One-third of Americans are obese as of this writing. And by 2030, more than half of Americans will be obese, according to some reports.
So if there were effective treatments to fight back this epidemic, it would be an amazing breakthrough not just for public health but for also for investors.
That, of course, is part of the shtick that previously fueled Herbalife (NYSE:HLF) … though now it is clearly just a spitting match between hedge fund managers. But it’s worth noting that weight-loss potential was part of the initial appeal in Herbalife stock that caused it to nearly double from 2009 to mid-2011. And if you believe the firsthand account of John Hempton, the obesity-fighting potential of the drinks coupled with an AA-like support group remains one of Herbalife’s strongest selling points.
But clearly, in the short-term, investors are taking the tiger by the tail with Herbalife. So what are the alternatives?
Simple: Prescription drugs.
Consider the amazing growth in big pharma across the 1990s and 2000s thanks to innovative drugs to treat heart disease. This included cholesterol-reducing statins like Lipitor from Pfizer (NYSE:PFE), and blood-thinning drug Plavix from Bristol-Myers Squibb (NYSE:BMY). Both drugs delivered $10 billion or more in revenue during their heyday.
And from 1995 to 2005, BMY soared almost 600% — without including dividends — vs. 160% for the S&P 500. PFE soared some 4,900%.
Patent expirations have sapped important revenue from big pharma as these heart disease treatments are moving into the generic realm. But a new era of blockbuster maintenance drugs might be upon us in the form of prospective obesity cures.
So what are the drugs and the companies you should speculate in to play the trend? Here are three — though remember that speculating on FDA approvals, the rate of prescriptions and other medical matters is a big gamble where facts aren’t fully known until after the fact. Make sure you do your due diligence on all these drugs and stocks before buying:
Vivus (NASDAQ:VVUS) won FDA approval of its Qsymia drug last summer, and is one of the few options out there for investors that involves a current medication instead of a prospective one. Unfortunately, Vivus is a classic “buy the rumor, sell the news” story and experienced all of its run-up in advance of approval — from around $8 to start 2011 to over $30 at the time of the approval news. Now VVUS is half that, in the mid-$14 range after bottoming around $10 last fall.
But there might be hope — investors panicked when prescriptions weren’t written as fast as they had hoped, but recent reports indicate that it may indeed be gaining traction and scripts grew 140% from October to December. If you want to bank on this first mover bouncing back, give Vivus a look.
Orexigen (NASDAQ:OREX) announced favorable developments with the FDA just a few weeks ago regarding its obesity drug Contrave. There’s still a long row to hoe here, especially considering the U.S. regulatory group demanded Orexigen focus on long-term studies in 2011 and is unlikely to allow Contrave on the market anytime in the near future.
But the progress is meaningful and buzz thus far has been positive — including rapid enrollment in a key study last summer and news just before Christmas that enrollment could be as much as 14 months ahead of schedule. That could accelerate the approval timeline … which is good if OREX has a hit in Contrave, though it will ultimately just result in a quicker implosion if the obesity drug fails to pass FDA standards.
Shares of OREX stock have run up 200% in the last 12 months, but still are almost 20% off a 52-week high set last July. Many experts estimate a 2014 launch if all goes well.
Another speculative play is Arena Pharmaceuticals (NASDAQ:ARNA). Its obesity drug, Belviq, is not yet on the market, but it’s close. Arena is hoping to launch Belviq in a matter of months following FDA approval last year.
However, the trouble of Vivus raises the question of whether ARNA will be able to hold its current valuation after a roughly 550% run-up in 12 months. There are some dependency issues that may give physicians pause, including attempts to label Belviq as a controlled substance that could severely limit the breadth of its appeal — and even has some hatching conspiracy theories that hedge funds are delaying the launch on purpose. So go into this position with your eyes wide open. The potential is big, but there are big risks too.
Anyway, speculative drug and medical device stocks are inherently all-or-nothing endeavors. You bet the farm often on a single treatment, and either it catches on and you cash in or it flops and you lose your shirt. I personally favor biotech funds instead, including the iShares Nasdaq Biotechnology Index (NASDAQ:IBB) and SPDR S&P Biotech ETF (NYSE:XBI), among others.
But if you want to swing for the fences, these three obesity plays could be attractive.
- The obesity drug rally has started. (24/7 Wall Street)
- Should you buy into the obesity drug craze? (The Motley Fool)
- JPMorgan Chase (NYSE:JPM) just called out the potential in obesity drugs at a recent event — particularly Arena Pharmaceuticals. (The Motley Fool)
- James Brumley says Vivus deserves a second look. (InvestorPlace)
- Watch the Qsimia shipments closely while you plot your strategy on Vivus. (IBD)
- What broader insurance coverage means for potential obesity drug sales. (Global Regulatory Science)
Jeff Reeves is the editor of InvestorPlace.com and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.