Why are Obesity Stocks Suddenly So Hot?
Reza is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
All three obesity drug candidates -- Arena Pharmaceuticals, Inc. (NASDAQ: ARNA), VIVUS Inc. (NASDAQ: VVUS), and Orexigen Therapeutics, Inc. (NASDAQ: OREX) -- have enjoyed healthy price increases this year. Yesterday, Arena was the most active stock on Nasdaq and we're talking about a small company. It was more active than Nasdaq staples like Microsoft, Oracle, Intel, Dell, RIM, Facebook, and Apple. Its price has risen a whopping 500% since I started covering it a couple of months ago.
Why are obesity drugs suddenly so hot? Two key reasons: (a) the FDA is getting really close to making decisions on the first obesity drugs in over a decade; (b) obesity has become an epidemic and the largest healthcare challenge in the US. Perhaps if the epidemic was as intense two years ago, the FDA would have thought twice about not approving Lorcaserin, the same drug they're about to approve. One of the speakers at the last Advisory Committee said he stood before the same committee two years ago and said the same thing -- they did nothing and the obesity problem intensified.
The obesity market size is tremendous. In their study "The U.S. Weight Loss & Diet Control Market," Marketdata predicts the weight loss market to be over $70 billion! I repeat, a 70 billion-dollar market. As there's been no new effective solutions in 13 years and the problem has gotten worse and worse, any newly approved obesity drug has the potential to make a lot of money. That said, it's important to keep in mind that making money is not the key motivator of the science. Science's main aim is to help people. In the word of George Merck:
“We try to never forget that medicine is for the people. It is not for profits.”
But profits do follow a successful dream, and investors have been bidding up the stocks of obesity drug companies in anticipation of successful market penetration. Out of the three companies awaiting approval, Arena has the best chance for the largest share of this huge target market primarily because it has the best safety profile and doctors I have interviewed indicate safety is of utmost importance to them when it comes to weight loss drugs.
Arena has its own manufacturing plant and a marketing agreement with Eisai, which is ready to hit the ground running upon approval. Vivus neither has a marketing partner nor its own manufacturing. Vivus has indicated it wants to serve the US market alone and we know how risky self-launch is. In fact, it's not uncommon for hedge funds to short self-launches because so many have not done well.
Another major advantage of Arena over Vivus is the label. Due to safety concerns about Qnexa, FDA will probably require a much more stringent label for Qnexa than for Lorcaserin, and Qnexa's required REMS program provides further constraints.
Some investors are attracted to Arena's long-term potential beyond obesity treatment. Dr. Daniel Lopez recently wrote:
"I am more interested in the long term potential of this company with it's very promising drugs in the pipeline. My interest is not only in the PPS but in the value of this company in its science that will help millions of people with diabetes, thromboembolic disease, pulmonary hypertension to name a few."
Given this huge market and the company's rich pipeline, I believe Arena is ripe as a scrumptious acquisition target by a Big Pharma. The company's current valuation does not have approval priced in. Just due to short covering the valuation is reaching a fair from all the artificial supply of shares that were provided by shorts. Approval should open to door to a flood of new coverage and upgrades, new and increased institutional ownership, and further short squeeze.
So I'd say for Arena shareholders, the fun's just starting. On the other hand, Vivus shareholders should be on the guard for a short attack as it becomes more evident, especially to the hedge funds that are their top institutional owners, that Vivus at best will have a small piece of the obesity pie.
I own shares in Arena. This is not an investment advice. Please do your own research. For more information about my interests and to join my spam free mailing list please visit www.rezamusic.com. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.