After the market closed Tuesday, July 17, 2012, it was announced that the obesity drug Qsymia (formerly Qnexa), developed by Vivus (NASDAQ:VVUS), was approved by the FDA. That follows on the heels of approval of Lorcaserin, developed by Arena (NASDAQ:ARNA), less than a month earlier. The approval of both drugs, following favorable FDA advisory panel votes, was anticipated.
The share price of Arena did not change much following approval of lorcaserin, and it is likely that the share price of Vivus will not change significantly following this approval. Vivus opening share price was about $30 following approval, which is about where it was trading in the days leading up to the approval. Approval of Lorcaserin did create a brief buying opportunity, as predicted by a Seeking Alpha article, for Vivus.
Safety concerns persist. According to AP, labeling will likely include a pregnancy test before prescribing Qsymia and a monthly pregnancy test thereafter. Use of Topiramate, one of two drugs in Qsymia, is associated with birth defects if used in the first trimester of pregnancy. An after-market study of cardiovascular safety is also mandated by the FDA, according to the AP because the other drug in Qsymia is Phentermine.
Keep in mind, both drugs are formulated in lower doses in Qsymia than the already prescribed individual drugs. It is unlikely that cheaper generic combinations will compete with Qsymia sales. It should also be noted that Arena is required to do post-market cardiovascular safety studies of Lorcaserin, which will be paid for by Eisai, and Orexigen (NASDAQ:OREX) has just initiated cardiovascular safety trial with its obesity drug, Contrave.
Predicting sales of Qsymia or Lorcaserin. Sales of Qsymia should start in late 2012, marketing will first target physicians treating obesity. Then, marketing will target family practitioners. On the flip side, Lorcaserin awaits DEA approval with probable labeling as a schedule IV drug. Lorcaserin will be marketed ASAP. Lorcaserin will be marketed by a large pharmaceutical company, Eisai, which offers advantages over the initial 150 person sales force being assembled by Vivus.
There has been speculation that Lorcaserin would be first to market, but, really, the ball is in the air. And finally, Vivus retains all revenue form Qsymia, whereas Arena retains about 30% of the revenue from Lorcaserin. A final note, it is generally agreed that Lorcaserin is safer than Qsymia, but Qsymia has better efficacy than Lorcaserin.
With two drugs on the market, the high end of my expectations and a conservative estimate is $300 million in revenue for either drug within two years. Assuming a 50% gross margin and growing sales worthy of a PE of 20, VVUS should trade at $30 per share in two years. Arena should have a higher gross margin, so shares should trade at $13 per share in two years. It is likely both companies are trading at near fair value with these estimates on revenue.
Efficacy of Lorcaserin is questionable, and safety of Qysymia, with labeling advising pregnancy tests, does not foreshadow robust sales. On the other hand, many assume the market is closer to a billion dollars for these drugs or that a PE ratio of 20 is low given the size of the potential market. If you think these estimates are low, then a buying opportunity exists for either company. My advice, VVUS and ARNA are a hold; wait and see how sales of lorcaserin and Qsymia develop.
Disclosure: I am long ARNA.