How Is VIVUS Faring in the Obesity Drug Market?

More than one third  of U.S. adults are suffering from obesity. People are becoming more health conscious and want the fastest and easiest solutions to lose weight. The U.S. weight loss market is estimated to reach $66 billion in 2013. Qsymia, an obesity treatment drug by VIVUS (VVUS), was approved by the Food and Drug Administration in July 2012 as a supplement to reduced-calorie diet and physical exercise for obesity management.

Despite the high prevalence of obesity and the huge magnitude of costs associated with the obesity comorbidity treatment, Qsymia is facing significant challenges to realize its full potential. What is the company's outlook for the foreseeable future?

Major issues
Qsymia's sales have been minuscule since its launch in September 2012. VIVUS' revenue from the drug in the second quarter of 2013 was $5.5 million compared to $4.1 million in the first quarter of 2013. At the same time, the company has reported a net loss of $55.5 million, which is primarily attributable to increased selling, general, and administrative, or SG&A, expenses related to commercialization of Qsymia. The increasing SG&A costs are real problem for VIVUS' management; the company has to keep a tight lid on these costs, but its promotion programs leave limited room for it to achieve this in near quarters.

Another major hurdle in Qsymia's success includes the lack of insurance reimbursement, safety concerns, and consumers' mind-set. Doctors and obese people take excess weight as a lifestyle issue that can be addressed through healthy living habits rather undergoing medical treatment.

FDA-approved retail availability
Until July, Qsymia was available only through mail-order pharmacies due to FDA regulations. The FDA required extra regulation because Qsymia may cause birth defects if taken while pregnant. However, in April FDA allowed Qsymia sales through certified retail pharmacies under its Risk Evaluation and Mitigation Strategy order . According to the order, VIVUS is required to provide training to those health care providers and pharmacies that prescribe and sell Qsymia to make sure that they understand the risk of the drug. Also, a medication guide will be dispensed with each Qsymia prescription.

The drug is now available at approximately 10,000 certified pharmacies nationwide, including Walgreens, Costco, and Duane Reade retail pharmacies. In the second quarter of 2013, there were approximately 81,000 Qsymia prescriptions dispensed including 24,000 orders dispensed under the free trial offer. All these orders were mail order. With increased availability at retail pharmacies, I expect Qsymia's sales to increase.

Addressing the reimbursement issue
Drugs sales are highly correlated to the reimbursement coverage for the drug, hence Qsymia's challenge. The high cost burden on patients due to lack of reimbursement for Qsymia has been limiting the growth of the product; currently Qsymia is available at $150 per month without insurance coverage. The company is trying hard to increase Qsymia reimbursement coverage. As of July, Qsymia has increased its reimbursement coverage for approximately 36%  of the 160 million people in the U.S. with private or self-insurance. The U.S. Veterans Administration became the first governmental entity to cover Qsymia at a $9 co-pay.

The company recently amended its agreement with Express Scripts and Medco Health Solutions, the top U.S. pharmacy benefit managers , or PBMs. PBMs are primarily responsible for processing and paying prescription drug claims, and their involvement helps patients get the drug at discounted rates. After the amendment, patients are required to pay only $25 to $30 for their co-payment, which was $50 to $60 earlier. Currently, Express Scripts and Medco together cover 63.4 million people. The management committed to increase the reimbursement base, and I believe this improvement will help increase drug sales.

Competition
Currently, Qsymia is facing competition from Belviq, another weight-loss drug from Arena Pharmaceuticals (ARNA). It received FDA approval  in July 2012, and Belviq was launched in the U.S. in June this year. Arena has realized $1.3 million from the sales of Belviq in its launch quarter ended in June 2013. The drug is a potential threat for Qsymia since Qsymia isn't picking up in the market, yet Belviq generated revenue of $1.3 million in just one month. Arena doesn't sell Belviq entirely; iIts marketing is handled by partner Eisai, a Japanese drug maker.

Orexigen Therapeutics (NASDAQ: OREX) is also developing a weight loss product, Contrave. The FDA issued  Orexigen a complete response letter in January 2011. The FDA noted that Contrave can cause cardiovascular problems and asked the company to perform more trials to come up with the drug's complete risk profile. Since the FDA required Orexigen to run additional clinical trials to rule out the possibility that Contrave can cause heart problems, I think it will take time to receive FDA approval. While Contrave may not be an immediate threat, I see Belviq as a major concern for Qsymia since it has already hit the market and is taking Qsymia's share.

Valuation

Source: Yahoo! Finance.

Currently VIVUS is facing trouble generating revenue, which is reflected in its EV/revenue ratio that is higher than Arena's EV/revenue ratio of 16.29. Orexigen is a loss-making company, and its EV/Revenue ratio is too high. A high EV/revenue ratio signifies that the company is not generating enough revenue compared to the investment the company makes. On the other hand, if we take a look at P/B ratios in the given pool, VIVUS is currently the most undervalued stock. I think VIVUS' fundamentals and a low P/B makes it attractive investment.

Conclusion
Qsymia is currently in the early stage of its lifecycle, and there are unique problems associated to its growth that VIVUS is trying to address. I believe the FDA approval to sell through certified pharmacies, the increasing reimbursement coverage, and the two promotion programs can improve its performance. Therefore, I remain neutral on this stock.