Speculation Heats Up Again In The Obesity Drug Space

Includes: ARNA, VVUS
by: Bio Insights

As I'm writing this on January 8th 2012, the market's favorite play on the new prescription obesity drug market, Arena Pharmaceuticals (NASDAQ:ARNA), is doing quite well for itself, shooting up over 10% on a smooth uptrend supported by heavy volume. I suspect that this is anticipation of the market launch of their obesity drug Belviq (which is also their "flagship drug"), as well as the company's upcoming presentation at the JPMorgan Healthcare Conference in San Diego which is set to take place during after-hours trading tomorrow (January 9th).

Investors should also note that the stock is also feeling a sense of relief after a ridiculously long 6 month wait for the DEA scheduling of Belviq (lorcaserin) after FDA approval in the summer of 2012. As expected, and as suggested by the FDA, Belviq was classified as a schedule IV drug near the end of December 2012.

This isn't the greatest news for their competitor Vivus (NASDAQ:VVUS), which was given a decent head start due to a lack of government-caused delays following the FDA approval of Qsymia. As you may remember, despite the fact that Belviq was approved weeks before Qsymia, Vivus was able to bring the drug to market as early as September 2012, while Arena had to sit on their hands while waiting for the DEA to make a decision. Now that both drugs will be on the market, speculation over the prescription obesity space is beginning to heat up noticeably.

The market (including myself) has been carefully watching Qsymia's performance ever since market launch in September 2012 to gauge the actual size of the prescription obesity drug market and to observe the pitfalls that wouldn't be evaded. As we saw, Qsymia's launch was quite troubled.

Recall that Qsymia did not perform well in its first few weeks. As detailed in their Q3 2012 earnings report from November 6th, the company only managed to sell 5,560 prescriptions between the launch of September 17th and October 26th 2012, bringing the company a disappointing product revenue of $41,000.

It was then revealed on January 7th 2013 that the company had impressive 68% sales growth in December 2012 relative to November 2012, which caused VVUS to jump almost 10% higher on abnormally high volume by the end of trading on that day.

Unfortunately, it's also true that these figures were aided by a trial program that the company offered to alleviate some of the pressure that the product's price was putting on sales growth. This, in combination with a bit of healthy profit-taking, explains the 3% pullback that is occurring in the stock today.

At an average of $62 per 30-day prescription out of pocket as discussed in Vivus' last quarter report, it's clear that the drug will have trouble in the market without much more extensive coverage from the healthcare companies. We've learned that pricing is a major factor in the prescription obesity drug sector.

The general consensus right now is that Belviq will outperform its rival Qsymia in prescription sales. This is partially demonstrated by the significant difference between the market capitalization of Arena and Vivus (at $2.20 B and $1.45 B respectively), and is supported by a few factors that could make Qsymia less attractive to doctors relative to Belviq.

Perhaps the most obvious is the fact that Qsymia contains phentermine, which was one of the active components of the dangerous obesity drug fen-phen that was halted years ago by safety concerns. The FDA only approved Qsymia under the condition that the company set up a strict REMS (Risk Evaluation and Mitigation Strategy), which makes the drug's risks very clear. Another is the fact that the EMA rejected Vivus' MAA for Qsymia immediately, while Belviq still has a chance to attain the European market.

Going forward, investors can look forward to additional sales data for Qsymia which can help gauge the general direction of the prescription obesity drug market. We will have to wait a bit longer before the early prescription sales data trickles in for Belviq, although I think that any outcome would be interesting. While it seems that both drugs will struggle with healthcare reimbursement issues and pricing for quite some time, we are just beginning to scratch the surface of a new drug market. Clearly, patience will be a virtue.

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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.