Under the Radar
Weight-Loss Gainers
By Lawrence Carrel Published: May 12, 2006
AN EFFECTIVE TREATMENT for obesity is becoming the holy grail of the drug industry. About 127 million, or 64.5%, of all U.S. adults are overweight, according to the American Obesity Association. That's nearly two out of every three Americans over 18, which adds up to quite a market for the maker that can perfect a safe weight-loss pill. Judging by investors' reactions of late, some small-capitalization companies are deemed to be getting close.
Early Wednesday, Vivus (VVUS: 4.75, -0.59, -11.1%) reported positive results from its midstage obesity-drug trial. The Mountain View, Calif., biotechnology company announced that a Phase II study of 200 obese people showed that more than 50% of the patients taking Qnexa, an orally administered appetite suppressant, experienced a 10% or greater loss of total body weight over six months. Mean weight loss in the Qnexa group was 25.1 pounds, compared with 4.8 pounds in the placebo group. Vivus said people continued to lose weight after the study ended and that the drug was well tolerated. By Thursday's close, Vivus shares had posted a two-day surge of 63% to $5.34.
"What is an accomplished expert in the field of sexual dysfunction doing with an obesity drug?" asks Marc Robins, principal of Robins Group, a Portland, Ore., institutional brokerage. "They ran into something serendipitous, and after trial and error they discovered a blockbuster." (Robins owns shares of Vivus.)
People may remember Vivus from the late 1990s, when Muse was the premier treatment for male impotence. While effective, Muse, approved in 1996, needed to be taken invasively. (Suffice it to say there's a medicated pellet and disposable plastic applicator involved.) The introduction of a little blue pill called Viagra in early 1998 all but did in Muse. Vivus's annual revenues fell from $130 million in 1997 to $14.7 million last year. The stock plunged from more than $40 in 1997 to $4 a year later. Vivus still sells Muse, but not much of it. For the first quarter, the company's revenues were $1.3 million. Its net loss of $8.8 million, or 20 cents a share, missed Wall Street's estimates by a nickel.
Sexual dysfunction remains important for Vivus. Avanafil, its new treatment for erectile dysfunction, just completed a Phase II trial. Alista, a treatment for female sexual dysfunction, is in a Phase II trial. And a testosterone spray to counter a lack of desire in women will soon enter a Phase II trial. Last Friday, Evamist, an estrogen hormonal treatment to reduce hot flashes associated with menopause, proved effective in a late-stage trial. Vivus said it would file a new drug application later this year. According to Tim Morris, Vivus's chief financial officer, the estrogen market is worth $1.5 billion. The stock rose just 7% to $3.40 on that announcement.
That's because fat is where it's really at. Robins says the obesity drug could generate sales between $2 billion and $4 billion annually. Vivus expects Qnexa to enter a Phase III trial next year and hit the market no earlier than 2010. Before then, the company will likely need to team up with a deep-pocketed partner.
"A reputable, large and well-known partner is key to advancing Vivus's pipeline to successful product commercialization," wrote Ken Trbovich, an analyst at Canadian investment bank RBC Capital Markets, in a research note Thursday. "If Vivus is unable to secure timely partnerships for Avanafil and the testosterone spray, these programs could be delayed."
Vivus projects an annual cash burn rate between $20 million and $22 million, and as of March 31 it had $21.2 million on hand. Vivus also on Wednesday announced it has sold $12 million worth of its common stock, or 3.7 million shares, to two institutional investors.
"The obesity drug news was unexpected, and it's huge," says Robins. "All of a sudden a whole new perspective has been placed upon this company and on its portfolio. I think it was orchestrated — the Evamist data, the announcement of an analyst presentation next week and now the obesity drug. More important than boosting the stock, this improves Vivus's position when negotiating marketing and development deals with the big drug houses."
This Is In
Arena Pharmaceuticals (ARNA: 13.62, -0.26, -1.9%) is another biotech trying to stake a claim in the weight-loss space. On Tuesday, its shares jumped 15% to $15.88 after it halved its first-quarter loss to $12.7 million, or 30 cents a share. Revenues nearly tripled year-over-year to $12.1 million. But by Thursday's close, shares had fallen back to $13.88.
Investors, while pleased with the financial results, seem more interested in clinical results. Lorcaserin, Arena's obesity candidate, is expected to enter Phase III trials later this year. In December, Phase II testing showed patients taking the appetite suppressant lost 7.9 pounds over 12 weeks, compared with 0.7 pounds for those taking a placebo. During the first quarter, Arena, based in San Diego, completed a $169 million follow-on offering, bringing its cash position to $291.1 million. George Fulop of New York investment bank Needham & Co. predicts an annual cash burn of $74 million. The last time we wrote about Arena, it said it didn't expect to submit the drug for approval before 2009.
"The recent decline in Arena's stock price [to $13.22] offers an attractive entry point, and Arena remains one of our top picks for 2006," wrote Fulop on Tuesday, reiterating his Buy rating and $23 price target. "We believe Lorcaserin in on track for initiation of Phase III trial in the second half of 2006.... Arena also bolstered its balance sheet, and is in a strong position to develop its five internally discovered compounds." It also has a diabetes drug and an insomnia treatment in its pipeline. (Needham has an investment-banking relationship with Arena.)
Obesity remedies aren't limited to the prescription kind. Nutrition 21 (NXXI: 2.10, -0.13, -5.8%) is now hawking its nutritional supplements aimed at combating weight gain and diabetes in drug stores nationwide. Often caused by obesity, diabetes is the fifth deadliest disease in the U.S. Chromax, based on the active ingredient chromium picolinate, is a supplement for nondiabetics that the company claims improves blood sugar metabolism and deters weight gain. Diachrome is a nonprescription supplement marketed to sufferers of type 2 diabetes.
Nutrition 21 had made money by selling ingredients to supplement retailers like Solgar and Twinlabs. It has now shifted its business model to marketing its own branded proprietary products such as Chromax and Diachrome. The move has been greeted enthusiastically so far. Six major retailers have committed to stock the supplements. Year-to-date (through Thursday), Nutrition 21 shares are up 260%. Last year, the Nasdaq Stock Market threatened the company with delisting for trading under a $1.
For the six months ended Dec. 31, the company posted a net loss of $4.2 million, or 11 cents a share, vs. a loss of $1.5 million, or four cents, in the year-earlier period. Half-year revenues declined to $5.7 million from $6.4 million. Over those six months, cash and short-term investments fell 20% to $6.9 million.
Management's promise that retail sales from Chromax and Diachrome will start coming in during the second half of 2006 provides encouragement to William Prather, an analyst with J.M. Dutton, an El Dorado Hills, Calif., firm that provides issuer-paid research.
"We believe Nutrition 21 has an excellent chance of being successful with their commercialization efforts," says Prather. "We estimate the chromium picolinate supplement category generates over $100 million annually."
Prather thinks the stock could move higher as the company penetrates new markets. The biggest risk, he says, lies in convincing doctors and pharmacists to recommend Nutrition 21's supplements.
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