Up, Down and Sideways: Weight Loss Stocks Revisited Print E-mail
By Brian Wilson, Lead Contributor   
Tuesday, 02 October 2012 05:06

icon_bmrlogoAnyone who has been following the world of emerging pharmaceutical companies in the last few months has probably heard a good amount about the two new FDA-approved prescription weight loss drugs Qsymia and Belviq.

We don't have enough market data to properly estimate just how successful these drugs will (or will not) be when they've entered the prescription weight loss market, but if the market capitalization of Vivus (NASDAQ: VVUS) and Arena (NASDAQ: ARNA) are any indication, the market is pricing in future blockbuster status.

Often neglected in the discussion is Orexigen (NASDAQ: OREX), which has another obesity drug called Contrave being developed. Contrave is currently in a phase III trial called “The Light Study” which won't conclude until 2017 based on estimates. Many investors are not keen on Orexigen for this reason, and waiting for the company to submit an NDA so that it can enter the obesity drug market soon. The annoying part, for OREX shareholders, is that the resubmission will probably come in 2014.

Nonetheless, Contrave has a few qualities that will distinguish it from the other two candidates later on. The drug is comprised of two active ingredients – naltrexone and bupropion. These compounds are mood-altering, like the competition, but the addition of bupropion makes it an addiction-tailored antidepressant. Bupropion is used to help smokers quit through mood elevation/stability, and research suggests that the strategy doctors employ to combat nicotine addiction can be used for food and obesity over-consumption as well. The other active ingredient in Contrave, naltrexone, antagonizes opiate receptors. This means that the “good feeling” opioids released by the body after eating will be eliminated (or at least significantly diminished) by Contrave. Orexigen basically aims to alter patients' behavior by removing the chemistry that promotes it.

Vivus' Qsymia uses a mixture of phentermine and topiramate. Phentermine is an anorectic, which is defined as something that suppresses appetite. More specifically it is a cousin of the amphetamines. It is this trait that has some investors worried about Qsymia due to the potential of a cardiovascular event for patients using amphetamine-like drugs. The other compound is topiramate, which acts as a mood “stabilizer” (hence its use as an anticonvulsant), which targets the “addiction” part of obesity.

Then, there is the single-compound Belviq (lorcaserin), which is largely expected to lead the prescription obesity drug market. Supposedly, the drug can specifically target the serotonin receptors related to appetite although the mechanism is not fully mapped at this point. Due to this, patients on lorcaserin can feel constantly satiated (and happier), which leads to altered behavior that can induce weight loss.

As of mid September, Qsymia (Vivus' drug) is commercially available in the US and it was set to provide sales data that we can use to gauge how successful the new obesity drug market will be-- however, shares dropped significantly after the company announced that the weight loss drug would be rejected by the European Medicines Agency committee. We had expected to see unilateral behavior between ARNA, VVUS, and OREX as the market focused on the performance of the weight loss drug market as a whole, but now some feel the European rejection of Qsymia takes out a large chunk of the global obesity market away from Vivus and hands it to Arena Pharmaceuticals. Either way, optimism over Contrave's prospects mow have buyers rushing back to OREX as ARNA trades sideways at the current levels.

The action is also attracting the attention of analysts. Credit Suisse initiated coverage on OREX and ARNA earlier last month with an “outperform” rating on OREX and a somewhat surprising “underperform” on ARNA. Many are shying away from direct comparisons between the drugs though, and arguments are being made on other factors. One is easy to point out – OREX is trading at a 80% discount (by market cap) relative to ARNA. If we aren't assuming that Belviq is far superior to Contrave, this suggests that Orexigen has enormous appreciation potential if all the sales figures come in as expected.

Investors who believe that Contrave will hold up to Belviq/Qsymia after its future release have a good opportunity to buy attractively priced shares at a steep discount. It seems that the bullish nod from Credit Suisse has sparked a rally that could once again have the stock revisiting 52-week highs, which would certainly attract external interest. Note, however, that short interest on OREX – about 6.7million shares (up from 5.6M prior), is also a significant factor that could come into play if the stock continues to rise.


Disclosure: None



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