Exciting Catalysts Approaching for This Bet
Mohsin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The obesity stocks are perhaps some of the most discussed and followed stocks in the entire biotechnology sector. The two drugs to receive FDA approval so far are Qsymia from VIVUS (NASDAQ: VVUS) and Belviq from Arena Pharmaceuticals (NASDAQ: ARNA). The third competitor, Orexigen (NASDAQ: OREX) is still trying to get the FDA to sign off on their obesity treatment Contrave. The drug is undergoing more tests to determine its cardiovascular effects on a large test group. Once Contrave does get FDA approval, the rally in Orexgien can be huge, however investors will also be a little cautious considering the post-approval decline of VIVUS and Arena.
Shares of Arena and VIVUS have depreciated significantly since the FDA granted approval to the two treatments. There are three primary reasons behind this post-approval price depreciation. The biggest reason behind any post-approval decline is the profit taking of long term investors. VIVUS has also suffered due to the poor market performance of Qsymia, which has shown slim sales despite huge expectations from the market. The company recently reduced the price of the drug and also introduced a free trial system that could help increase consumer interest. The retention rates of consumers after the trial period have been pretty impressive.
The third reason has been the unexpectedly poor feedback from European regulatory bodies. Investors of both drugs were expecting their products to receive European approval, but any such acceptance is still largely elusive. Despite these issues, investors still believe in these products, and both companies have market capitalizations in excess of $1 billion.
Investors have been waiting for a Belviq launch for quite a while now, but DEA scheduling is still elusive. Otherwise Arena is all set to launch Belviq, and the company is partnering up with Esai, which gives this partner a significant share of any future Arena revenues. It is almost 100 days since the DEA application, and the market expects that a decision will be made by the month's end. On the other hand the European Medical Association (EMA) might give a decision on Belviq during the week's meeting. If these two approvals come through we will see a mammoth rally in Arena's stock price.
The key to all biopharmaceutical companies is the strength of their respective pipelines. Even if there are approved candidates available in the market, having a strong pipeline reduces the reliance on a single product and thus reduces the risk for investors. If we compare VIVUS and Arena, the latter has the better pipeline. The company has five candidates in the pipeline out of which Belviq has already received FDA approval. In addition to Belviq, three candidates have already entered Phase 1 clinical trials. The candidate APD334 has recently entered Phase 1 trials and could have a sales potential of up to $500 million. On the other hand VIVUS is conducting research on Qsymia for sleep apnea and diabetes.
Arena is a top pick for the obesity sector due to its safer profile and better sales channel. The company is trying to reduce investor risk by taking on other drugs, which could reduce company reliance on Belviq. According to company disclosures it has initiated Phase 1 Clinical Trials of APD334 for autoimmune diseases; this will make Arena a competitor of Novartis’s Gilenya, which has annual sales potential of approx. $500 million.
Arena has already applied for Belviq approval in Mexico, which has an even higher obesity rate than the United States. There are some very exciting catalysts approaching for Arena investors, and the stock price could significantly appreciate on any positive news. The company is already trading at reasonable valuations, so there is limited downside at these levels.
Mohsin Saeed 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!