New Weight Loss Treatments Could Boost Sales for These 3 Biotechs

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Arena Pharmaceuticals (NASDAQ: ARNA) is a controversial stock among biotech investors. The bulls believe that increasing rates of global obesity will inevitably trigger more sales of its new weight loss drug, Belviq, which was approved by the FDA last June. However, the bears believe that lingering safety concerns regarding Belviq and the company’s insistence on combining the treatment with other medications could cause problems down the road.

Over the past twelve months, the stock has gone nowhere, despite Arena’s claims that Belviq could become the company’s next blockbuster drug. Let’s take a look at what makes Arena tick and how it compares to its industry peers.

A solid second quarter
During the second quarter, Arena’s earnings rose to $0.17 per share, up from a break-even in the prior year quarter and topping the consensus estimate by $0.04. Revenue surged 213% to $68.9 million, mainly attributable to a $65 million milestone payment from its Belviq partner Eisai, topping the $48 million that analysts had expected.

Arena’s second quarter included the first three weeks of Belviq sales after its U.S. release in June, which came in at $1.3 million. 12,500 prescriptions for Belviq were written up to July 19. However, analysts considered Belviq’s initial sales to be light, considering that the $1.3 million in recorded sales included inventory stocking, and 60% to 70% of prescriptions were filled for free in a bid to attract more patients to eventually pay for the drug.

Expanding overseas and broadening its portfolio
Arena has established two major marketing and supply agreements in Asia -- one with South Korean pharmaceutical company Ildong Pharmaceutical last November, and another one with Taiwanese company CY Biotech in July. Eisai currently holds the marketing rights for Belviq in North and South America.

The rest of Arena’s portfolio includes pipeline candidates such as APD811, APD334, and temanogrel, which are aimed at diversifying away from obesity drugs. This focus on its pipeline growth, however, caused research & development costs to rise 33.3% to $18.8 million, while general & administrative expenses rose 65.4% to $8.6 million during the quarter.

Is the past a warning or an inspiration?
Despite Belviq’s promising start, there are still concerns about the drug’s safety. Instead of reducing appetite, Belviq attempts to suppress the appetite by targeting the brain. Belviq is only intended for obese patients with high blood pressure or diabetes.

The treatment can cause headache, dizziness, fatigue, nausea, dry mouth, constipation, a slowed heartbeat, and painful erections. If the patient suffers from diabetes, as many obese patients do, it can also cause back pain and a persistent cough. If patients take more than prescribed, there is also the risk of hallucinations, euphoria, and impaired thinking -- which have led the Drug Enforcement Agency to classify Belviq as a Schedule IV controlled substance, indicating a risk of dependence.

That startling side effect profile might cause some biotech investors to think of fenfluramine, which was combined with phentermine to create the once popular weight loss drug combination, fen-phen. Fenfluramine, which targets the central nervous system to suppress hunger, was banned by the FDA in 1997 after it caused serious damage to heart valves. Phentermine, on the other hand, was deemed to be safe.

Arena is currently testing out a combination of Belviq with phentermine, nicknamed Bel-Phen, which could become the safer successor to Fen-Phen. If tests show that the two drugs can be safely combined, Arena could have a major blockbuster drug on its hands.

Other competitors
A company frequently mentioned in the same breath as Arena is VIVUS (NASDAQ: VVUS). VIVUS’ new anti-obesity drug, Qsymia, was approved last July by the FDA and launched last September in the U.S. Like Belviq, Qsymia is only intended for chronically obese patients with associated medical conditions. Qsymia is a combination of topiramate, an anticonvulsant, and phentermine.

However, VIVUS’ second-quarter earnings were considerably weaker than Arena’s. The company reported a loss of $0.48 per share, up from a loss of $0.24 per share last year and beating estimates by a penny. VIVUS attributed the big bottom line drop to increased operating expenses. Revenue, which is entirely composed of Qsymia sales, came in at $5.5 million for the quarter, a big jump from the prior year quarter, when it had no reported revenue. It was also a sequential improvement of 34% from the $4.1 million in sales it reported in the first quarter. Analysts, however, had expected Qsymia sales to come in at $6 million.

Another smaller competitor to keep an eye on is Orexigen Therapeutics (NASDAQ: OREX). The company doesn’t have any approved products on the market yet, but has two weight-loss product candidates in its pipeline -- Contrave and Empatic. Both products are designed to target the brain through regulating dopamine activity to control the appetite. Contrave has completed Phase III clinical trials, and a NDA (new drug application) has already been submitted and reviewed by the FDA. A final decision is expected in the fall of 2014. Empatic completed Phase II clinical trials in January.

Orexigen has a big backer, Takeda Pharmaceutical, for the development and commercialization of Contrave in North America, but the drug will arrive fairly late to the game, considering that Belviq and Qsymia were approved last year. Investors should also remember that Contrave failed FDA approval in 2011 due to concerns regarding heart safety.

A Foolish final thought
In conclusion, the obesity market still has massive potential. The WHO states that the number of obese people worldwide has nearly doubled since 1980. 1.5 billion people around the world are classified as overweight, and 500 million of those categorized as obese.

However, manufacturers of weight loss treatments are still struggling to shake off the lasting negative perception that Fen-Phen left with physicians and patients in the 1990s. Investors can count on the FDA to put any new entrants into this market under the microscope and scrutinize them thoroughly for safety risks before they are approved. Even then, market growth is not guaranteed, as seen with the relatively slow start that Belviq and Qsymia have experienced since they hit the market.

Therefore, the indecision seen across the market about these three stocks is well justified, since these companies have not proven that their weight loss treatments can generate lasting top-line growth. However, obesity, high blood pressure, and diabetes are still steadily rising across the world, so investors should still keep a close eye on these three companies and their treatments.

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