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With the back to back approval of obesity drugs from Arena Pharmaceuticals (ARNA) and Vivus Pharmaceuticals (VVUS), there is a third, hidden winner.

We're not talking about Orexigen Theraputics (OREX) - which is also working on an obesity drug. OREX has had a nice run on the coat-tails of ARNA and VVUS, rallying hard when Arena's drug, Belviq, was approved on June 27th, because this event signified that the obesity drug approval window was once-again open after 13 years. OREX continued to rally since then, but the reality is that Orexigen is conducting a pre-approval cardio-vascular outcomes trial (CVOT) and their drug, Contrave, won't be up for approval until late 2013 at the earliest. More likely it will have a PDUFA date (the date by which FDA has to give a final response - either approval or complete response letter) sometime in 2014, based on the latest announcement from the company.

The hidden winner is Supernus Pharmaceuticals (SUPN). Supernus is a generic drug developer who just went public this past year. They are working on central nervous system therapies. On June 26th of this year, Supernus won tentative FDA approval for their drug Trokendi XR - an extended release pediatric formulation of the generic drug topiramate at dosages of 25mg, 50mg, 100mg and 200mg.

What does a pediatric anti-seizure medication have to do with the red-hot obesity space? Simple, topiramate is one of the two ingredients in Vivus' drug Qsymia. Qsymia is a single-tablet fixed-dose combination of immediate release phentermine and extended release topiramate where the dosage of topiramate is much lower than the clinically available doses used for treatment of seizure disorder and migraines. Indeed, Qsyimia contains 46 mg and 92 mg of topiramate for the recommended dose and highest dose, respectively.

Prior to the approval of Supernus' drug, Vivus investors that we spoke with correctly argued that doctors would be hesitant to substitute generic phentermine and generic topiramate for Qsymia because the lowest available dosage of generic topiramate was 100 mg, and was not an extended release formulation. Now however, Trokendi XR will be available at 50mg, and 100mg in extended release formulations. Doctors can substitute a Qsymia prescription with a prescription of generic phentermine and Trokendi XR (which is also a generic).

Supernus will not be able to market their drug until after June 2013 due to an exclusivity issue having to do with some of the topiramate safety data for infants up to 24 months of age. FDA wants the safety information in the label, and Johnson & Johnson (JNJ), the original developer of topiramate, has patent protection on this data through next June. Supernus has recently announced that they plan to begin marketing Trokendi XR in the third quarter of 2013.

Here are the strongest indicators that Trokendi XR in combination with generic phentermine will be prescribed by doctors in substitution for Qsymia - at least in some cases:

1) Trokendi XR is likely to be priced on par with other generic formulations of Topiramate, meaning that it will probably be cheaper to fill 2 scripts for generic drugs (phentermine and Trokendi XR) than one script for a brand-name drug (Qsymia). Neither Vivus nor Supernus have announced pricing on their drugs as of the date of this writing so this is conjecture on our part; however, we note that Supernus has no marketing exclusivity for Trokendi XR therefore it is, by definition, a generic drug. On the other hand Vivus does have marketing exclusivity for Qsymia making it a brand-name drug.

2) Insurers may demand generic substitution if there is a significant cost savings. The caveat here is that the doses of Trokendi XR are not *exactly* the same as the doses of topiramate in Qsymia, but they are close enough that doctors may feel comfortable making the switch. Vivus' key argument regarding the novelty on Qsymia partly hinged on the idea that the topriamate was an extended release formulation and Supernus' drug preserves this key feature.

3) By prescribing phentermine in conjunction with Trokendi XR, doctors would be able to avoid the Qsymia REMS (risk evaluation and mitigation strategy) program. Although the Qsymia REMS program does not seem too burdensome, some doctors may prefer being able to prescribe drugs where they can easily give out samples and where their patients can pick them up at a local pharmacy rather than waiting for a mail-order prescription. (Qsymia's REMS program calls, at least initially, for distribution only through mail-order pharmacies.)

4) Doctors have more flexibility when the two drugs are in separate pills. If a certain patient is having trouble with either the phentermine or the topiramate component of Qsymia, their only choices are to use a different dose, or to discontinue the medication. With a two-pill regimen, a doctor can taper either drug separately to get the combination "just right" for each individual patient. (During the phase II clinical trials of Qsymia Vivus themselves used a 2-pill regimen).

5) Those in the know have already voted with their wallets. The day after receiving approval for Qsymia, VVUS rallied a respectable 9.6%. At the same time, SUPN rallied a whopping 36.95% with no news of its own. We take this as a sign that those who closely follow the biotech space, and especially the obesity space, figured out that SUPN had the key missing ingredient to a generic version of Qsymia and ran the stock up as a result of accumulation.

This all begs the question: Should you buy Supernus' stock? The answer is - it depends.

We see Supernus as benefiting from all of the marketing and post-approval testing that Vivus does without having to spend a dime to do it themselves.

SUPN is not yet a widely followed stock, as evidence by the low average daily share volume of some 200,000 shares. Because it so recently went public, options are not trading yet. The fact that the stock is not widely followed and has no options traded means that it is subject to less attention (some would say less manipulation) by hedge funds and high frequency trading programs. The fact that SUPN is newly public implies some degree of risk compared to companies that have been public much longer; although, given the 10 year development cycles in biotech, this may be a moot point.

SUPN has guided that they have enough cash to last through second quarter of next year. They have a second generic anti-seizure medication (extended-release-oxcarbazepine) up for approval in October, and might be able to bring this drug to market and begin generating revenues by the beginning of 2013. We think it more likely that SUPN will raise cash at some point in the coming months. The stock is near it's 52-week high of $15.20 which was hit the day after Trokendi XR received approval. Biotech companies generally raise cash when their stock is rallying, and in SUPN's case, we believe there is a good possibility that the market will react favorably to them raising cash now because Qsymia's approval expands their addressable market dramatically.

The day after Qsymia was approved, VVUS closed at $29 per share, and SUPN closed at $14.64 per share; therefore, you can acquire twice as many shares of SUPN for the same amount of invested capital. We believe that SUPN is likely to continue to rally along with VVUS for the next few weeks, so the lower share price translates into a form of non-recourse leverage.

For investors wanting exposure to the cashflows that the newly approved obesity drugs will generate, SUPN is a nice second derivative play. It potentially gives you the upside of Vivus' obesity drug without all the manipulation of a highly followed stock. What you will miss out on is a possible Qsymia European approval later this year (not as sure of a bet as their US approval since phentermine is not an approved drug in Europe) and, any revenues from Vivus' ED drug, Stendra, which received FDA approval in April. Should Vivus get bought-out, this would also not benefit SUPN shares; however, buying VVUS at it's current price purely on speculation of a buyout is, in our opinion, not a wise choice.

It may be advisable to wait for the inevitable pull-back before buying in, but keep in mind that since most investors did not buy SUPN in anticipation of Qsymia's approval, there will likely be much less selling pressure on SUPN than on VVUS, so any pullback may be small.

Source: Obesity Drug Approvals - A Hidden Winner In Supernus

Additional disclosure: Author was long VVUS through the Qsymia PDUFA decision and may initiate a long position in SUPN in the coming week.