Periodically there are ‘hot’ themes that emerge in investing in healthcare. This is most commonly under the umbrella of biotech or pharmaceuticals, because it’s exciting to see the development of new technologies for unmet medical needs. How can one not be interested in the next potential treatment of AIDS, cancer, or heart disease? And if the science doesn’t garner attention, the commercial potential certainly will.
Unfortunately, most drugs in development fail. Still, the chance that one will succeed (coupled with the huge potential return that investing could offer) is exciting. Such promise may manifest itself as lofty stock prices.
One of the hot topics at the moment is obesity drugs. There are three companies developing new drugs, two of which are approved and one of which has launched. (Author warning: there are always multiple details about any stock that influence the price and outlook. My goal here is to paint the general picture of the obesity landscape as it pertains to drug development, practicing medicine and investing because the topics are fascinating to me. This narrative is selective for what I find interesting, and it is therefore incomplete. This is not intended to offer investment advice.)
To set the stage, the players (companies) are Vivus, Orexigen, and Arena.
- Vivus’ drug, Qsymia, causes people to lose about 10% of their body weight (a 200 pound person will lose about 20 pounds over a three to six month period). This is one of the most effective weight loss drugs available. What are Qsymia’s magic ingredients? This is a mix of two old, generic drugs: topiramate, an epilepsy drug that is known to predispose to weight loss, and phentermine, a drug specifically for dieting. Qsymia has been on the market since mid September.
- Arena has developed a completely new drug called Belviq (the generic name is lorcarserin). This drug is now FDA approved will become available in early 2013. The drug causes about 3% weight loss (a 200 pound person will lose about six pounds). Investors (at least some of them) are enthusiastic because the drug causes almost no side effects . . . essentially like placebo (sort of in line with the unimpressive effectiveness).
- The final company, Orexigen , is developing Contrave, another mix of two generic drugs: bupropion (aka Wellbutrin, an antidepressant) and naltrexone (a drug for alcohol or opiate addiction). Contrave, which is not yet approved, causes weight loss of 4-6%.
There are drugs for obesity already on the market. These include Meridia, Zenical, and the generic drug phentermine. While these drugs did ok commercially (Meridia at its peak had US sales of about $300m and Xenical sold almost $600m annually), they were disappointing given the potentially large market. Indeed, as the population gets heavier, the commercial market should be getting larger (no pun intended). There was one drug that was on the way to becoming a big success, the Phen-Fen combination, sold by Wyeth. However, this drug was later determined to kill people (it damaged heart valves), and Wyeth was saddled with a legal bill that ultimately exceeded $20 billion.
Why, then have these drugs generally been unsuccessful? There are several reasons:
- Weight loss is ok, but not spectacular.
- These pills are expensive costing $150 or so per month (possibly a bit less with insurance, though coverage is generally very limited)
- The side effects are often not trivial
- The weight comes back when you stop the drug
The three companies that produce weight loss drugs have been valued by the market by anywhere from $300 million to $3 billion over time. This dynamic illustrates the challenges of predicting the future . . . how much will these drugs actually sell? What will be the enthusiasm and consumer demand? Will people pay $150 for a combination of two generic drugs that they can get for $10 in total?
I’m fond of a quote by Patrick Moynihan (former NY state senator): “Everyone is entitled to their own opinion, but they’re not entitled to their own facts.” The stock price for each of these companies expresses the collective market opinion of what the future holds. The facts as to how the drugs will fare . . . well, those will be borne out over time. In the interim, it is fascinating to see the process of drug development and the investor hopes that are realized (or dashed) along the way.