Submitted by Mike Anthony as part of our contributors program.
Believe it or not, the weight loss sector contains more companies than Vivus (NASDAQ: VVUS) and Arena Pharmaceuticals (NASDAQ: ARNA). Despite the constant headlines about the head-to-head competition of these two mid-cap companies, there are actually many companies with legitimate claims in this sector. Investors wanting to participate in the possible upside of the weight loss sector should take the time to understand the competition, because it is more intense than they might think.
Investors betting on the widely-anticipated approval of Vivus’ drug Qnexa or Arena’s drug Lorcaserin might want to hedge their portfolios in case of FDA rejections. Aside from orlistat, the FDA-approved and available-on-the-shelf-today standard of care in obesity drugs, there are several other treatments that could quickly capture market share or expand the market for weight loss overall. As the competition intensifies, who will win the battles for new FDA approvals, brand name appeal, and ultimate market share?
Beginning with the Biggest
Orlistat is the FDA’s only approved obesity treatment for prescription and non-prescription use, and orlistat is most commonly sold under the product name Xenical. Roche, one of the world’s largest biotech companies, owns Xenical and competes against another major orlistat drug called Alli, owned by GlaxoSmithKline (NYSE: GSK). These are the two “established” companies in the obesity drug market: Roche and GlaxoSmithKline.
Both Roche and GlaxoSmithKline use orlistat in their drugs. Orlistat is in a class of medications called lipase inhibitors. It works by preventing some of the fat in foods eaten from being absorbed in the intestines. This unabsorbed fat is then removed from the body in the stool. Roche and GlaxoSmithKline both have rights to orlistat and doctors usually prescribe it alongside a diet and exercise regimen. Prescription orlistat can be used by people with high blood pressure, diabetes, high cholesterol, or heart disease. Orlistat can also used after weight-loss to help people keep from gaining back weight.
Many people are unaware of the difference between Xenical and Alli. The most important revenue differentiator between the two drugs is that Xenical is a prescription weight loss medication and Alli is non-prescription. Alli is one of the few over-the-counter weight loss drugs ever to have been approved by the FDA.
Other than Xenical and Alli, there are no other major FDA-approved obesity drugs. In fact, common treatments for obesity still involve physical surgery: fat tissue removal or stomach restriction. Because of this, investors know that there is an outstanding need for a drug-based treatment to obesity. Beyond Roche and GlaxoSmithKline, however, what alternatives are available to investors?
1. Roche (PINK: RHHBY)
Currently available treatments for obesity: orlistat, sold under the trade name Xenical.
Research: In studies, Xenical was shown to help people lose an average of 12.4 pounds after six months of treatment. Xenical can also help people who have already lost weight maintain lower weight. In one study, 52 percent of people not taking the medicine regained the weight they had lost, compared to just 26 percent of people who continued to take Xenical.
Pros: Roche’s Xenical is the only prescription obesity drug currently approved for long-term use. It is on shelves, generating revenue, and has been administered to thousands of patients worldwide during the past decade.
Cons: Xenical can cause liver problems, uncontrolled bowel movements and gas.
2. GlaxoSmithKline (NYSE: GSK)
Currently available treatments for obesity: orlistat, sold under the trade nme Alli (available over-the-counter and non-prescription)
Research: On average, Alli tends to prevent the absorption of approximately 25% of the fat in one’s diet. Studies have shown that when used in combination with dieting, Alli helps people lose 50% more weight than they would lose by simply dieting.
Pros: Alli is approved by the FDA for over-the-counter use as a weight loss aid.
Cons: Like Xenical, Alli can cause serious liver problems, uncontrolled bowel movements and gas.
Vivus and Arena: Battling Over the FDA This Summer
Vivus (NASDAQ: VVUS) is one of the most popular stocks among biotech investors due to its drug Qnexa. The company has a market capitalization of $2.5 billion, despite having no revenues, because of an anticipated FDA approval of its Qnexa drug on July 17th. Qnexa has been through Phase 3 trials and has earned the positive recommendation of the FDA’s advisory panel for approval.
Arena Pharmaceuticals (NASDAQ: ARNA) is another popular stock among biotech investors due to its drug Lorcaserin. Arena also has a billion-dollar market capitalization despite minimal revenues, because its weight loss drug Lorcaserin is expected to be approved by the FDA on June 27th. On May 10th, FDA advisors voted 18 to 4 to recommend Lorcaserin for approval, giving it decent odds of successful approval.
These two stocks are making headlines almost every day as investors and traders jockey for position ahead of the anticipated July 17th and June 27th FDA decision dates. Volatility and options premium is very high for both stocks, indicating a broad understanding that the FDA announcements will have a dramatic impact on the stocks’ share prices. Both drugs have health concerns, from their safety for pregnant women to their risks tied to increased heart rate.
Natural Competitors: Weight Loss Without the FDA Approval
Yes, you can lose weight without paying for FDA-approved medication. Diet, exercise, and other natural treatments have helped people lose weight for millennia. Although the market for FDA approved drugs is large, there is also a significant market for natural treatments to obesity and weight management. Some of the opportunities in this sector include Weight Watchers (NYSE: WTW), ChromaDex (OTC: CDXC), Vitamin Shoppe (NYSE: VSI), Pfizer (NYSE: PFE) and GNC (NYSE: GNC), among many other health-focused companies.
According to the U.S. Centers for Disease Control and Prevention, two-thirds of Americans are overweight, and one-third of those people are obese. The bureau predicts that the U.S. obesity rate will climb from 33% to more than 40% by 2030. Thus, as Americans look for weight management solutions, they will inevitably look for natural alternatives. Weight loss drugs account for well over $200 million in annual sales, with sales expected to exceed $2.5 billion by 2020. This drug market is dwarfed, however, by the market for natural weight management. Specifically, Global Industry Analysts forecast the global market for weight-control products of all types to exceed $53 billion by 2017. The tens of billions of additional dollars beyond FDA-approved drug sales are available to companies like Weight Watchers, ChromaDex, Vitamin Shoppe, and GNC.
As an example, Chromadex has patents for pterostilbene and resveritrol, two natural compounds with USDA-backed claims for heart health. ChromaDex has studied (and will soon release data regarding) the effects of these natural compounds on weight loss, lipid control, and heart health. The study was completed at the University of Mississippi. Just as Weight Watchers or GNC stand to benefit from customers buying healthy food and vitamins, so ChromaDex stands to benefit from people seeking natural alternatives to drugs.
Although Roche and GlaxoSmithKline have enjoyed a reign in the weight loss drug market for more than a decade, they may finally meet another challenger this summer after either of the FDA decisions for Vivus and Arena. Beyond the FDA-approved marketplace, natural weight loss companies also are ramping up efforts to claim more market share in the multi-billion dollar overall market. Investors should carefully evaluate the competition and consider possible alternatives or hedges to positions in high-flying stocks.