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

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
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