On September 24th, 2012, Vivus (VVUS) announced that it expected the European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use to recommend against the approval of its weight-loss drug, Qsiva. While the VVUS stock exhibited a substantial decline in PPS in the days following this announcement (hitting a low of $17.81), the stock has rebounded nicely over the last week of trading (up approximately 21% from its post-EU announcement lows). Investors thus appear to be shrugging off this negative event with the belief that the EU market was going to be a minor contributor to Qsiva/Qsymia revenues, and the recent uptick in U.S. sales compensates for the lack of an EU approval. To date, however, no analyst has gone public with a quantitative estimate of EU market size for either Vivus' or Arena's (ARNA) recently FDA-approved anti-obesity drugs. As such, it remains to be seen how much an EU denial would hurt either Qsymia or Belviq in their respective quests to become the next blockbuster drug.
Given that Qsymia does not appear to be able to ever gain EU approval, I will only explore the potential valuation for Belviq in Europe. Moreover, Arena recently announced during a series of investor conferences that the company was on track to respond to the EU's list of 120 day questions on or before October 25th, and that they were expecting approval in the first half of next year. So all public signals from Arena about Belviq's EU prospects seem to be very positive. A quantitative valuation for Belviq in the EU should thus help investors to understand the significance of this pending material event.
According to both WHO and EUROSTAT, obesity is easily the most significant health issue facing the EU today, with some countries showing an adult obesity rate topping 50%. With over 700 million people living in the EU and obesity skyrocketing, the EU market certainly appears to be a potential windfall for any company that can gain approval for an anti-obesity drug.
Even so, a quantitative valuation estimate for an anti-obesity drug in the EU is a difficult prospect for two reasons. Firstly, the rates of obesity vary widely among countries according to EUROSTAT, making the math tedious and time-consuming. Secondly, reliable demographic data is only available for 19 member states, not all 27. As such, any valuation estimate for Belviq in the EU should be considered a conservative ballpark figure, as data for many countries are simply not available. Nevertheless, a ballpark figure should still aid investors in assessing the impact of an EU approval on Belviq's rest of the world (ROW) prospects going forward.
The Model: This European revenue model for Belviq used the following terms as input:
· Total number of morbidly obese adults in Europe as of 2011 for 19 member states.
· Cost per pill = $2.50 (used in other valuation models and actual price remains unknown)
· Number of potential adult responders for Belviq = (1/3 of adults with a BMI of 27kg/m2 or greater). Meta-analysis showed that a little more than 1/3 of patients exhibited clinically-significant (> 5%) weight loss while using Belviq). Patients that do not achieve this 5% benchmark by 12 weeks are recommended to discontinue its use, and are thus considered "non-responders".
· Market penetration modeled under three scenarios: 0.54, 1.34, and 1.6% (most new drugs range from 0.54 - 1.6 for the first year on the market according to recent Bayesian analyses).
· Market penetration was restricted only to the potential responder population, not the total adult obesity market.
· I also excluded potential revenue from non-responders that begin therapy but discontinue its use after 12 weeks. And I used a 9-month therapeutic cycle for responders with clinically-significant weight-loss to calculate yearly cost per patient (i.e., doctors will likely not keep responders on the Belviq year round due to acclimation and hence, reduced efficacy). Of course, Arena will realize some revenue from non-responders, but this model was meant to be conservative in nature.
European revenue model for first year under three different market penetration scenarios - In USD ($):
Market Penetration %
Est. # of Scripts
Gross Revenue ($)
This valuation models shows that even the most conservative revenue estimate for Belviq's first year on the market in the EU would be worth approximately $100M. To put this number in context, very few new drugs in the past 6 years have generated $100M in sales in the United States, much less in Europe. Yet, the average market penetration value of 1.34 for new drugs yields a considerably higher first-year revenue for Belviq of nearly $250M. Finally, the maximum market penetration scenario estimates revenue to come in around a handsome $300M in the first year alone. Overall, the average revenue estimate stands at $212M, which readers should keep in mind is a conservative estimate due to the restrictions placed on the model, and the missing data for some EU member states. Given that obesity rates are only going to increase in the EU (as well as globally), and the market penetration rate should substantially increase once doctors become comfortable prescribing Belviq, an EU approval is certainly not a minor event. Our valuation estimates compared to other published US models suggest that an EU approval would be worth approximately a 25% increase in market cap, even after taking a potential marketing agreement into consideration.
In conclusion, the sheer size of the global obesity epidemic and the human tendency to seek out the path of least resistance (diet and exercise be damned) make Belviq possibly one of the easiest drugs ever to turn into a blockbuster. As Warren Buffet once famously said about Coca-Cola and a ham sandwich, the same appears to be true in this instance, i.e., a ham sandwich could launch Belviq and make it a blockbuster drug. Even so, Eisai is not a ham sandwich, but rather a well-oiled marketing machine that has taken drugs with considerably less potential into the blockbuster stratosphere. As an investor, I like those kinds of opportunities, and see no logical reason why ARNA shares should not continue to increase substantially in the coming years, especially if Belviq is approved in the EU in 2013.
Disclosure: I am long ARNA.