Have Anti-Obesity Drug Companies Failed?

Includes: ARNA, OREX, VVUS
by: Harlan Kessler


35% of the US population is considered to be obese.

Qsymia was the first treatment to market, however sales have been sluggish.

Belviq's impact to Arena is limited due to its current royalty agreement.

Orexigen may be a dark horse in the race due to its Contrave's mix of effectiveness and safety.

By now you would have thought that doctors and patients alike would flock to the only two FDA approved weight control therapies offered by VIVUS (NASDAQ:VVUS) and Arena Pharmaceuticals (NASDAQ:ARNA) to aide in weight loss over and above diet and exercise. After all, obesity has assumed the dimensions of an epidemic in the United States where 35% of the population is considered to be obese and the American Medical Association has even declared it to be a disease last year. This is why many investors considered the FDA approvals for Qsymia and Belviq, from VIVUS and Arena respectively, to be a license to print money. However, this seems very far from reality after what has transpired over the past year.

VIVUS and Qsymia

Qsymia was the first treatment to enter the market by approximately one year; however sales have gotten off to a dreadfully slow start. The company chose to go it alone without a strong marketing partner with large resources. Naturally, this meant that they would be able to keep all the rewards but also meant that they would have to pay for all of the costs and work with a less experienced sales team with a much smaller reach. Another problem was that insurers were slow to add the treatment to their reimbursable medication list meaning that a number of the potential patients would have had to pay out of their own pockets for the treatment. Though the treatment showed the better weight-loss results in its phase 3 trials when compared to Belviq, it had a less favorable safety profile and was not approved for long-term use in Europe on the grounds of safety.

Sales of Qsymia for the full year came in at $23.7 million and it is very doubtful whether this figure will touch $50 million for the current year. However there are a number of things to be said in favor of the company. The mail order distribution system has been replaced by the traditional prescription methods and insurance reimbursements are growing, albeit slowly, and have now touched the 50% mark. Finally, the patent on the treatment has been extended to 2029 giving the company exclusivity until this time. The company has $343 million in cash which is sufficient to take care of even the worst cash burn scenario for the next couple of years. Stendra and Spedra have been partnered in 3 separate deals and could potentially bring in $400 million in revenue and decrease the company's dependence on Qsymia.

I believe that the current price of $6.10 undervalues the stock and I support the view of the analysts covering the stock that a fair value is anything between $8 and $9. Given the current fair value estimates, increased traction of Qsymia in the market and the 3 deals noted above, there is still some upside to be had if you buy the stock.

Belviq and Arena

Belviq was delayed by one year due to the scheduling by the DEA and eventually made it to the market towards the end of the second quarter of 2013. It also had problems with insurance coverage and was forced to withdraw its application for marketing authorization in Europe because the application was likely to be rejected. Arena has a strong marketing partner in Eisai (OTCPK:ESALY) which is doubling its sales force in the pursuit of increased sales. However, the benefit to Arena is restricted to royalties of 31.5% and revenue of $ 2.3 million from sales of Belviq which are miniscule compared to its potential. However, insurance coverage for Belviq has touched 50%, and Eisai is aiming for 75% by March 2015 increasing the potential market size by 50%. In addition, there are plans to test Belviq as a treatment for smokers who wish to stop smoking and it is already being tested, in a pilot study in combination with phentermine, for weight loss. Investors should not overlook the drug development pipeline which has four molecules in various stages of clinical testing. These are all early clinical trials but could well be the engine for the long term growth of Arena.

Currently, I believe that the company is fairly valued at its current price of approximately $ 7.00 and investors should wait and watch future developments before accumulating any more shares. However, if the company turns its slight loss into a small profit or if positive results are demonstrated at its clinical trials for future treatments one could see shares of ARNA jump.

Is Orexigen the dark horse?

Orexigen Therapeutics' (NASDAQ:OREX) has a treatment called Contrave which is being reviewed by the FDA that could be the right balance between weight loss results and the safety concerns that have plagued the prior two treatments. It has completed a long and rigorous study of the cardiovascular effects of its treatment which involved almost 10,000 patients and has shown that there is no increase in adverse effects as a result of using its product. This could lead to approval in the US from the FDA and perhaps approval in Europe, a market which has not been available to its competitors. In addition, it has already received favorable feedback on its application from European regulators. It has a solid and supportive partner in Takeda Pharmaceuticals (OTCPK:TKPYY) which can provide considerable marketing support and a highly trained sales team.

The fact that the company is only third in the market could work to its advantage because it has been able to learn valuable lessons from the problems that its competitors have faced. If it is able to be first into Europe, this would be a valuable competitive edge. In addition, the other two treatments have opened the doors with respect to insurance coverage and should make the company's job in this area much easier. I believe that the company is undervalued at its current price of approximately $7.00 and would place a fair value estimate at between $11 and $12 a share based on analyst opinion and estimates. The potential upside makes OREX a good buy at this point.

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.