Just How Fat Is Arena Pharmaceuticals' Opportunity?

New York City Mayor Michael Bloomberg has been leading the charge against obesity, imposing bans on super-sized sodas, the use of trans fats in restaurants, and on food donations to the homeless because he can't monitor the salt, fat, and fiber content.

While Bloomberg might be the epitome of a Nanny State run amok, it is symptomatic of the changed mind-set that's occurring at all levels of government and may help explain why the Food and Drug Administration is suddenly willing to accept drugs as a means of combating obesity. Because of the pervasive view that obesity is out of control, drug developers Arena Pharmaceuticals (Nasdaq: ARNA  ) , Orexigen Therapeutics (Nasdaq: OREX  ) , and VIVUS (Nasdaq: VVUS  ) unexpectedly found a receptive audience at the regulatory agency.

Arena was the first to get FDA approval for its fat-fighting drug Belviq, but VIVUS's Qsymia was first to market because the former still needs to receive drug classification. Orexigen is still has years to go to get Contrave approved, but no matter -- with an epidemic on our hands, the market opportunity will be large enough that everyone will reap the reward.

Although VIVUS won the race to market -- it just announced Qsymia is available -- many expect Arena to quickly catch up so let's see how fat this opportunity is.

Arena Pharmaceuticals snapshot

Market Cap $2 billion
Revenues (TTM) $30 million
1-Year Stock Return 538.6%
Return on Investment (44%)
Estimated 5-Year EPS Growth 25%
Dividend & Yield N/A, N/A
Recent Price $9.26
CAPS Rating (out of 5) **

Source: FinViz.com. TTM = trailing 12 months.

Fat chance
According to the Centers for Disease Control and Prevention, 36% of adults in the U.S. are obese, with associated annual medical costs running north of $148 billion in 2008. By 2020, fat-fighting drugs should capture $3.5 billion in sales.

While that may be of epidemic proportions, everyone can't use the various treatments since they're reserved for those with body mass indexes of 30% or more (or 27% if they have other conditions). Moreover, one analyst says despite the seemingly wide-open field here, the market will barely sustain one blockbuster treatment, let alone three, and his choice is Contrave.

As noted above, Orexigen's therapy is still at least two years away, so I find that curious, but even if true I think Arena's got the markings of the early winner anyway.

More is not better
Although Qsymia was said to have the better results in clinical trials, as many have pointed out, that was for its higher dosage levels, but that also brought on greater risk of heart problems. So the greater weight loss advantage that Qsymia is supposed to have over Belviq may not be so great. As Fool blogger Joseph Dedvukaj recently noted, Belviq's broad labeling "gives physicians, broad discretion in the way a patient's illnesses, diseases, or co-morbidities can be managed with the use of Belviq. The demand for Belviq will come from knowledgable physicians who have their patient's best interests at heart."

Arena also has the benefit of having already partnered with Japanese pharmaceutical Eisai, best known for its Alzheimer's treatment and acid reflux therapy. It's picking up almost all the costs on post-approval studies the FDA mandated while VIVUS is footing the bill itself, which isn't to say it might not get a helping hand soon enough, as large pharmaceuticals like Pfizer and Merck abandoned the obesity drug field years ago. With the new mind-set at the FDA making such drugs more palatable, they might want to reenter the market, but Arena's unique drug discovery technology would give it an advantage in any bidding that might develop.

I agree with the Fool's biotech guru Brian Orelli that the scales of success tip in Arena's favor, and I've already rated it to outperform the broad market indexes on Motley Fool CAPS. The fat-fighting market is still in early innings. Having won FDA approval wasn't the end game but rather just the beginning of a much longer marathon. Tell me in the comments section below if you think Arena Pharmaceuticals will get a second wind and be able to pass up the head start VIVUS was given while also holding off Orexigen's eventual entry.

A sky-high opportunity
If you want to discovering even more about these revolutionary obesity treatments, make sure to check out our in-depth coverage of Arena Pharmaceuticals in this brand new premium research report. Complete with a year's worth of updates, this report will give you the investing edge you need, along with a full year of updates! Click here to get your copy.

Fool contributor Rich Duprey owns shares of Pfizer, but he holds no other position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (5) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 19, 2012, at 2:12 PM, bhasa04 wrote:

    Scales of success tip definitely in Arena's favor. The wall street analysts will start promoting Arena once their firms have accumulated enough Arena shares and ditched the competitor shares.

  • Report this Comment On September 19, 2012, at 3:49 PM, bhasa04 wrote:

    Belviq (Lorcaserin) weight-loss clinical trial patient Ed Susman (who is a MedPage reporter in real life) lost 55 lbs in one year.

    His weight went from 293 to 238 lbs, that is 55 lbs. In other words, he lost 18% of his body weight.

    The low 3% weight loss number often quoted by "Experts" is nonsense. This drug will be a blockbuster once people start realizing the amount of weight they can lose without major side effects

    http://www.medpagetoday.com/PrimaryCare/Obesity/33723

  • Report this Comment On September 19, 2012, at 10:53 PM, Foreeverlong wrote:

    Physicians want a safe and efficacious drug for their patients. Belviq has the added benefit of treatment of Type II diabetes. It is a game changing drug.

  • Report this Comment On September 20, 2012, at 7:43 AM, MRJOSEPHD wrote:

    Arena is the winner hands down!

  • Report this Comment On September 20, 2012, at 11:02 AM, CER4040 wrote:

    Just to reiterate what bhasa04 wrote. The 3% number used by many dubious media sources to badmouth Arena is nothing but a big lie, and everyone who followed the FDA advisory panel knows it. The FDA mandated that minimum efficacy guidline for approval is 5% weight loss. So for all you hacks out there that keep trying to perpetuate this myth that Arena only has 3% weight loss....How do you explain that they met the FDA 5% criteria for approval?

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Related Tickers

10/20/2014 3:59 PM
ARNA $4.17 Up +0.16 +3.99%
Arena Pharmaceutic… CAPS Rating: ***
OREX $4.06 Down -0.02 -0.49%
Orexigen Therapeut… CAPS Rating: **
VVUS $3.45 Up +0.09 +2.68%
VIVUS, Inc. CAPS Rating: **

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