Rex Graham's  Instablog

MediciNova (MNOV) shares jumped after FDA 'fast track' designation for methamphetamine-addiction drug candidate. We recommend holding tight. The company is planning to issue new common stock: we recommend buying MNOV's diluted shares after the new stock is issued. Read more

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

This season of pumpkin pie, mashed potatoes and rising obesity rates is a perfect time to talk turkey about the overly bearish sales estimates of Belviq and Qsymia, the obesity drugs approved by the FDA this summer.

The oft-cited $1 billion-a-year combined estimated sales for Qsymia, which is made by Vivus, Inc. (VVUS), and Belviq, made by Arena Pharmaceuticals (ARNA), should be revised upward. Why? It's not just because of Aetna's Nov. 20 revision to include Qsymia and Belviq "as medically necessary weight reduction medications" for its 37.3 million covered health plan members.

Two important policy shifts at the federal level - by the Centers for Medicare & Medicaid Services and the U.S. Preventive Services Task Force - also bode well for much broader coverage of weight loss prescription medicines. The shift is a logical way to cut massive health costs caused by obesity. The trajectory of policy shifts is leading experts to predict that Qsymia and Belviq will soon become covered by all private and public health insurers, including Medicare, the federal health plan for Americans aged 65 and older and younger people with disabilities, and Medicaid, the federal-state health program for low-income individuals and families.

Even the Mayo Clinic informs patients visiting its website that Qsymia and Belviq are "prescription weight-loss medications your doctor may prescribe." Estimates of the market in the U.S. alone for obesity drugs are as high as $60 billion a year, but nobody knows for sure. Consider this: the market capitalization of Vivus currently at $1.12 billion and Arena's market cap at $2.03 billion. Even if the obesity drug market's eventual size is one-tenth of the highest current estimate, both companies are grossly undervalued.

Obesity policy timeline

This is the timeline of major events in the past 12 months that underlie the assessment that sales of Qsymia and Belviq will be better than expected:

· November 2011: A "decision memo" by the Centers for Medicare & Medicaid Services ((CMS)) states: "The evidence is adequate to conclude that intensive behavioral therapy for obesity, defined as a body mass index of 30 or higher is reasonable and necessary for the prevention or early detection of illness or disability." More intensive treatment plans, including up to 26 office visits in one year, are now expected to become part of Medicare and Medicaid coverage. ((Neither Qsymia norBelviq had been approved by the FDA yet.))

· May 8, 2012: A report by U.S. Institute of Medicine and the Robert Wood Johnson Foundation estimated that the annual cost of treating obesity-related chronic disease and disability is $190.2 billion. Obviously, reducing obesity reduces obesity-related costs and "the staggering human toll."

· June 2, 2012: The U.S. Preventive Services Task Force recommends intensive, multicomponent behavioral intervention for patients with BMI of 30 or higher to reduce weight and lower metabolic risk factors for diabetes and cardiovascular disease. ((Still no decision by the FDA at this point on Qsymia or Belviq.))

· June 27, 2012: FDA approves Arena Pharmaceutical's Belviq, along with a reduced-calorie diet and exercise, for chronic weight management of adults with BMI of 30 or higher ((or BMI of 27 or greater when the individual has a weight-related condition such as high blood pressure, type 2 diabetes or high cholesterol)). It was the FDA's first approval of a weight loss drug in 13 years.

· July 17, 2012: FDA approves Vivus' Qsymia along with a reduced-calorie diet and exercise, for chronic weight management of adults with BMI of 30 or higher ((or BMI of 27 or greater when the individual has a weight-related condition such as high blood pressure, type 2 diabetes or high cholesterol)).

· November 20, 2012: Aetna, a health insurance provider to 37.3 million policyholders, revised its Clinical Policy Bulletin to include Belviq and Qsymia as "medically necessary weight reduction medications." ((Each Aetna benefit plan defines which services are covered; members need to consult with benefit representatives to determine if their plan has limitations that would apply to obesity medicines.))

"Along with Aetna, many other private insurers already cover visits and obesity counseling, and ObamaCare will mandate that preventative services for obesity are covered," said Dr. Michael Kaplan, chief medical officer of The Center for Medical Weight Loss, a Tarrytown, N.Y.-based company with 750 affiliated doctors in weight loss clinics nationwide. "ObamaCare should lead to 100 percent of the population being covered for obesity management in 2014."

