Obesity & Obesity Drugs, the Three Majors

Obesity & Obesity Drugs, the Three Majors

The media provides new content on obesity virtually every day. It is aimed at the large percentage of Americans who are overweight or obese. What the media generally does not cover are the drug companies in process of developing new branded drugs aimed at weight loss.

The three major companies in this sector are Arena Pharmaceuticals (NASDAQ: ARNA), VIVUS (NASDAQ: VVUS), and Orexigen Therapeutics (NASDAQ: OREX). Note that these companies are relatively small, with market caps of ~$2.1 billion, ~$1.4 billion, and ~$500 million, respectively. All are in the development stage and are still losing money.

No large drug company appears to have interest in this sector, likely because of doubts about the ultimate size of this market. Large companies search for drugs with large addressable markets. Regardless of the number of Americans who are obese, market size will be determined by the number of patients who actually decide to use such treatments. These drugs will be expensive at the outset so achieving insurance reimbursement is a major concern, particularly in light of the fact that Medicare currently bars reimbursement. Having to pay in cash will obviously impact demand. Furthermore, particularly at the outset, there are likely to be persistent doubts about whether such drugs actually work. These doubts will arise from the fact that the obese have likely tried all types of other solutions in the past, in many cases with limited or no success. How will these companies convince doctors and doctors then convince patients that these drugs provide increased efficacy?

ARNA (Belviq) and VVUS (Qsymia) received FDA approval for their products during 2012. OREX’s Contrave is still in clinical trials. It is possible that FDA approval for Contrave may come in late 2013 to be followed by European Union (EU) approval in 2014. It should be noted that the EU has turned down VVUS’s application while ARNA’s is still pending.

Both ARNA and VVUS are expected to launch their products during the first half of 2013. Their paths to success are not clear, in part due to the issues outlined above. The Wall Street EPS consensus does not see ARNA and VVUS reaching profitability until 2015. OREX is clearly behind these two companies on the approval curve but its small market cap relative to its competitors may over-discount the disadvantage of not being a first mover, especially when the Wall Street consensus also sees OREX reaching profitability in 2015 (albeit at lower levels than ARNA and VVUS). Meaningful differences between the three drugs are also hard to discern at this time. Furthermore, all three companies will face the same obstacles and those obstacles will only be overcome as the market develops. One may reasonably question whether the advantage of being first-to-market is important given the unproven near-term size of the obesity drug market.

OREX closed at $6.03 on 1/11/13. It reached a 52-week high of $7.73 on 7/17/12. Two factors are likely to affect its stock price positively. First, if ARNA’s and VVUS’s launches gain some initial traction, then Wall Street is likely to view OREX’s medium-term market opportunity more favorably. Second, as the time for FDA approval draws closer and, assuming no negative data emerges in the meantime, Wall Street may come to believe that approval is likely. These two factors point to a possible trading opportunity which rests on OREX’s valuation relative to ARNA and VVUS. Obviously, it is a risky opportunity but, at the right price, it may make sense for the right investor.