2 Biotech Stocks Ready To Soar On New Drugs

 |  Includes: ARNA, CEA, DNDN, GSK, VVUS
by: Dividend Kings

Typically, when investors are choosing where they want to put their money, they look for options that offer at least some long term appeal. In the biotech market, long term appeal is favored more so than in other industries, mostly because there are few drugs that work well one day, but are obsolete the next. For instance, few would make money from a company that develops a drug to treat kidney disease, only to realize a few weeks down the road the drug actually stops the kidneys from working. A failure is usually an absolute failure in the biotech industry, especially when it comes to pharmaceuticals.

However, there is one scenario few have considered that I think is worth examining. It is the idea that a particular pharmaceutical development could make other drugs obsolete. I am not saying this is going to happen any time soon, but I think it is worth considering if you are weighing long-term investments.

Recently, there have been a few drugs in development concerning weight loss. Weight loss drugs fell out of favor over the last several years because of pharmaceutical disasters, but the FDA has begun considering this sort of treatment again and at least two companies have decided it is the direction in which to head. Both Vivus (VVUS) and Arena (ARNA) are focused on weight loss drugs, both of which could be approved in the near future.

Before I examine the potential of both companies, I want to take a minute to talk about obesity drugs in general and how they might affect the overall market. Based on the recent report issued by the Organization for Economic Cooperation and Development (OECD), at least 75% of Americans will be obese by the year 2020. In general, Americans are leading unhealthy lives and it is leading to a variety of serious illnesses. Based on these predictions, greater numbers of people are going to need medication for treating heart disease and Type 2 diabetes, both diseases closely associated with diabetes. There is a good chance biotech companies focused on drugs to treat obesity related disease could fare well, but there is also the chance everything could be derailed if the root cause is stopped in its tracks.

Assume for a minute that "curing" obesity would cure at least 95% of diseases related to being overweight. What would happen in the biotech stock market? Companies developing ways to eliminate obesity would soar and eventually, companies focused on dealing with the diseases caused by obesity would be obsolete. Obviously, this is not going to happen tomorrow or in the near future, but it is something to consider. If you are in this for the long haul, your money is better spent focused on the root of several problems instead of each individual problem. So which companies should you watch?

Vivus is one of the major players in the obesity market. The company saw a bump following the OECD report and the current price just under $23. Most expect it to steadily increase over the next decade. Its main product in the pipeline is Qnexa, which is the first weight loss drug expected to receive approval from the FDA in more than a decade. Word is expected on approval in April, but most believe there is little doubt it will go through, due to a positive report on the drug from an FDA panel back in February. Stock prices doubled following the report, but the weight loss drug market is still an iffy place.

Arena Pharmaceuticals is the other company I have been watching in regard to weight loss "cures." Arena is developing a drug called Lorcaserin, which is intended to help with weight management, including weight loss and maintenance of weight loss, in patients who are clinically obese or patients who are seriously overweight and have at least one weight-related co-morbid condition. Lorcaserin is believed to act as a selective serotonin 2C receptor agonist. Most agree Qnexa will receive approval before Lorcaserin, but Arena is still worth a good long look. This is because it is currently available for less than $3, while Vivus is hovering around $23.

The other question I am sometimes asked in regard to the resurgence of the weight loss drug market is who will suffer if curing obesity cures a myriad of other diseases? Companies that are currently doing well will take a hit because their products would no longer be needed. These include:

Human Genome Sciences (HGSI), due to its focus on treatments that affect diseases related to obesity such as type 2 diabetes. HGSI is currently seeing successful results from a phase 3 trial of the drug for use in treating Type 2 diabetes. An April 3, 2012 news release provided more information about the success of these trials, showing seven of the eight were successful. That is great news for HGSI in the current reality, but the fewer cases of type 2 diabetes diagnosed the less the need for the drug.

Another company that could get hit hard is Dendreon (DNDN). The company's main focus continues to be cancer treatment and the company has a strong pipeline. This includes DN24-02, an ACI targeted at the HER 2/neu receptor, D-3263 HCl, a small molecule compound that activates the ion channel receptor TRPM8 (also known as TRPP8) in clinical development for the potential treatment of patients with solid tumors, and two additional antigen targets, carbonic anhydrase IX (CA9) and carcinoembryonic antigen, for the development of ACI candidates. Many medical experts consider certain types of cancer a direct byproduct of obesity, so as obesity rates rise many predict cancer rates will do the same. Likewise, if obesity rates were to drop, experts believe certain types of cancer would occur less frequently.

Buying into the theory of certain drugs becoming obsolete if obesity drugs are successful is a long term outlook. However, it is one that deserves some attention, especially from investors who are planning to invest over the long haul.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.