Arena And Vivus Investors: Do Not Fear A Market Correction

Includes: ARNA, OREX, VVUS
by: Jacob Smith

While the market has been showing some signs that a temporary top has taken place, many analysts and investors are becoming skittish about not only putting new money to work but are even beginning to question whether or not they should sell the shares they already have. Daily we are hearing rumors and opinions on whether the federal reserve is going to begin tapering its bond buying program and what that decision will mean to the stock market in the foreseeable future.

In this article I posit that Arena (NASDAQ:ARNA), Vivus (NASDAQ:VVUS), and, to a much lesser extent, Orexigen (NASDAQ:OREX) shareholders should not over think their current positions in these stocks by concerning themselves with the macro picture of the economy and stock market's direction. The conventional wisdom is that biotech stocks are one of the more "recession proof" stock sectors because "people always get sick and need medication" to treat those illnesses, regardless of how the economy is doing.

As we all know, conventional wisdom is not always very wise. Take the following sampling of 3 biotech stocks during the "Great Recession" between 2007 and 2009. Peregrine Pharmaceuticals (PPHM) represents the riskier, more volatile small cap biotech industry. Gilead Sciences (NASDAQ:GILD) represents a larger, more established biotech with sales on already extremely successful drugs and a very promising pipeline. Pfizer (NYSE:PFE) represents a giant pharma with a high dividend, what many would refer to as "safe, less risky" and also a stock that is often categorized as a "recession proof" healthcare industry stock.

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These 3 stocks provide a great cross section of what the biotech sector looked like during the "great recession" from 2007 to around 2009. Obviously, biotech was not a magic bullet where investors could "buy and go away" and feel perfectly safe during the recession. Biotech was hit very hard along with most of market.

If biotech is not the special snowflake that conventional wisdom would suggest, how has the idea that biotech is largely "recession proof" come into being?

What history tells us about the difference between the biotech industry's relationship with recessions and how the game is completely changed when disruptive drugs are developed or sold during recessions

If you took the above examples in a vacuum you could easily extrapolate the theory that the "biotech stocks are recession-proof" cliche is complete nonsense. However, I posit that there is an explanation as to why the three stocks above did not perform well during the last recession: none of the companies were bringing disruptive, unique drugs to the market during the recession.

For proof that having novel, potentially blockbuster drugs does indeed make biotech stocks "recession proof," one only need look to the recession of that took place between July, 1990 and March, 1991. While the market as a whole was going through a correction, many of the now infamous biotechnology stocks of the 90's that gave investors 1,000% plus returns were as hot as any time in their respective histories.

(S&P 500 during early 1990's recession)

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[Amgen (NASDAQ:AMGN) during the early 1990's recession, adjusted for splits]

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(Pfizer during the early 1990's, adjusted for splits)

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Obviously, shares of Pfizer and Amgen were not fazed by the bear market going on around them between 1990 and 1991. In fact, the companies were absolutely soaring during this time.

What was the difference between PFE and AMGN during the early 90's bear market and PPHM, GILD, and PFE during the Great Recession that took place starting in 2007?

First, PPHM had no revolutionary drug coming out on the market and was just another highly speculative penny biotech stock. GILD had already burst onto the scene and its drugs and the drugs' potential had already been priced into the stock. PFE was just another worn out, old, large cap pharma providing a decent dividend with a boring pipeline. All 3 of these companies were not in position to "shock the market" with novel, potential blockbuster drugs and thus could not differentiate themselves as stocks that should be purchased aggressively in the face of a severe, death spiraling market.

Conversely, during the early 1990's recession, AMGN and PFE were producing potential blockbusters and the market could not help but buy these stocks hand over fist while the rest of the market suffered. I suggest that, in reality, it all comes down to risk and whether some stocks are worth betting on, even during a strong bear market, because those stocks have such incredible potential.

Right when the early 1990's recession was in full swing, Pfizer was releasing Diflucan, an extremely affective and novel antifungal, Zoloft, one of the most successful anti-depressants in history, and Zithromax, which took the medical community by storm, providing treatment for bronchial infections.

Amgen was also delivering its own disruptive, novel drug technology during the early 90's recession, with the releases of two gene-spliced drugs, Neupogen and Epogen. These drugs were full of potential and investors saw this potential come to fruition as Amgen controlled more than 90% of the white and red blood cell stimulator market by 1993.

ARNA and VVUS are much more like PFE and AMGN back in the early 1990's than PPHM, PFE, and GILD during the "Great Recession" because both companies offer disruptive, potential blockbuster drugs to an enormous market that desperately needs them

To say the potential for effective obesity drugs is massive would be an understatement. There are approximately 1.4 billion obese people in the world today. Many of these people suffer from other comorbidities such as diabetes. Obesity costs the United States billions of dollars annually in health care related expenses. Arena's drug, Belviq, is also proven to help diabetics even without corresponding weight loss. Just as anti depressants and blood cell stimulators took the medical community by storm in the early 1990's by filling an enormous need, so too can Qsymia and Belviq fill a gigantic need that is continuing more and more to prove highly deadly, costly, and downright scary. That is even leaving out the aesthetic and self confidence boosting benefits of these weight loss drugs.

Whether these drugs prove to be blockbusters we will have to wait and see. It is not fair to predict the success of Belviq based on current sales of Qsymia. Not only is Belviq and entirely different and novel drug, acting upon serotonin in the brain to reduce cravings and hopefully give the patient more willpower to eat less, the REMS placed on Qsymia were excruciatingly detrimental to its sales. Qsymia could still prove to be a blockbuster. There is clearly room enough for both Belviq and Qsymia as the market for effective obesity drugs is enormous.

Either way, the world has been waiting over 13 years for an FDA approved, effective weight loss drug and, starting June 7th, people will have two choices to help combat obesity. If that is not enough catalyst for these two companies to trade outside of any looming market correction like AMGN and PFE of the early 90's, then the conventional wisdom that "biotechnology stocks are recession-proof" really is nothing more than an annoying and highly dangerous myth.

Disclosure: I am long ARNA. 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.