The following two BioTech companies are setting all their hopes on their respective obesity drugs and offering investors above-average upside once certain catalysts are triggered. The pharmaceutical companies are not without risk, as future capital gains depend on critical milestone events that could make the stocks multi-baggers or top losers if those catalysts fail.
Hence, stop loss limits are essential. Investors should be aware that the following stocks, despite significant market capitalizations, can exhibit high volatility as the example of Amylin Pharmaceuticals, Inc. (AMLN) had shown, which failed to reach such milestone (FDA approval). Investors who think about an investment in more diversified obesity plays should consider heavyweights such as Pfizer Inc. (PFE) or Abbott Laboratories (ABT), which I have also rated as a BUY (though with significantly less upside potential).
Vivus, Inc. (VVUS) is a pharmaceutical company that specializes in the treatment of obesity, diabetes, sleep apnea and male sexual health. Currently, all hopes are set on Vivus' lead product "Qnexa," a drug aimed at addressing the obesity problem in the United States. The drug awaits final approval from the FDA on July 17, 2012, and if approved, is going to hit the most attractive drug market—the United States—this year.
The U.S. center for disease control and prevention suggests that more than one third of U.S. adults are obese, with the problem intensifying going forward as Americans continue to eat unhealthy and are reluctant to engage in sufficient sport activities. Obesity has been named as America's number one health threat.
Even though Vivus also has other products in its portfolio, Qnexa is going to be the most important in the company's history. In this regard, I expect the stock to react massively in response to the FDA decision.
The stock currently quotes at $27.16 close to its 52-week high 29.99, clearly showing the market's overall excitement about the upcoming FDA ruling. Investors who are optimistic about a positive ruling, should think about initiating a position with a stop loss at $25. The current market metrics are: 69x forward earnings and 8x book, which are quite meaningless for a pharmaceutical company that is in the process of completing Phase III clinical trials.
Another pharmaceutical company operating in the obesity field is Arena Pharmaceuticals, Inc. (ARNA). The company has a market capitalization of $2.2 billion. Arena has just recently received FDA approval to market its main obesity product "Belviq," which the markets welcomed with excitement: The stock is up 500% year to date.
The stock currently trades at $11.18, which is close to its 52-week high of $13.50. I attribute the increase in price from $4 to $11 to the FDA's decision to allow Belviq to be marketed. In addition, the market reacted with relief to the recent approval, as a previous submission for FDA approval had been rejected. The massive increase in price and market capitalization shows the excitement investors exhibit once FDA approval is secured.
I suggest that a positive FDA decision for Vivus' Qnexa will be spilling over to Arena and send the stock even higher as optimism regarding future sales increases. It is up to the savvy investor to sell into a market of strength and secure his gains. Going forward, I predict the volatility of the stock to increase in the short- and medium-term. Investors, who consider an investment should only enter into Arena with a tight stop loss limit at $10 where the short-term upward trend canal would be broken and set off a bearish signal.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.