This Investment Just Became More Attractive

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The FDA approval of obesity drugs has been received with a lot of investor enthusiasm. The FDA has thus far approved two drugs: Qsymia from Vivus (NASDAQ: VVUS) and Belviq from Arena (NASDAQ: ARNA)The share prices of these companies have seen a lot of growth initially, but the enthusiasm has since died down somewhat. Belviq is still in the process of being launched into the market. Arena is partnering with Esai to launch its obesity pill and has already received a positive DEA ruling. According to the DEA, Belviq is a class IV substance, meaning that it has a low risk of abuse. This makes it much easier for Arena to market its drug due to less strict distribution guidance. The market was expecting Arena's Belviq to be launched in the US during March and was also expecting Arena to provide substantial launch information on the recent conference call. To investor disappointment the company failed to provide any such information, resulting in a minor stock slip. 

Vivus, on the other hand, has had a lot of trouble in its efforts to make Qsymia a success. This is because the FDA has placed stricter guidelines for approval of Qsymia. It has been approved as an addition to a reduced calorie diet and exercise for patients with chronic weight issues. This approval also includes recommendation for post marketing monitoring for cardiovascular risk and restricted distribution to specialty mail order pharmacies only. This restriction has been one of the primary reasons behind poor sales of Qsymia so far.

Although both Belviq and Qsymia have yet to show their market potential, each company has crossed the magic mark of $1 billion in market capitalization. Therefore even if consumers have yet to show their interest, investors believe in this new industry, and that means any new company that rolls out an FDA-approved obesity pill will probably get stellar valuations. The company closest to achieving this task is Orexigen. It is currently working on the Light Study for its obesity pill Contrave. The company is testing the drug in a randomized cardiovascular trial involving 9,000 patients. Positive trial results could eventually lead to FDA approval, and the company's stock could easily reach its mean sell side target price of $10, a 100% return on current valuations.    

Quarterly Results

The other day, Vivus released its highly anticipated quarterly results. The market was expecting the company to report EPS of $-0.44, and more importantly revenues of $3.09 million. The most important takeaway from the quarterly earnings was the amount of interest Qsymia has generated and the steps the company was taking to improve sales figures. If we look at the table below, we can see that Vivus has missed Street expectations in the last four quarters.

<table> <tbody> <tr> <td> <p><strong>Earnings History</strong></p> </td> <td> <p><strong>11-Dec</strong></p> </td> <td> <p><strong>12-Mar</strong></p> </td> <td> <p><strong>12-Jun</strong></p> </td> <td> <p><strong>12-Sep</strong></p> </td> </tr> <tr> <td> <p>EPS Est</p> </td> <td> <p>-0.11</p> </td> <td> <p>-0.14</p> </td> <td> <p>-0.23</p> </td> <td> <p>-0.31</p> </td> </tr> <tr> <td> <p>EPS Actual</p> </td> <td> <p>-0.14</p> </td> <td> <p>-0.2</p> </td> <td> <p>-0.24</p> </td> <td> <p>-0.4</p> </td> </tr> <tr> <td> <p>Difference</p> </td> <td> <p>-0.03</p> </td> <td> <p>-0.06</p> </td> <td> <p>-0.01</p> </td> <td> <p>-0.09</p> </td> </tr> <tr> <td> <p>Surprise %</p> </td> <td> <p>-27.30%</p> </td> <td> <p>-42.90%</p> </td> <td> <p>-4.30%</p> </td> <td> <p>-29.00%</p> </td> </tr> </tbody> </table>

Source: Yahoo! Finance

Actual Quarter Results

Qsymia sales once again failed to inspire a share price rebound, and the stock was down 5% on earnings. The bad news for investors is that the pill only generated sales of $2 million, as compared to Street expectations of $3.1 million. However, on the bright side, the free trial program ‘Get Started’ has been immensely effective. According to company disclosures approximately 17,000 people have participated in the program, and a staggering 70% have asked for a paid second round of prescription. However, these marketing efforts have increased the company's SG&A expenses to $50.3 million. Vivus ended the quarter with a cash balance of $58 million, and according to analysts will have to raise cash at this outflow rate in the next 12 to 18 months. 

European Approval

The European Medicines Agency's (EMA) Committee for Medicinal Products for Human Use (CHMP) has also confirmed its earlier decision of not granting an MAA (Marketing Authorization Application) to Qsiva (phentermine/topiramate ER). The company had filed a review with the governing body, but it has been refused on the basis of potential cardiovascular risks Qsiva might pose. The CHMP has asked for a pre-approval cardiovascular outcomes trial for Qsiva to establish the long term safety of the product. I believe the product will eventually receive the European approval, and this update places it one step close to that eventuality.


In more recent news Vivus has further reduced the price tag on its Qsymia. This can mean more troubles to Arena investors because Arena has already priced Belviq at $199 for a months supply. Vivus has launched a new 'Save Now' program which it operates directly through its website. According to disclosed information, the drug is now available to customers at only $75, savings of a mammoth $85 dollars. This now makes Belviq almost three times as expensive as Qsymia. Arena might not find it that easy to slash off price because it is launching the drug with a partner that will take a 33% cut from wholesale receipts. 

Bottom line

The company has shown hopeful data for Qsymia, but there is still a long road ahead. To make it a blockbuster the distribution channel limitations will have to be lifted. The recently launched trial system was a good step, and more such programs will increase awareness amongst consumers of the potential of Vivus. The success rate of 70% is pretty impressive and is a testament to the commercial potential of the drug. Insurance coverage remains the key to the success of Qsymia, which is priced at $160 per month. In more good news for investors, Aetna and Express Scripts have agreed to cover Qsymia, and there are rumors that more coverage is on its way. I believe this price decline on earnings is a good opportunity for prospective investors to get in because share prices should rebound on coverage news and the future sales potential of Qsymia. Belviq is due to be launched in US and will enjoy a much better sales channel. The safer profile of Belviq might give it an initial sales edge over Qsymia in the short run. 

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