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Vivus' Qnexa

Qnexa, a weight loss drug being offered by Vivus Inc. (VVUS), is due to get FDA approval today. Qnexa is a combination of two previously known drugs; amphetamine phentermine, which reduces a person's appetite, and topiramate, which develops a feeling of being satiated. Considering the fact that its competitor, Arena Pharmaceutical Inc. (ARNA), has already received FDA approval for its diet drug, Belviq, earlier this year on June 27 (despite the medication having side effects like depression, headaches, and fatigue, which are less severe than those of Qnexa's), it is likely that Qnexa will get the nod as well. Qnexa and Belviq had both been earlier rejected by the FDA in 2010 over safety concerns.

In addition, Vivus' Stendra has been overshadowed by speculations about Qnexa. Stendra is a faster acting rival of Pfizer's (NYSE:PFE) Viagra and was approved in April (forecasted sales of $300 million annually).

Likelihood of Approval:

Following are reasons why receiving an approval is likely:

  • There is pressure on the FDA to approve drugs for weight loss, because currently obesity-related diseases are costing the government a lot. Health issues like diabetes, kidney failures and heart issues constitute 9% of total U.S. healthcare spending (some analysts says it is higher than 9%), which means $234 billion per year. According to Justin G. Trogdon, an author of the projections related to obesity, if obesity remains at the current level of 34% of the adult population, then savings could be as much as $550 billion.
  • Although there are serious side effects (e.g. birth defects if taken by pregnant women, memory issues and heart related issues) of Qnexa, its efficacy rates are higher than Belviq. During tests, people on average lost 5% of their body weight by using Belviq, and 10.5% by using Qnexa, for a year.
  • In February, the FDA's Endocrinologic and Metabolic Drug Advisory Committee voted 20-2 in favor of Qnexa, despite the severe side effects. Although the committee's vote has no bearing on the FDA's decision, it can still be seen as a positive response to Qnexa.

Demand:

Obesity in the U.S. is a very common problem, and it is expected to affect 42% of the population by 2030 (one-quarter of them being severely obese), which turns out to be more than 120 million people. Even if we are to assume that both Qnexa and Belviq will get an equal market share, a roughly 60 million consumer base is quite good for Vivus. Qnexa and Belviq also have a first mover edge over their rival Orexigen Therapeutics (OREX), whose weight loss drug, Contrave, is expected to come out in 2014. By 2014, Belviq and Qnexa will have fairly established their names in the market, and a new entry will face a challenge in terms of attracting customers away from the first movers. Belviq is expected to start selling in early 2013, while Qnexa is expected to be launched in the U.S. by the end of 2012.

Wall Street thinks that Qnexa has a potential of achieving $1 billion in sales or more at its peak. For Arena, the figure is expected to be $2 billion by 2020, when considering a twice-a-day dose at $2 per dose.

The only cause for concern for Vivus would be the prescribing restrictions that might accompany FDA approval, because of safety concerns. In the past, Meridia, a similar drug, was pulled out over heart-related side effects. Officials at VVUS have proposed not to prescribe Qnexa for women of childbearing age. This would not be good for the company, because women aged 15-64 form more than 30% of the population. However, the FDA, in its news release, has stated not to use Belviq during pregnancy too. The stock price rise for Vivus will incorporate the seriousness of the restrictions. These restrictions might help Belviq gain a higher market share in the future, as compared to Qnexa.

With regards to European approvals, Vivus has an oral hearing with the EMA (European Medicines Agency) scheduled for September, 2012. Oral hearings are a part of the approval process. ARNA filed for marketing approval of Belviq in Switzerland on July 11, and expects the review process by Swissmedic, the Swiss health agency, to start this month. While Eisai is responsible for marketing Belviq in the U.S., ARNA is looking at other possible partners for targeting the European and Asian markets.

Stock Price Expectations:

Both the companies' stocks are almost trading at their 52-week highs.

VVUS' stock price might not see a drastic rise because the chances of approval have already been factored in, with VVUS' stock price rising 6% yesterday, and it has been experiencing appreciation since Belviq's approval in June. The graph below shows the stock price performance YTD for ARNA and VVUS. Post approval (June 27 to date), ARNA has been down 2.5% from $11.39 to $11.11, while Vivus is up 1.3%. ARNA is set to profit more in the future in case of restrictions imposed on prescribing Qnexa.


(Click to enlarge)

Short ratio for ARNA is 1.4, while it is 5 for VVUS. This reflects investor expectations that ARNA is set to benefit more.

We are reiterating our buy recommendation for both ARNA and VVUS because of the impending profits that are to be made, even if they are lesser in the case of VVUS due to unfavorable restrictions.

Source: Buy Vivus On Expected FDA Approval For Qnexa