Are Prescription Obesity Drug Companies Permanently Broken? Print E-mail
By Brian Wilson - Lead Contributor   
Thursday, 22 May 2014 07:49
Yesterday we discussed the sheer extent of the recent selloff in biotech, and the buying opportunities that are available once again.
Today, we will shift our focus to "value traps" that still pose a major threat to any healthcare investors currently looking to dumpster dive for new stocks.

Value traps are basically investment opportunities that appear to be cheap despite being inherently flawed in some way. Value investors are often tricked into thinking that these stocks are set to outperform due to their current "low" price, although they are buying a stock that is fairly valued or worse.

We see Vivus (VVUS) and Arena Pharma (ARNA) - the two major players in the prescription obesity drug market - as ideal examples of value traps in the healthcare sector. Both of these companies appear to be cheap due to their poor performance throughout the last year, although they are very flawed investments. We will explain our reasoning below:

Arena/ARNA

This heavily promoted company still manages to hold onto a market cap of $1.4 B, despite the disappointing commercial performance of its FDA-approved obesity drug Belviq (lorcaserin). While revenues are on the uptrend, the company's "blockbuster" drug is only capturing a small corner of the obesity drug market. Competitor drug phentermine, a generic (and cheaper) weight loss treatment, seems to be holding its ground quite well.

Eisai, the company that acquired the marketing rights to Belviq from Arena, may even drop the drug completely if sales do not ramp up. Margins on this drug appear to be low, and the demand is much lower than expected.

On the bright side, the company is hedging its bet on Belviq with a 4-drug pipeline of candidates unrelated to obesity. Arena is also holding a lot of cash (~$203 M), which is enough to pay for R&D for another two years in the event that Belviq stagnates.

Vivus/VVUS

Vivus has been criticized extensively for its failure to market Qsymia (phentermine and topiramate ER) to the millions of obese adults in the United States. Although Qsymia is the most efficacious prescription obesity drug on the market, lingering cardiovascular risk concerns and poor margins keep the company's quarterly earnings deep in the red.

In Q1 2014, despite having sold $36.7 M worth of Qsymia, the company posted losses of $15.6 M. The sales revenue was dragged down by COGS of ~50%. This isn't "Dendreon bad", but it is a major impediment to the company's hopes of long-term success.

Vivus has a market cap for $477 M. This makes the company cheaper than Arena, although the company doesn't really have a pipeline worth factoring into the valuation. Qsymia will make or break this company, and we expect the latter given what we've seen so far.

In summary...

Many investors were very excited about the commercial potential of the prescription obesity market, but it's becoming clear to Wall Street that these drugs will not become "staples" of primary care anytime soon. And because of lower profit margins, we expect very limited income generation from the first generation of prescription obesity drugs. Whether this income will be enough to recoup the cost of drug development is unknown.

Its because of dismal scenarios like these that the buy side places so much emphasis on rare disease and cancer drug developers. Primary care appears to be dead from the standpoint of healthcare investors.



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