Benefits of modest weight loss

An estimated one-third of the total U.S. population of 311 million are obese, defined as having a body mass index (BMI) of 30 or higher, which is equivalent to a person who is 5 foot 4 weighing 175 pounds, or a person who is 6 foot 4 weighing 247 pounds. ((BMI is defined as weight in kilograms divided by height in meters squared.))

A landmark 2005 study found that 27 percent of all national health care charges were associated with patients who are physically inactive, overweight and obese. More recent studies document that modest weight loss of 5 to 10 percent can significantly reduce rates of type 2 diabetes, hypertension, cardiovascular disease and other health problems. All private and public health insurance plans pay for diabetes drugs, and it's only logical to cover obesity-prevention services and drugs that reduce rates of diabetes.

In other words, reducing obesity will save the nation some unknown percentage of the $190.2 billion it currently spends on obesity-related diseases ((such as diabetes)) and disability. At the same time, not all obesity treatments are cost effective: the National Weight Registry found that surgeries designed to restrict overeating don't really work in most cases; most of those patients exercise very little, eat more high-fat foods than the norm, and gain the weight back.

Less costly approaches than surgery seem to work better. However, neither reduced-calorie diets alone, nor increased exercise alone lead to long-term weight loss. The combination of diet and exercise helps about 20 percent of people lose weight and keep it off, according to the National Weight Registry. What will help the remaining 80 percent? Qsymia and/or Belviq plus a low-calorie diet, exercise, routine counseling and related approaches actually work.

Kaplan is using that approach with Qsymia and "having pretty good results in combination with intensive counseling and behavior modification" with no side effects. "In some cases we can discontinue hypertension medications and medications for type 2 diabetes," Kaplan said. "Getting patients to lose even 10 percent of their body mass is huge because health outcomes improve dramatically even with modest weight loss."

Checking zero-sum math

Some analysts describe the market for Qsymia and Belviq as a zero-sum game, with sales of one hurting the other. It's easy to understand the argument: with Qsymia costing $120 to $160 a month, mostly out of pocket, and Belviq expected to cost roughly the same, a patient will use only one or the other, right? It depends.

Indeed, about 30 percent of the patients who have received Qsymia prescriptions didn't fill them. Dr. Edward Zbella, medical director of the Tampa, Fla.-based Medi-Weightloss Clinics, said his 82 affiliated weight loss clinics plan to use the two generic drugs in Qsymia at a price of about $40 per month of treatment, rather than relying on Qsymia, with a price tag of $120 to $160 a month.

"There is no advantage for us to use Qsymia," Zbella said. At the same time, he said a high-intensity approach of a low-calorie diet, regular exercise, counseling and weight loss drugs can be highly effective. "Type 2 diabetes is almost always due to obesity," he said. "And older obese patients need hip and knee replacements, which are expected to increase ten-fold in the next five years, and the negative health impacts of obesity go on, and on, and on."

However, if insurance plans are eager to avoid spending increases to treat type 2 diabetes, hypertension and cardiovascular disease, why not cover obesity drugs? Zbella said if health insurance providers cover Qsymia and Belviq prescriptions, his clinics will prescribe them.

Patients who want to lose the most weight the fastest may opt for Qsymia. Why? Patients taking it in clinical trials lost 8.6 to 9.4 percent of their body weight ((compared to controls)) at one year. Weight loss with Belviq was 3.0 to 3.3 percent at one year. However, Belviq has a better safety profile, and may end up being more popular for maintaining weight loss long term. Neither drug can be used during pregnancy.

"Qsymia looks like a better drug for a patient who weighs more, so we may start a patient on it, but Qsymia and Belviq are both are excellent for maintaining weight loss," Kaplan said.

Reasonable expectations

Vivus reported $453,000 in Qsymia shipments for the last two weeks of September, an amount equivalent to roughly only 3,000 prescriptions. The intentionally cumbersome online ordering from CVS Pharmacy and Walgreens hurt. The FDA required the difficult ordering process and home delivery of Qsymia as a way to limit sales to women of childbearing ages, but weight loss doctors say the FDA has gone too far if the federal government truly wants to lower the obesity rate.

"It's all kinds of paperwork; it's a hassle and CVS and Walgreens don't even stock them," said Dr. Arthur Aronson, owner of Medarts Medical Weight Loss Specialists in San Diego, Calif. He sees up to 300 patients during a busy month, but refuses to prescribe Qsymia because of the prescription hassles - unless patients ask for it.

