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Time To Get Fat On Obesity

|Includes: Arena Pharmaceuticals, Inc. (ARNA), OREX, SHPG, VVUS

With the stock market rising for seven straight months, greed is alive and well and one sector that's getting a great deal of attention are stocks relating to obesity.

Just four years ago I was living a block away from the beach in Playa Del Carmen and spent every morning and afternoon playing sports in the sand. Whether it was running, playing volleyball, kite-surfing or throwing the football, the beach was a magnet loaded with beautiful people. I was an American living abroad amongst many Europeans in this Mayan Riviera hot spot for tourists and I couldn't believe how skinny they were. I guess I was used to seeing all the large waists waddle through downtown Fort Worth. Although obesity may not kill the Europeans, I guarantee you that smoking will. It was rare to know a European that wasn't a chain smoker, regardless of how athletic they were. There wasn't a day that went by while we were sitting around that my friends didn't make fun of several groups of Americans walking down the beach, always pointing out how fat they were. I'll admit, it was always easy to spot most Americans on the beach even though they might have been a 1/4 mile away heading our direction. I truly felt embarrassed, yet always defended other aspects of life as an American.

While Americans continue to get bigger and bigger, investors plan on fattening their pocketbooks, as they place their bets on a handful of companies and their prospects for getting FDA approval on drugs to help slim down the obese, the first potential approval of such a drug in fourteen years.

Let's take a brief look at a few companies that might offer you the chance to stuff your pockets with cash.

Arena Pharmaceuticals, Inc. (NASDAQ:ARNA) has a drug called Lorcaserin that will be scrutinized before an FDA advisory panel on May 10th, followed by an FDA decision on June 27th. With a mammoth market cap of $565 million as I write, driven through the roof by speculators, I'm in the same camp as short-sellers here, as I feel the FDA will soundly reject approval. There's just too many risks betting on Lorcaserin, a drug that caused tumors in rats and demonstrated very little benefit in terms of weight loss.

VIVUS Inc. (NASDAQ:VVUS) has a drug called Qnexa that offers a much better chance of FDA approval, especially since the FDA pushed back the approval decision date from April 17th to July 17th and thus signaling that approval is all but a done deal while they take a little more time to review a risk management plan. With a current market cap of $2 billion, the stock is already priced as if Qnexa's been approved. That said, there will likely be future gains in the stock after approval and subsequent product launch, but don't expect to become rich overnight. A surprising negative CRL on July 17th will result in disaster for shareholders, but I don't see this as the outcome.

Orexigen Therapeutics, Inc. (NASDAQ:OREX) has a drug called Contrave that received a majority vote for approval from an FDA advisory panel in early 2011 sending the stock soaring, only to later crash after the FDA rejected approval and cited the need for further studies relating to the affects on the heart. Its development and commercialization partner Takeda Pharmaceuticals (TYO: 4502) is still hopeful that Contrave will eventually be approved and in February, an agreement was reached with (DMEP) Division of Metabolic and Endocrinology Products via an (NYSE:SPA) Special Protocol Assessment with regards to a (CVOT) Cardiovascular Outcomes Trial, expected to last through 2014. With a current market cap of $233 million, I consider Orexigen to be dead money for quite some time and it's better this issue gets revisited in mid 2013, so until then, simply hit the snooze button.

Lightlake Therapeutics Inc. (OTCQB:LLTP) is a company that's followed by absolutely no one and whereas the market caps of the companies mentioned above range from $233 million to $2 billion, Lightlake sports a paltry $9 million valuation. On top of this measly valuation, the company just announced very positive preliminary Phase II results this past Thursday for the treatment of Binge Eating Disorder using Intranasal Naloxone, yet virtually no one even noticed. While the Naloxone treatment isn't directly an obesity drug, it eventually removes the binge eating behavior that leads to obesity and best of all, it has an amazing safety record.

While there is currently no FDA-approved pharmacologic treatment for Binge Eating Disorder, there's an $18 billion dollar company in Ireland that also recently reported Phase II results for their drug Vyvanse in the battle against Binge Eating Disorder, a serious condition according to Shire plc (SHPGY) and a condition that can translate into big bucks for companies such as Shire and Lightlake, as Shire estimates potential blockbuster sales (over $1 billion annually) for an FDA-approved treatment and notes that the potential market for BED treatment is over $5 billion annually. That said, Shire isn't the type of investment that will potentially bring mega-type gains to your portfolio, but their strong interest in Binge Eating Disorder certainly validates the fact that Lightlake Therapeutics appears to be severely undervalued and completely ignored at this stage of the approval process, especially when taking the safety factor into consideration.

In a recent company presentation, Lightlake stated that they've already been contacted by big pharma regarding a potential partnership and I suspect we'll soon see some sort of announcement revolving around such a partnership that includes a Phase III clinical trial along with in-depth language about development and commercialization. The company also made a great move in appointing Mary Pendergast as Regulatory and Strategic Matters Advisor, as Pendergast was a Deputy Commissioner and Senior Advisor at the FDA.

In attempting to make your portfolio fat with obesity stocks, I think the big guys might end up as a disappointment while the little guy could steal the show.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: I expect to be compensated for this article.