Published On Retail Investor 360: Monday, 18 August 2014 23:08 Written by Doctor Hung V. Tran, MD, MS. Disclosure: We are long on MNKD and we do not have any financial relationship with any companies we cover.
360 catalyst key
- 360 Biotech's contrarian thesis on the weight loss drugs developer published in 2013 was unwelcoming but turned out valid.
- Stock promoters who were overly exuberant on Arena, Orexigen and/or VIVUS mislead investors. However, they now spin the fact to bash on these same companies despite a substantial drop in the share price.
- The drastic share price declines widen the margin of safety for Arena and VIVUS making them safer investments than in 2013. Nonetheless, it is impossible to forecast when shares price could stabilize (at least for 360 and Warren Buffett (Trades, Portfolio)).
- No investor is expected to be correct all the time so shareholders of Arena, Orexigen and VIVUS, who purchased shares at the wrong time (but strongly believe in these companies), should write a letter to the management to share insights in helping the management to catalyze sales growth.
- Investors who believe in the vast obesity market are right, as the potential is still there … but the easier and proven way to stop obesity is via the prediabetes and diabetes markets.
- Lantus (the top-selling basal insulin for treating diabetes) is facing patent expiration soon. Most other diabetes drugmakers are either too big (little growth potential) or too little (precarious investments).
- MannKind is the most prudent choice for investing in diabetes and obesity because the company is medium sized. Now that MannKind has command of the vast armies of Sanofi sales/marketing reps to deliver Afrezza, a revolutionary diabetes treatment the world has yet to see, the potential for MannKind is limitless.
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- MNKD 15-Year Financial Data
- The intrinsic value of MNKD
- Peter Lynch Chart of MNKD
Introduction. Since 2013, when we published our first short thesis on three obesity drugmakers (Orexigen, Arena and VIVUS) they panned out as forecasted and did not perform even in the full swing of the bull market – when most stocks earned substantial rewards for shareholders. We were disappointed that our contrarian research on Orexigen and the obesity-drugmakers were unwelcome in 2013 due to the market's exuberant expectation at the time. Nonetheless, we remained convinced in our thesis despite market noises.
Investors who bought into the grandeur promises while neglecting the data paid dearly with their own cash. VIVUS shed 66 percent in shares price; Orexigen lost 18 percent; and likewise, Arena is down 36 percent since last year. Some market broadcasters disappeared while other promoters like EnhydrisPECorp attempted to spin facts and taken the imprudent position to bash Arena, VIVUS, and/or Orexigen.
Source: Google Finance
Needless to say, much has changed in the obesity market since 2013 as companies' stories are dynamic, and investors need to perform their due diligence. Both VIVUS and Arena posted encouraging sales for their lead drugs Qsymia and Belviq, respectively. Nonetheless, further distance remains before Belviq and Qsymia could become blockbusters, which are drugs that had at least $1 billion in annual sales. This research will briefly update what has changed as well as to suggest a prudent course of action for investors in going forward.
That being said; investors who lost money can recoup their losses by investing in MannKind. Shareholders who believe in Arena, VIVUS or Orexigen can also hold on to their shares, but you could write letters to the company to share your insights. Shareholders' activism, be it large or small, can be the catalyst that helps companies implement changes resulting in drastic earnings growth.
Arena pharmaceuticals. Despite Belviq data that shows modest weight reduction in clinical trials, when the drug is combined with therapeutic lifestyle changes (or TLCs) it arguably shows meaningful weight loss. Neither TLC nor Belviq alone is adequate in reducing weight loss. Interestingly, Arena has taken the proper approach because the company started a weight management support program – helping patients lose weight and also gain a plethora of medical benefits. Hence, the key to Belviq's sales growth is to market strongly its benefits when taken in combinations with TLCs.
As patients lose weight and exercise, their physical appearances and moods improve. At the cellular level, their metabolism also optimizes to result in a reduction of meaningful health parameters such as blood pressure, insulin resistance and rate of bone mineral density (BMD) loss, thus helping to prevent hip fractures.
Generic competitor. Orlistat is a popular weight management drug, which was FDA-approved in 1999. Roche initially marketed Orlistat under the brand name Xenical. Only four months into its launch, Orlistat reached blockbuster sales of more than $1 billion in revenues for Roche. In subsequent years, sales dropped drastically despite the company's extensive efforts to galvanize its sales and marketing approaches.
Perhaps Orlistat was part of a fad and by its nature will only have fleeting success. After exhaustive efforts, Roche sold Orlistat to GlaxoSmithKline (GSK) in 2006. GSK obtained the FDA approval to market Orlistat over-the-counter (or OTC), which improved the drug's presence but its efficacy and safety profile remain unchanged – and with that being said, sales persistently decline.
Interestingly, the FDA recalled Orlistat earlier this year due to tampering concerns. Therefore, the recall could only help generate more sales for Belviq and Qsymia.
If you would like to read the full research, please click on this link.