Anti-Obesity Stocks Are Attractively Priced

Ishtiaq is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

The obesity market was one of the most attractive sectors a year ago, and the shares of companies developing anti-obesity drugs were the pharmaceutical sector's hottest properties. However, it looks like investors hugely overvalued the market for anti-obesity drugs, resulting in tepid performance of these stocks.

Only one company, Vivus (NASDAQ: VVUS) has been able to market its drug. However, Vivus’ drug, Qsymia, was approved with a long list of restrictions from the FDA. As a result, the company was not able to properly market its drug, which led to less-than-impressive earnings. Vivus only reported $2 million in revenues for last year's fourth quarter.

Hurdles cleared?

Vivus’ stock has taken a nosedive since it hit $30 per share after the approval of its anti-obesity drug. At the moment, the stock is trading around $12. So has the stock bottomed out? I think so.

One of the biggest stumbling blocks for the company was restrictions on the marketing of the drug. Qsymia was only available through mail orders, which resulted in lower sales. However, recently, the FDA has relaxed restrictions on the marketing of Qsymia, which should allow the company to bring in higher sales in the future. Now the drug is also available through certified pharmacies.

Another hurdle in the way of higher sales is the high cost of the treatment. Obesity drugs are not entirely covered through insurance; as a result, high out-of-pocket expenses deter patients from adopting this treatment. The company is trying to solve this issue by offering free trial periods, as well as increasing the insurance coverage for the drug. However, the issue still remains, and it's not likely to be solved in the near future, since the market for obesity drugs is still at a development stage. It will take some time for the company to convince insurers of the definitive advantage of this treatment compared to others.

Going forward, investors should expect a substantial increase in sales due to the relaxation in restrictions, which gives the company more options to market the drug. As a result, the stock price is likely to move higher in the next four to six months, giving a solid base for investors to initiate a position.

Another Player Entering the Market?

Arena Pharmaceuticals (NASDAQ: ARNA) was the first company to get an anti-obesity drug (Belviq) approved in over a decade. However, it has not been able to launch its drug due to some regulatory issues. Arena’s drug had to go through DEA scheduling, which has resulted in the delay of the launch. However, the final decision from DEA should be coming any day now, and the company should be able to market its drug with its partner, Eisai. Arena Pharmaceuticals’ stock has also lingered around $8 since the approval of the drug, and analysts have been reducing their price targets.

The biggest concern about Arena actually stems from the less-than-impressive performance of Vivus’ drug, which has led the market to believe that anti-obesity drugs might not become popular. I believe the market is overplaying the problems faced by Vivus, and the comparison is not fair. Arena will not have the same hurdles Vivus did, and the company will also have an experienced partner in Eisai. As a result, Belviq's launch should be smoother and more effective than Vivus’s launch of Qsymia.

Again, I believe Arena’s stock has bottomed, giving investors a great opportunity to buy. At the current levels, there is a substantial upside potential in the stock. Once the revenues from the drug start flowing in, the stock will start its steady upward movement. Over the next six to eight months, Arena should be trading at least 30% above its current price.

Orexigen Therapeutics (NASDAQ: OREX) is another player in the obesity sector; however, the company’s anti-obesity drug, Contrave, is still in the development stage. Orexigen will still take some time to enter the market, but it looks like the company won't lose much due to the late entry. As I said above, the market is still developing, and it will take some time for patients to adopt these treatments.

The first-mover advantage has not gone to Vivus, which indicates that the market is valuing each drugmaker's product on its merits.This already interesting market will become fascinating once all the players launch their drugs and start competing for market share. Orexigen’s stock price will not see a big jump in the short-term, in my opinion.

Conclusion

Companies in the obesity market are fairly valued at the moment considering the performance of the products. However, the launch of new drugs and increased coverage from insurers can result in a substantial increase in revenues. As a result, the valuation for these companies will become extremely attractive. Arena and Vivus's post-drug-approval price levels were extremely inflated, in my opinion; however, the current price levels have factored in all the subsequent events, and they represent a better value.

  


Ishtiaq Ahmed has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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