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It wasn't that long ago that obesity drugs were considered a lifestyle drug. Doctors, the Food and Drug Administration, and insurers believed losing weight was a vanity issue. Doctors were reluctant to prescribe them, the FDA wouldn't approve them unless they had squeaky-clean safety records, and insurers wouldn't pay for them.
The tides appear to be changing.
After getting rejected once, Arena Pharmaceuticals' (NASDAQ: ARNA ) Belviq and VIVUS' (NASDAQ: VVUS ) Qsymia were both approved by the FDA last year. And the FDA seems open to approving a third drug, Orexigen's (NASDAQ: OREX ) Contrave.
Getting FDA approval is a necessary step, but it isn't sufficient to gain blockbuster sales. VIVUS and Arena's marketing partner Eisai have to convince doctors to prescribe the drugs and insurers to cover them.
VIVUS is making progress. On its first-quarter conference call, the company said 34% of privately insured lives cover Qsymia. Its goal is to have coverage for half of privately insured patients by the end of the year.
Obesity drugs are included in the latest version of the American Association of Clinical Endocrinologist Comprehensive Diabetes Management Algorithm, which endocrinologists and general practitioners use as a guide to determine how to treat diabetics and those who may become diabetic.
Listed after lifestyle modifications -- eating less and working out more -- the algorithm suggests using Belviq, Qsymia, Roche's Xenical, or phentermine, the safer part of phen-fen that's available as a generic. The association clearly sees a connection between obesity and type 2 diabetes, with weight loss being an important method for controlling diabetes.
Spending money to save more
From an insurer's perspective, it only makes sense to cover obesity medications if patients are willing to cover the added expense with higher premiums or if the expense now can help lower medical costs, thus keeping premiums down.
Higher premiums might be an option for some plans, especially for employer-sponsored health insurance, where the employers could benefit from increased productivity from healthier employees.
It's clear insurers could save money by increasing weight loss. According to a study by the Campaign to End Obesity, increases in obesity rates are responsible for $74.6 billion in higher spending by private health insurers.
But those benefits from losing weight are seen years down the line. The study recommends looking out 25 years. How many people are going to have the same insurance now as they will 25 years from now?
Government wild card
The solution could be for the government to require insurers to cover obesity medications like it does with vaccines, which also have pay-now and save-later benefits. If all the insurers are required to cover the drugs, then they'll all be on a level playing field for increased premiums, and they can all benefit down the line no matter who previously insured the patient.
If the government is going to require insurers to cover the drugs, it would have to cover them in the plans it runs, Medicare and Medicaid. I think we're likely to see that as a first step before making it a requirement for private insurers, although it may take awhile given the push to decrease costs now.
Who will win the obesity drug market?
Can VIVUS pick up its lagging sales and fend off the competition, or will Arena Pharmaceuticals reign supreme in the obesity space? If you're in the dark, grab copies of The Motley Fool's premium research reports on VIVUS and Arena Pharmaceuticals to stay up to date. The reports have all the must-know information, including an in-depth look at the obesity market and reasons to buy and sell both stocks. Click now for an exclusive look at Arena and VIVUS -- complete with a full year of free updates -- today.