The $60 Billion Obesity Question And 3 Undervalued Stocks

Includes: ARNA, CDXC, VVUS
by: Takeover Analyst

More than 1.4B adults were categorized as obese globally in 2008 and demographic trends are actually pointing towards an increase in this figure. According to the Centers for Disease Control and Prevention, childhood obesity has gone up more than 300% over the last three decades, around 1 out of 5 children aged 6-19 are obese, and more than 1 out of 3 are either overweight or obese. And even though consumers have become increasingly cognizant about the negative health risks associated with obesity, Americans' eating habits have remained the same.

Decades and decades of research to find the ultimate weight loss drug have been disappointing to say the least. The good news is that the tide is heading in the right direction. The FDA has become aware of the common side effects of obvious treatment mechanisms, BioPharma has been driving innovation ex post failures, and shareholders are demanding results.

Take a look at VIVUS (NASDAQ:VVUS) to get a sense of how much of a catalyst weight loss drugs can be to shareholder value. Over the last 12 months, the stock has more than tripled. Over the last 5 years, the stock has nearly quintupled - over the same time period, the Dow Jones was down 5.8%. On July 17 this year, the FDA will be making a final ruling on the biopharmaceutical company's Qnexa weight loss drug, and investors should expect increased volatility as that date nears. The advisory committee voted 20-2 for approval and, although disagreements arise, the FDA is likely to concur.

Other companies have similar catalysts. ChromaDex (NASDAQ:CDXC) has developed a formulation of the natural compound pterostilbene found within blueberries - christened pTeroPure - that helps with weight management. The dietary supplement TrimBlu is (1) rich in D3, B3, B6, and B12 and (2) supports healthy metabolism such as insulin production that regulates blood sugar. By helping the body utilize energy more efficiency, TrimBlu offers a solution to the billions of individuals overweight or afraid of becoming overweight.

Independent research firm Frost & Sullivan named patented pTeroPure as the 2010 North American Most Promising Ingredient of the Year. Sales in BluScience, the retail division that distributes the dietary supplement, has exceeded internal expectations by more than 50%. And, better yet, the science has been confirmed yet again. Clinical safety data for pTeroPure from a double-blind randomized trial has demonstrated no meaningful adverse events with consumption. At the same time, pterostilbene has shown superior biological activity, prolonged antioxidant activity, and better oral bioavailability, among other positive effects.

These positive effects have, again, generated considerable momentum. According to The Motley Fool, "this year, it's all about obesity drugs". Arena Pharmaceuticals (NASDAQ:ARNA) has appreciated by more than 350% over the last three months and excited the market with its own product - an observation evidenced by the fact that an average of 20M shares are being traded daily. The gains particularly took off since an advisory panel voted 18-4 in favor of the firm's weight loss candidate lorcaserin. The FDA is scheduled to give its final decision on June 27th. Roche Holdings (OTCQX:RHHBY) has prescription anti-obesity drug Xenical on the market, but lorcaserin looks like a better answer to obesity. Arena's main risks are (1) delays with the new drug application, which will give rivals time to penetrate the market, and (2) weak follow-up trials that dissipate excitement. The product was actually rejected two years ago for producing elevated cancer rates in rats, but the evidence has since shown that this risk does not translate over to humans.

In light of the strong demand from a more than $60B market, investors are advised to take broad exposure in the weight management industry. 2012 will continue to be the year of the anti-obesity drug and stock returns are likely to become more pronounced as approval dates near.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in CDXC, ARNA, VVUS over the next 72 hours.

Disclaimer: The distributor of this research report, Gould Partners, is not a licensed investment adviser or broker dealer. We are a consultant to a third-party representing ChromaDex and have received one thousand dollars for independent research. Investors are cautioned to perform their own due diligence as information contained within this report has been derived from public sources and cannot be guaranteed by us to be fully accurate. Always discuss investments with a licensed professional before making any financial decision. Statements made herein are often "forward-looking statements" as defined under Section 27A of the Securities Act of 1933, Section 21E of the Securities Act of 1934, and the Private Securities Litigation Reform Act of 1995. Since these statements are uncertain, actual results may be materially different from those expected.