Weight loss is a $20 billion per year industry. Yet, it seems the more we spend on shedding pounds, the more pounds we have to shed. Today, two-thirds of adults and one-third of children in the U.S. are overweight or obese, and the numbers are climbing.
With a growing market of that magnitude and so much money changing hands, it's no wonder investors' eyes light up when they hear the words "new obesity drug."
But if you want to find the "gold in those hills," that is, to invest in a stock that will really pay off, you have to know where to look.
Because if you stake a claim in the wrong place, you may lose more weight from your wallet than your waistline…
Two Stocks: A Cautionary Tale
Back in 2012, the U.S. Food and Drug Administration (FDA) broke a 13-year dry spell and approved two new bariatric (weight loss) drugs for commercialization in the United States: Belviq (lorcaserin hydrochloride), manufactured by Arena Pharmaceuticals Inc. (Nasdaq: ARNA), and Qsymia (phentermine and topiramate extended-release), manufactured by VIVUS Inc. (Nasdaq: VVUS).
With these drugs, along with diet and exercise, a patient could expect to lose from 5% to 8% of their body weight over time.
In the run-up and subsequent FDA approval, VIVUS' shares nearly tripled, rising from about $10 the previous January to nearly $30 in July, a month after Qysimia's approval. Arena did even better, with shares rocketing from about $1.60 in January to a high of $11.81 in July – a profit of more than 600%.
But just one year later, after drug sales had failed to hit the high numbers everyone had expected, VIVIS stock fell back to the $13 range, and Arena to $8. The bottom didn't exactly fall out, but the numbers were clearly going in the wrong direction.
Obviously, physicians weren't prescribing the meds in anything like the volume everyone expected. A boost was in order, and the American Medical Association (AMA) tried to come to the rescue by declaring it recognized obesity as a disease requiring medical intervention, both for treatment and prevention.
Unfortunately, the boost didn't help.
Today, share value for VIVUS stands at about $2.43, and Arena stock is going for about $4.46.
So, what happened?
Important Considerations for Every New Drug
The most fundamental and important consideration to consider when investing in a small research and development company with a new drug is obvious: Its lead drug must be safe and effective.
A long and arduous regulatory gauntlet, including animal studies, clinical trials, and various stages of FDA review, is dedicated to establishing exactly those two criteria.
When a drug reaches commercialization stage, however, a different set of dynamics takes over: Doctors must be willing to prescribe it, and in most cases, insurance companies must be willing to cover it.
And for weight loss drugs, there lies the rub. Before Qsymia and Belviq, every drug in use for weight loss, whether approved or used off-label, had eventually been pulled off the drugstore shelves by the FDA because of onerous or even dangerous side effects.
Perhaps the most infamous of these cases involved a drug combination referred to as Fen-Phen, which contained two drugs, fenfluramine and phentermine, which together caused a deadly condition called pulmonary hypertension, as well as heart valve problems, in some patients who used them.
The lesson wasn't lost on physicians – or the FDA. For the agency's part, it refused to approve a new bariatric drug for well over a decade. As far as doctors were concerned, medications came with a risk they simply weren't interested in exposing their patients to, especially for long-term use.
So when Qsymia and Belviq became available, doctors were understandably skeptical and cautious. They had been burned before.
And then there was the problem of insurance coverage. In short, most plans wouldn't cover this type of drug.
To a lot of people, that policy didn't make sense. According to the Centers for Disease Control and Prevention (CDC), obesity came with a whole host of risks for serious, often life-threatening, health problems including:
- Coronary heart disease, stroke, and high blood pressure
- Type-2 diabetes
- Cancers, such as endometrial, breast, and colon cancer
- High total cholesterol or high levels of triglycerides
- Liver and gallbladder disease
- Sleep apnea and respiratory problems
- Degeneration of cartilage and underlying bone within a joint (osteoarthritis)
- Reproductive health complications, such as infertility
- Mental health conditions
You would think a little preventive medicine where obesity is concerned would save insurance companies a ton of money, but for the time being, many, if not most, of them are digging in their heels.
The resultant cost to patients averages about $2,400 per year. A 25-year-old person dealing with obesity could easily be looking at a lifetime expenditure of $120,000 or more. Understandably, they're resistant to paying – especially when the media insists on labeling obesity as a self-control problem, not a medical one.
For patients who still want a bariatric drug but at a bargain basement price, they can still get phentermine, which turned out to be the safe half of the Fen-Phen combination, for a few dollars a month.
For investors, these factors have resulted in lackluster returns for VIVUS and Arena. Docs don't want – and don't know how – to prescribe the drugs, insurance carriers don't want to cover them, and patients don't want to pay out of pocket.
I should mention that Novo Nordisk A/S (NYSE ADR: NVO) also had an injectable weight management drug, Saxenda, approved in December. But given the average patient's aversion to injection, I wouldn't be surprised to see Novo Nordisk do even less business with its drug than the other two firms did with theirs.
So for investors, it looks as if weight loss drugs have turned out to be fool's gold.
About the Author
Ernie Tremblay has more than 25 years of experience in following and analyzing the latest developments in health, medicine, and related technologies. He understands the FDA approval process, as well as the "hard science" behind new, experimental drugs and the market demand for them - and has a comprehensive grasp of the complex dynamics that determine whether a new drug will be a breakthrough winner, or just another casualty of the FDA approval process.