Is The Anti-Obesity Space Going To Get Crowded?

Includes: ARNA, OREX, VVUS
by: Spencer Osborne

This weekend at the American Diabetes Association's 73rd Science Sessions, closely held Zagfen, a company developing a novel treatment for severely obese patients, announced some pretty compelling results to a phase 2 trial on its drug Beloranib. While this drug still has a lot of testing to do before approval, it demonstrates that the prescription anti-obesity space may get more crowded in the next few years. Zagfen got the attention of Bloomberg at the conference, and it is speculated that the company may decide to do a public offering in the near future. It is no surprise that Zagfen would try to make a splash at the sessions.

Vivus (NASDAQ:VVUS) and Arena (NASDAQ:ARNA) have been paving the way in the space with drugs that are designed to help control appetite and are taken in conjunction with a diet and exercise program. Orexigen (NASDAQ:OREX) is in trials with a drug called Contrave, and even companies like Novo, with Victoza, are trying to step into the ring. The arena of obesity treatments may well become very tempting for pharma companies with the American Medical Association recently deciding to classify obesity as a disease.

Zagfen's treatment seems to be geared toward severely obese patients. The drug is administered with two injections per week. A few compelling points about the data Zagfen released this weekend are:

  • The analysis delivered was interim results from an ongoing phase 2 trial
  • Beloranib is a selective methionine aminopeptidase 2 (MetAP2) inhibitor
  • Patients were NOT instructed to change diet or exercise.
  • Patients receiving 12 weeks of treatment in the full trial were randomized to 0.6 mg (n = 37), 1.2 mg (n = 37), or 2.4 mg (n = 36) of subcutaneous beloranib vs. placebo (n = 38).
  • After 12 weeks, subjects on 0.6 mg, 1.2 mg, or 2.4 mg lost an average of (± SEM) -3.8 ± 0.8 kg, -6.1 ± 1.5 kg, and -9.9 ± 2.3 kg, respectively, vs. +1.8 ± 0.4 kg for placebo (all p<0.005 vs. placebo)
  • Patients treated with beloranib showed improvements in cardiometabolic risk factors including reduced triglycerides, LDL cholesterol and C-reactive protein (an inflammatory marker) vs. placebo.
  • Sense of hunger was reduced significantly.

The Zagfen path to obesity treatment deals with the complex issue in a different manner than the currently available Qsymia and Belviq. Zagfen actually targets the fat and what the body does with fat. It is an interesting approach. Beloranib works by targeting an enzyme called MetAP2. This enzyme works in the human body to control fatty acids and how they are utilized. As an inhibitor of the MetAP2 enzyme, Beloranib reduces the production of new fatty acid molecules by the liver and helps to convert already stored fats into useful energy. When a single product can reduce appetite AND deal with fat it is something worth noting. While Beloranib still has a long way to go in the FDA process, it is something worth noting to investors in Vivus, Arena, and Orexigen, Two of these companies are already on the market with products, and one is in trials of its own.

From an investment perspective the current battleground is between Vivus and Arena. In many ways, it does not need to be a battleground at all in that there is plenty of room for both to succeed in this market. Neither company has much to worry about from a perspective of another company impacting sales. Arena and Vivus have had a free reign for quite some time yet. A more compelling issue is getting insurance companies to cover treatments, and getting consumers to consider using them. One potential impact on these equities may be in the valuation models over the longer term. What happens to Vivus and Arena valuation with a third player in the market? A fourth? A fifth?

Do not lose focus. Pay attention to what is important here. Debate about pills vs. shots, percentages of weight loss, and the method of study can all be interesting, but really carry little meaning on your investment. Rather than get into all of that, spend your time modeling additional players in the sector two and three years out and see how that impacts the valuation model you have. This Zagfen news will have little impact on the short term price action of these companies, but may begin to have analysts exploring a more crowded space in the next few years. Remember, the more successful Vivus and Arena are, the more others will want to get into the space.

Disclosure: I am long ARNA. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have no position in Vivus or Orexigen.