Investors understandably don't have the patience for such glitches to be resolved. Many pulled out of Vivus because of the disappointingly slow initial sales, but it's time for them to come back to Vivus and Arena because the insurance landscape is shifting in favor of the two companies.

New Year's resolutions

Already, Vivus has expanded its online distribution network for Qsymia to two additional home-delivery networks: Express Scripts and Kaiser Permanente ((for its 9 million health plan members)). Some analysts now predict a substantial increase in Qsymia sales in the fourth quarter. They may be correct, but as anyone who frequents a fitness club knows, almost all new members arrive, like clockwork, in January, not the fourth quarter of the year.

"Right now, it's slow at our clinic, which is usual this time of year," Aronson said in a pre-Thanksgiving telephone interview. "In January, patients literally line up at the doors."

The post-holiday bump in interest in weight loss is great timing for Belviq, which should be available by then. However, it must first be "scheduled" as a controlled drug by the U.S. Drug Enforcement Administration (DEA), after which Eisai, Inc., will begin marketing it in most of North and South America ((including the U.S., Canada, Mexico and Brazil)). Eisai has a marketing and supply agreement with Arena.

Regulatory red tape

It's possible that the FDA could require the same unnecessarily cumbersome online prescription ordering process for Belviq that has slowed Qsymia sales. However, Kaplan said his weight loss clinics regard the red tape as an opportunity. Office staffers sit down with patients at a computer and assist them with ordering. Patients love it. Refills are much simpler and return visits are easier on everybody.

Since reimbursable counseling sessions are now recommended as an essential part of weight loss treatment, clinics have an incentive to schedule additional patient visits. More frequent visits help ensure that patients follow through on prescription ordering, adherence to diet and exercise plans and achievement of significant weight loss.

Post-marketing studies

The FDA has required both Arena and Vivus to conduct post-marketing studies, including long-term outcomes trials to assess the effect of Belviq and Qsymia on the risk for heart attack and stroke. Until the post-marketing studies verify cardiovascular safety, many physicians won't get out their prescription pads.

"Physicians in our practice are unlikely to significantly prescribe either the phentermine/topiramate combination [Qsymia] or lorcaserin [Belviq] in the near future," said Umesh Masharani, a clinical professor at the UC San Francisco Diabetes Center.

Masharani points to his experience with the then-almost-magical combination of fenfluramine and phentermine, known as fen-phen. A study published in 1984 in Archives of Internal Medicine found that after taking fen-phen for 24 weeks, overweight patients lost an average of 18.5 pounds, versus 9.7 pounds in the control group receiving only individualized diets.

After sales soared in the 1990s, fen-phen crashed following the publication of a 1996 paper in the New England Journal of Medicine by researchers at the Mayo Clinic. They reported a correlation between heart valve dysfunction and fen-phen.

Lingering fen-phen fears

Today, Masharani and other diabetes specialists are quick to point out that one of the ingredients that was present in fen-phen, phentermine, also is present in Qsymia (phentermine and topiramate in extended-release form).

Patients in clinical trials taking Qsymia lost 8.6 to 9.4 percent of their body weight ((compared to controls)) at one year. Weight loss with Belviq was 3.0 to 3.3 percent.

"We are concerned about the adverse reactions of these drugs and the relatively modest efficacy," said Masharani, author of the book "Diabetes Demystified."

While Masharani's diabetes patients will have to wait for post-marketing studies to be completed before receiving a prescription for Qsymia or Belviq.

The FDA weighed the risks of waiting to approve Qsymia and Belviq versus not waiting for further studies. It came to the opposite conclusion as Masharani. The regulatory agency's approval of the two obesity drugs recognized the obvious; the potential health gains of even modest weight loss far outweighed the potential risks of side effects. The nation's private and public health insurance industries have come to the same conclusion.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.

Cardium Therapeutics (CXM), a biotech company and developer of a caffeine-rich energy supplement, has acquired a privately-held marketing company that has developed a larger and tastier line of fruit-based energy and nutritional products.

Cardium's purchase of San Diego, Calif.-based To Go Brands was a bargain for Cardium: To Go Brands posted about $1.7 million in sales during the first six months of 2012, which is roughly the amount Cardium paid in the form of restricted common stock.

