critical pounds and thereby save the healthcare system money. With obesity classified as a disease by the AMA we feel that it is important that your company cover this treatment." Doctors will also be empowered. In fact, this AMA classification cannot be ignored by the medical professionals that are employed by the insurance companies.
The reason that the insurance issue is critical is that many consumers have expressed a reluctance to pay very much money out of pocket. A survey by analyst firm Piper Jaffray showed that just 3.3% of the obese people surveyed would spend over $50. With consumers now empowered, I wonder what that survey would look like in a few weeks as this news gets more traction. The currently available treatments are expensive. Especially if patients are not insured. Right now both Vivus and Arena are offering attractive discounts and free trials to spur consumer acceptance. These discounts and trials are great, but from an investment perspective eat into the bottom line. The more insurance companies that cover these drugs, the better the bottom line will be.
The AMA news will not send these equities up as fast as they came down when Consumer Reports issued stances on a preference for proper diet and exercise instead of Belviq or Qsymia. Bad news always seems to cause a bigger overreaction than good news. When I reported the Consumer Report news, I stated that the opinion of the publication, while well respected by consumers, would not be the ultimate judge of success or failure. These pills will stand on their merits for success or failure. I classified the Consumer Reports' piece as a bump in the road. In much the same way, the AMA decision will not lead to instant success either. It is like a green light though in that it allows things to flow in a positive direction. The distinct difference is that the Consumer Reports opinion will fade away. The AMA opinion is a referendum of sorts, and will grow in its impact over time.
I have long stated that Wall Street has been waiting for sales numbers to arrive before determining the level of success on Arena and Belviq. I have warned that channel checks can send this equity on a 10% to 20% move in either direction (depending on the numbers). Further, I have stated that the early sales numbers will not be exact. Now I will add to that analysis with this. The AMA classification of obesity as a disease will give pause to anyone that is thinking that obesity drugs will be Wall Street failures. This news will provide support of sorts to limit downside risk.
This news benefits Arena, Vivus, and Orexigen in that all three companies are now dealing with empowered consumers. Empowered consumers can be exponentially stronger for the price of an equity than empowered investors. I have called Arena a buy at anything under $8.50 and with this news that stance remains. Lastly, do not lose sight of the channel checks that could make their way to the newswires any day now. They will move the price of Arena. Stay tuned.
Additional disclosure: I have no position in Vivus or Orexigen.