Partnership and Acquisition in the Red Hot Weight Loss Market
Reza is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Obesity is not just an American epidemic but a global pandemic. In the US, the first approved obesity drug in 13 years is Arena Pharmaceutical's (NASDAQ: ARNA) Belviq. A second company, Vivus (NASDAQ: VVUS) stands a good chance of getting its drug, Qnexa, approved by the FDA on July 17; an approval many hope carries heavy restrictions and a REMS program due to serious safety concerns.
The FDA's decision is highly respected globally and facilitates approvals in the rest of the world. Europe is the closest next approval publicly known. Everything that I have read indicates Belviq should get approved in Europe before year's end. Vivus may never get approved in Europe due to safety concerns – one of its two generic components, phentermine, is not currently approved for use in Europe. Many people believe the FDA should not approve Qnexa until the outstanding FORTRESS study of topiramate-induced birth defects is complete (as discussed in my last MF article). However, given the political pressure and financial powers behind Vivus, I would not be surprised to see Qnexa get approved without completion of the above mentioned safety study.
What Europe may never approve is likely to get approved in the US and expose the population to an unnecessary risk. Attorney Joseph Dedvukaj argues "even an extremely restrictive REMS will likely cause the physician and patient to take the path of least resistance and prescribe the ingredients PHEN/TPM because: 1. the ingredients are cheaper, and 2. it is easier for the physician/patient because any REMS, no matter how restrictive, will be too costly and time consuming for patients and physicians to follow."
Even if Qnexa gets approved, Belviq will be the first choice for most doctors, and it's good that doctors have a choice. Doctors are in a much better position to choose the right drug for their patients than hedge fund manager and their media cronies who misrepresent Belviq's efficacy numbers or call it minimal or marginal.
There is nothing minimal or marginal about Belviq's efficacy: 47.5% of patients who took Belviq lost at least 5% of their weight versus 20.3% for placebo patients. Of those completing the studies, 63.9% lost greater than 5% of their weight, 34.7% lost greater than 10% of their weight, and the top 25% lost over 16.7%. The average weight loss for those who took Belviq for a year was 11%. It has been scientifically proven that even a 5% drop in weight can result in meaningful improvements in overall health. And Belviq comes with an excellent safety profile.
Arena's marketing partner, Eisai, has a challenging task ahead of them. Belviq is a wonderful drug and will be the drug of choice for physicians all over the world. Eisai must mount a strong marketing campaign to inform the physicians and end users about the true efficacy for patients and counter false messages that are being put out there regularly about efficacy by parties who are interested in keeping a lid on Arena's shares (i.e., short interest, institutional buyers, potential acquirers, competitors). So far Arena and Eisai have been very quiet, but we've heard a lot of noise and misrepresentation from Wall Street.
Arena recently announced that it has filed a Marketing Authorization Application (MAA) with the Swiss health authority, Swissmedic. With Swiss approval Arena will have most if not all of Europe covered while Vivus stands little chance of ever getting approved in Europe. Therefore Arena will dominate the European market.
The next key questions in many investors' minds concern partnership and/or acquisition. Some investors argue it makes sense for a Big Pharma company to outright buyout Arena instead of partnering in Europe. The current marketing agreements with Eisai for North and South America can already make a deal more complicated than if there were no licensing deal. A European partnership could further complicate a future acquisition if the partner and acquirer are different. It is conceivable that a company like Pfizer (NYSE: PFE) or Johnson & Johnson (NYSE: JNJ) may partner with Arena and look toward acquiring the company later. Of course, Eisai is also a possible acquirer given their already strong partnership with Arena, although some argue Eisai might not be able to afford to buy Arena.
Compared to other biotech acquisitions, a price tag of $8 to $10 billion is not out of the question. There's much discussion among investors on whether the eventual acquisition price should be 40 or 60 dollars per share, but in my opinion that speculation is not as interesting as what lies ahead for Arena in the short term.
We have seen a relentless level of bashing of Arena, which begs ethical questions deserving of a separate article. This bashing makes perfect sense because a) short interest is over 45 million shares; b) institutional interest is very low compared to similar companies; and c) in an attempt to buy an acquisition as cheaply as possible, a Big Pharma could try to suppress the stock price, a practice that is not unheard of.
Demand from short sellers replaces the artificial supply of shares they provide and therefore short covering can and will, in my opinion, fuel Arena's further rally. On the other hand, I expect institutions will soon, if not already, look into having a piece of the action, especially once they see Vivus' restrictions. Currently, most sell-side analysts are still living the same fiction that caused them to wrongly predict a failure at the AdComm and non-approval.
Sell-side analysts have to balance pleasing their large short clients that remained short and completely missed the run, and long institutions. However, I believe that buy-side analysts who work for large institutions and mutual funds will issue buy recommendations internally, if they haven't already. I strongly believe we will see the institutional ownership rise from a current estimate of 26% to over 60%. This momentum has already started.
This surge in demand puts the market makers in a tough position of having to come up with tens of millions of shares that are currently owned by retail investors. Retail has seen a huge gain in its holdings and acts more emotionally than institutions. Sudden price drops and coordinated attacks (as we've recently seen), cause retail to take profit and hand over its shares to institutions for half of the fair value, in my opinion. But some retail investors who even have a cost basis in $1s and $2s are determined to hold unless they get a fair value for their shares, which some believe will ultimately be set when the company is acquired. I can wait.
I am long ARNA. This article is not an investment advice. Please do your own research. To find out more about my interests visit www.rezamusic.com and to join my mailing list email me on (info at rezamusic dot com).
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