New Obesity Drugs May Mean Fat Profits
Tony is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The U.S. Food and Drug Administration (FDA) recently approved the first new weight-loss drug in 13 years. This move signals two things: public health officials are becoming serious in their fight against rising obesity in the country and the fight against obesity is moving away from diets and toward a pharmaceutical solution.
The new drug approved by the FDA is called Belviq and will be brought to market by Arena Pharmaceuticals (NASDAQ: ARNA) and its Japanese partner, the pharmaceutical company Eisai. The stock of Arena jumped nearly 30 percent after the announcement. Belviq is indicated for patients with a body mass index greater than 29 or that are overweight and also have either high blood pressure, high cholesterol or type 2 diabetes. Belviq works by tricking the brain into thinking the body is sated with lesser amounts of food actually consumed.
There is definitely a need for a drug like Belviq in the country. According to the Centers for Disease Control and Prevention (CDC), more than two thirds of Americans are overweight and more than one third – 78 million U.S. adults – are considered to be obese. That percentage is forecast to climb to 42 percent by 2030. A recent study indicated that obesity accounts for $190 billion in annual medical costs, which is quite a burden on the U.S. healthcare system. The CDC estimates that obesity costs the U.S. economy $147 billion annually in medical expenses.
The approval for Belviq is truly a landmark decision by the FDA. The last diet drug approved – Roche's Xenical – was approved in 1999. The FDA has held to a very high standard for diet drug approvals since the withdrawal of “fen-phen” in 1997. That drug, created by Wyeth, was found to cause heart valve problems and ran up a $13 billion litigation bill for Wyeth.
The okay from the FDA is certainly good news for investors in Arena Pharmaceuticals. According to an estimate from Piper Jaffray, sales of the product may reach $2 billion in 2020. But the FDA approval is also good news for other companies that have diet drugs in the pipeline, awaiting approval.
Two such companies, whose stock jumped sharply after the approval, are Vivus (NASDAQ: VVUS) and Orexigen Therapeutics (NASDAQ: OREX). The two diet drugs awaiting FDA approval are Qnexa and Contrave, respectively. In a study Qnexa, which is up for FDA approval on July 17, helped patients on average lose 10 percent of their weight after a year of treatment. Orexigen is not expected to get a yes or no from the FDA until 2014.
Investors are optimistic about both firms getting an okay from the FDA because, with the Belviq decision, the FDA seems to have shifted its stance. It now seems to be willing to put diet drugs on the market in order to help people lose weight, even if there is a bit of associated risk. All three drugs – Belviq, Qnexa and Contrave – were originally rejected by the FDA.
Even though these drugs are intended as a supplement to diet and exercise, it's interesting to note the performance of companies that offer diet plans such as Weight Watchers International (NYSE: WTW) and NutriSystem. Both are weak, with Weight Watchers in particular hitting a 52-week low recently, down nearly 40 percent from its 52-week high. The worry here for investors is that people will switch from natural weight-loss methods like diets to the easier method of simply taking 'magic' pills for weight loss.
So if investors want to play the obesity trend, the better bet should be to own Arena or Vivus. Arena is still selling for roughly two times projected 2020 sales, which is cheaper than many biotech stocks, which on average sell for 4.3 times sales.
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