Obesity: The next investment driver

As Americans get fatter, so might your wallet.

By InvestorPlace May 11, 2012 10:41AM

By James Brumley

 

If you're reading this, odds are you already know the FDA's advisory panel has ruled favorably on Arena Pharmaceuticals' (ARNA) Lorcaserin, one of the first weight-loss drugs in more than a decade that to have a real shot at winning the FDA's final approval.


Arena shares opened up about 75% Friday as a result, and the move not only legitimizes the company but also bodes favorably for other companies working on similar diet pills.

 

Frankly, though, the real story here is bigger than one drug -- or even two or three.

 

How big is the obesity issue? It's big enough that the FDA and the advisory panel are not only considering, but reconsidering, two obesity drugs that were previously vetoed by the body -- two drugs that just a few years ago would have been scoffed at after the fallout from Fen Phen and other diet pills. Fen Phen was an appetite suppressant that, after it had been marketed, was found to cause heart damage in some users.

 

Arena's Lorcaserin, of course, is one of those two obesity drugs that were sent packing the first time the company sought its approval back in 2010. The other one is Vivus' (VVUS) Qnexa. It also originally was rejected by the advisory panel back in 2010 but given the green light back in February of this year and sent to the FDA for the final say-so in July.

 

Not that it's impossible to get the nod of approval the second time around, but it's tough -- the panel generally doesn't care to reverse previous decisions. When the need is there, though, the FDA's gotta do what the FDA's gotta do.

 

The second chance being given to Arena and Vivus should verify that the need is indeed there.


Epidemic means opportunity

The estimates vary slightly, but all of them are staggering. One study suggests that approximately 150 million people in the United States are considered obese, or overweight. The CDC's figures say two-thirds of Americans are overweight, with one-third being obese (presumably there's overlap). The CDC further says more than 40% of us will be officially obese by 2030, at our current rate of progress.

 

It's not like these people aren't spending money to help solve their problem, though. They are. In fact, obese people likely will spend $222 million on weight-loss drugs alone this year, with the figure hitting (and this isn't a misprint) $2.6 billion by 2020. Global Industry Analysts is forecasting that the global market for weight-control products (all types) will reach $53 billion by 2017.

 

How does the fat-busting pill industry grow from a couple hundred million dollars to a couple billion in less than a decade when it has been dead in the water for so long?

A big part of the challenge so far has simply been the lack of a pill that was worth the risk.

 

There's a reason the FDA hasn't approved a true prescription diet pill since giving the thumbs-up to Roche's (RHHBY) Xenical back in 1999. All the others introduced to the FDA in the meantime were either ineffective, or dangerous, if not both -- and that's assuming they even made it that far. Merck & Co. (MRK) halted the development of its obesity pill taranabant in 2008, and it wasn't alone in pulling the plug on diet pill development.

 

A handful of over-the-counter choices have surfaced in the meantime too, but to tepid results. GlaxoSmithKline (GSK), for example, introduced its Alli system as a potential weight-loss game-changer back in 2007. The product didn't get much traction sales-wise, possibly because users have said its weight-loss results were unimpressive. Being linked to liver damage in 2010 (another reason for the FDA and its advisory panel to be skeptical since then) might have been the death blow for Alli.

 

Point being, while the diet-pill market has been unimpressive to date, it's not because need and demand are weak. It's because no company has actually safely met that need yet. Vivus' Qnexa and Arena's Lorcaserin are the best bets yet in a string of diet-pill introductions that could get the industry over that hump.

 

Take the hint

While the recent focus has been two diet pill names, it's not like they're the only ways to play the accelerating anti-obesity trend. (They're good ways, but not the only ways.)

 

Weight Watchers International (WTW) is one of the other possibilities. It's the diametrical opposite of losing weight by taking a pill, but it's still a proven choice. The club/group-oriented organization posted record revenue and earnings in 2011, and is perfectly positioned as the alternative to dangerous pills in the brewing war on obesity.

 

Whereas Weight Watchers is the non-pill alternative, Orexigen Therapeutics (OREX) is smack-dab in the middle of the diet-pill race with Vivus and Arena. It's just well behind the two leaders. Orexigen is working on Contrave, which should get its second chance with the FDA advisory panel sometime in 2013 after the FDA shot it down in early 2011. As Arena and Vivus can both testify, never say never.

 

Last but not least, while diet pills and weight-loss food, like NutriSystem (NTRI) meals, are expected to garner the lion's share of what's on pace to be a $53 billion global business within five years, the fastest-growing segment in the obesity industry is actually going to be devices and equipment that help obese people lose weight.

 

EnteroMedics (ETRM) provides an example. Its implantable neuromodulation system sends electrical pulses to regulate signals of hunger and fullness between the brain and the vagus nerve. It's more than a little Star Trek-ish, but the field is proving more and more viable every year. The company could file for approval of the device in the U.S as early as next year.

 

Bottom line? No matter how you slice it, there's investment opportunity in obesity ... $53 billion worth within five years, to be exact. And odds are good there will be more than one way to win. Like dieting, though, it could take a little patience to reap the full reward.

 

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

 

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1Comment
May 11, 2012 11:06AM
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Keep eatin so I can make some money. Buy Pharmaceuticals and restaurants.
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