Hefty Profits in Store for Obesity-Drug Makers

The pharmaceutical world was abuzz last week with the news that the Food and Drug Administration, after much hemming and hawing, has finally voted to approve the weight-loss drug Qnexa for the treatment of obesity. Markets roiled as VIVUS' (NAS: VVUS) stock soared nearly 100% in after-hours trading, and the stocks of other drug companies with such drugs on the FDA's radar rose as well. Arena Pharmaceuticals (NAS: ARNA) and Orexigen Therapeutics (NAS: OREX) each saw stock values rise almost 17%, after the panel endorsed Qnexa.

It was a long and winding road for VIVUS, fraught with roadblocks and complications. Qnexa had been rejected more than a year ago, not for being ineffective at helping people lose weight, but for having too many side effects. Ditto goes for Arena's lorcaserin, rejected last fall, and Orexigen's obesity drug Contrave, given the thumbs-down several weeks earlier. The side effects were weighty, and serious: birth defects such as cleft palate and heart problems for Qnexa, and heart complications for both lorcaserin and Contrave. This time around, the FDA wanted more in-depth studies regarding side effects.

For these drugmakers, the FDA's position translated into increased time and expense. Orexigen estimated a $100 million price tag for its second round of study on Contrave, with a two- to three-year wait until it can once again approach the FDA for approval. And VIVUS isn't out of the woods yet, either: Though the panelists voted in its favor, they insisted on post-approval studies to assess heart complications. Why have these drug companies put themselves through all this stress and expense? In a word: money.

How much money? Quite a lot, it would seem.

Simply put, drug manufacturers bite the bullet and keep trying for approval because the market for these drugs is expanding and the potential profits are enormous. Experts estimate that nearly two-thirds of Americans are overweight or obese, and they peg the national health-care tab for treating attendant health problems at $150 billion. That's a lot of money being spent on health problems that can, the theory goes, be prevented with weight loss. In addition, a study by market-research firm Decision Resources estimates that the global demand for these treatments will create a market that was worth $420 million in 2010 and will be valued at $2.6 billion by 2020. Note that this does not include China, which is experiencing its own obesity problem because of the country's new affluence.

My take
With a burgeoning market champing at the bit to embrace weight-loss drugs, the future of these three manufacturers looks mighty bright. Hurdles remain, but there seems little doubt that these types of drugs will eventually become part of the weight-control landscape, considering the need and desire for these products. If you're looking for a growth industry whose prospects are looking especially robust, this sector might be worth a look.

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At the time thisarticle was published Fool contributorAmanda Alixowns no shares in the companies mentioned above. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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