Profiting From Vanity

The health-care sector tends to be fairly resistant to recessions, but there's one sector -- cosmetic treatments -- that is more dependent on discretionary spending. With the economy improving, now seems like a good time to take a look at the players in the space.

Ever-expanding use
Without a doubt, the most famous drug in this category is wrinkle remover Botox. Fortunately for its manufacturer Allergan , Botox is approved for more than just wrinkles. The company estimates that about half of the sales go for therapeutic uses, including migraines, urinary incontinence, eye disorders, and a few other diseases.

In 2012, sales for therapeutic indications grew 13% compared to an 8% increase in total sales. Do the math, and you can figure out that the cosmetic uses barely increased year over year. Part of that probably has to do with the economy, but competition from Valeant Pharmaceutical's Dysport and MerzPharma's Xeomin isn't helping. Botox still has a vast majority of the market, but if it didn't have any competition, sales growth would undoubtedly be higher.

Allergan's cosmetic sales might get a boost from the recent approval to treat crow's feet. Unfortunately, it may also get more competition from a big player. Johnson & Johnson  is reportedly developing an anti-wringle drug of its own.

One chin is better than two
This month Kythera Biopharmaceuticals posted positive data for two phase 3 trials for its drug candidate ATX-101. It treats reduction of submental fat, which commonly presents as a double chin.

The data are somewhat subjective, using two different scales -- the Clinician-Reported Submental Fat Rating Scale and the Patient-Reported Submental Fat Rating Scale -- but even taking that into account, it still appears the drug cuts submental fat much better than placebo. Patients experienced two grades of improvement on the scales in 13.4% to 18.7% of the patients taking ATX-101 compared to 0% to 3.2% in patients getting placebo.

Investors should keep in mind that the risk-benefit analysis that the FDA does with each drug is highly dependent on the disease a drug treats. Drugs for terminal illnesses can have worse side effects than those that treat more mundane issues like double chins. There were no serious adverse events, but even mildly adverse ones could be enough to keep the FDA from rejecting the drug. Kythera said they were "predominately" transient, but 4% of subjects discontinued the study due to adverse events. Until we get more information, I'm not willing to declare ATX-101 an easy approval just yet.

and Arena Pharmaceuticals have had slow launches with their obesity drugs in part because patients aren't willing to shell out every month to pay for the drugs.

VIVUS, which launched Qsymia first, learned the hard way when 30% of the early prescriptions were abandoned. The company quickly figured out that it would have to deeply discount the initial prescriptions and Arena's marketing partner Eisai followed suit and started sampling as soon as it launched Belviq.

While the discounts have helped bring in patients, it's a hard road to blockbuster status when net revenues are 50% of what they should have been if everyone were paying full price. An improving economy could help the companies draw in more full-paying customers. Increasing coverage by insurers will also help dramatically.

While I've included obesity drugs that treat cosmetic treatments, insurers are increasingly realizing that obesity is a medical condition because it leads to other diseases like heart attacks and diabetes. Insurers can theoretically save money in the long term by helping patients lose weight now.

Perhaps by the next recession obesity drugs will be practically resistant to it.

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Fool contributor Brian Orelli has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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