Pharmaceutical companies also are diversifying their product lines with dietary-supplement products. Pfizer (PFE) in February 2012 acquired privately held Alacer Corp., the maker and distributor of Emergen-C, a vitamin C product. Schiff Nutrition International in March purchased Airborne, Inc., a leading provider of immune support products, including its health formula, which is a unique combination of vitamins, nutrients and proprietary blend of herbal extracts.

B vitamins, or niacin, are now a billion dollar product in the form of Abbott Laboratories' (ABT) Niaspan, which has been designed to raise levels of good cholesterol in the body. However, Niaspan sales may be vulnerable after a recent study showed that Niaspan had no effect in lowering heart attacks.

GlaxoSmithKline (GSK) has a brand name prescription drug called Lovaza, which contains a combination of ethyl esters of omega 3 fatty acids that are designed as a dietary supplement to reduce triglyceride levels in patients with high triglyceride levels.

Cardium inexpensive purchase must have had the corporate taste of one of To Go's newest products:VitaRocks vitamin snacks that pop and crackle in the mouth. Cardium's three scientifically based supplements in its MedPodium product line are tasteless, while To Go's 25 products are packed with fruity zest and low in sugar content.

Financing with new stock

Under the terms of Cardium's asset purchase agreement with To Go Brands, Cardium issued 8.4 million unregistered shares of common stock, or about 6.5 percent of outstanding shares after the acquisition, to be held in escrow for 6 months. An additional 1.2 million shares of common stock have been issued and will be held in escrow for an 18-month period.

Ladenburg Thalmann & Co. Inc., a Miami, Fla.-based equity research company, more than doubled its revenue estimates of Cardium's own line of nutritional supplements from $2.5 million to $5.7 million in 2014. Ladenburg Thalmann increased its estimate of the net present value (NPV) of Cardium from $59.6 million and $0.50 per share on 119.6 million shares, to $64.6 million and $0.50 per share, reflecting the additional outstanding shares.

Cardium's cost-effective purchase must have had the corporate taste of one of To Go Brand's newest products: VitaRocks vitamin snacks that pop and crackle in the mouth. Cardium's three scientifically based supplements in its MedPodium product line are tasteless, while To Go Brand's products are packed with fruity zest and low in sugar content.

The focus on nutritional fun can be seen in the recent introduction of Centrum's (Pfizer) new flavor burst chews adult multivitamins, and Vitafusion's (Northwest Natural Products) adult vitamin gummies.

Diversification strategy

The acquisition of To Go Brands is part of Cardium's opportunistic diversification strategy -- balancing higher-risk, higher-return products with lower-risk products.

Cardium's highest-tech product candidate, its gene-therapy candidate to treat heart disease is in late-stage clinical trials. The company's FDA-cleared Excellagen, a lower-risk product, is an advanced wound-care product that has been commercialized and supports the healing of skin ulcers common among diabetics as well as other patients with dermal wounds.

Dietary supplement diamond

"Consistent with our capital-efficient business model, we continue to actively evaluate new technologies and business opportunities," Christopher J. Reinhard, Chief Executive Officer of Cardium, said in a news release.

Reinhard said the latest purchase made strategic sense for Cardium, because To Go Brands not only has established logistics and distribution capabilities, but it also has an e-commerce platform and an experienced management team with access to key U.S. retail channels.

Reinhard said the latest purchase made strategic sense for Cardium, because To Go Brands not only has established logistics and distribution capabilities, but also an e-commerce platform and an experienced management team with access to key U.S. retail channels.

Energy supplement sales

The National Business Journal said its 2012 Supplement Business Report, release Oct. 1, 2012, reports that the dietary supplements industry surpassed $30 billion in 2011 sales, up 7 percent from the previous year. Other studies have reported twice that rate of sales increase for energy drinks. The growth is a positive factor in the merchandise mix of grocery stores, drugstores and mass market retailers such as Wal-Mart.

"The success of products like 5-Hour Energy has shown that the nutraceutical space has the potential to generate billion-dollar products without the extensive regulatory and other hurdles biologics," Reinhard said. "To play in this newly emerging space, products have to be healthy and taste great too, and that's what To Go Brands is all about."

To Go Brands portfolio includes 25 drink mixes, fruit, vegetable and vitamin products and its Trim Energy Green Coffee Bean supplement, which is designed to support healthy weight loss.

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

Additional disclosure: I received payment from Cardium Therapeutics to write about its acquisition of To Go Brands.