You cannot read a major U.S. newspaper for more than a week before you will read something about the "obesity epidemic" in the country. To be fair, it is a serious problem with major ramifications on the health, productivity and economy of this country for years to come. But rather than fret about a problem with no clear solution, investors can do what they do best - figure out a way to make a buck off the situation.

IN PICTURES: Retire A Millionaire In 10 Steps

Diet, Exercise and Support
In terms of non-medical intervention, there are two clear leaders in the U.S. obesity market - Weight Watchers (NYSE:WTW) and NutriSystem (Nasdaq:NTRI). Here is a classic good news / bad news dilemma for investors. Both of these companies have exceptional returns on capital, strong brand value, asset-light business models and huge addressable markets. Unfortunately, that is hardly a secret on the Street, and both stocks carry valuations that do not suggest ample appreciation potential.

Over-the-Counter Options
Ever since the FDA pulled products containing ephedra off the market, there has been a dearth of proven over-the-counter options for weight loss. GlaxoSmithKline (NYSE:GSK) markets Roche's drug Xenical as Alli in the U.S. and U.K. over-the-counter markets, but sales here have been largely disappointing, with less than $300 million in sales last year.

Other pharmaceutical and food companies have tried to reap profits from the popularity of "fitness food" like protein bars and meal-replacement bars. Whether it is Abbott Labs' (NYSE:ABT) ZonePerfect, Danone's Met-Rx or Nestle's PowerBar, these businesses do well in their own right, but they are buried in such large companies that their performance does not substantially move the needle.

New Drugs on the Way
The history of prescription pharmaceuticals for obesity is writ large with disappointment. Most experimental drugs have shown too little efficacy for consideration, while those that managed to show efficacy came with side-effect profiles ranging from the unpleasant to the lethal. That may be about to change, though, as three companies hope to bring a new generation of better (and we hope, safer) drugs to market.

Vivus (Nasdaq:VVUS) has developed Qnexa for obesity. Qnexa is a once-daily oral formulation of phentermine and topiramate; both previously-approved drugs known to have efficacy in weight loss. Studies of Qnexa have shown weight loss of 10-15% over a year with common side effects of paresthesia ("pins and needles" on the skin), dry mouth and constipation.

Arena Pharmaceuticals (Nasdaq:ARNA) is hoping to get FDA approval for its drug lorcaserin. Lorcaserin has not been shown to be as effective as Qnexa, as the average patient lost about 8% of his or her body weight, but the side-effect profile seems very mild as only headaches were more common than in the placebo group. Unfortunately, lorcaserin is a next-generation drug from a category with a bad history, and although lorcaserin has not shown any cardiac risks, some doctors may nevertheless condemn it with guilt by association.

Last and not least is Orexigen Therapeutics (Nasdaq:OREX) and its drug Contrave. Similar to Qnexa, Contrave is a mixture of two other drugs, naltrexone and bupropion. Clinical trials of Contrave have shown about a 7% average weight loss, with mild nausea as the primary side-effect.

The Future of Obesity Drugs
Although an effective obesity drug has been commonly thought to be worth several billion dollars a year in sales, there has been a surprising lack of enthusiasm for these new drugs. None of the drugs have big-pharma marketing partners and all three companies may find themselves marketing the drugs by themselves. Perhaps that reluctance is due to the fact that the ingredients for Contrave and Qnexa are available as generics (though not in a single-dose pill) and the feared risks of lorcaserin, or maybe it is due to the long and disappointing history of obesity drugs.

One way or another, we will find out soon if these drugs will reach the market and whether the companies will persuade doctors to prescribe them. Vivus will be the first in front of the FDA, with a committee meeting on July 15 and Arena follows this about two months later with a committee meeting in September. I am not aware of a committee meeting on the schedule for Orexigen, but if such a meeting occurs, it will likely be after Arena. Along similar lines, final FDA decisions are due for Vivus and Arena by the end of October and the end of January 2011 for Orexigen.

The Bottom Line
There is simply too much money at stake for companies not to continue to target the obesity market. While NutriSystem and Weight Watchers are relatively safe and proven ideas, I do not see huge undervaluation in the shares. Vivus, Arena and Orexigen, though, are much more of your boom-or-bust type of situation. I think Vivus and Arena both have credible chances of success in the market, with the biggest question in my mind being whether people taking Qnexa will tolerate the higher incidence of side-effects in exchange for better efficacy. As both Vivus and Arena have cash and a pipeline extending beyond obesity, they could be worth a shot in a well-diversified portfolio. (Learn more about investing in drug companies, see Stocks On Drugs: What It Takes To Get High.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Stock Analysis

    Will J.C. Penney Come Back in 2016? (JCP)

    J.C. Penney is without a doubt turning itself around, but that doesn't guarantee the stock will respond immediately.
  2. Stock Analysis

    Allstate: How Being Boring Earns it Billions (ALL)

    A summary of what Allstate Insurance sells and whom it sells it to including recent mergers and acquisitions that have helped boost its bottom line.
  3. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  4. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  5. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  6. Stock Analysis

    When Will Dick's Sporting Goods Bounce Back? (DKS)

    Is DKS a bargain here?
  7. Investing News

    How AT&T Evolved into a Mobile Phone Giant

    A third of Americans use an AT&T mobile phone. How did it evolve from a state-sponsored monopoly, though antitrust and a technological revolution?
  8. Stock Analysis

    Home Depot: Can its Shares Continue Climbing?

    Home Depot has outperformed the market by a wide margin in the last 12 months. Is this sustainable?
  9. Stock Analysis

    Yelp: Can it Regain its Losses in 2016? (YELP)

    Yelp investors have had reason to be happy recently. Will the good spirits last?
  10. Stock Analysis

    Is Walmart's Rally Sustainable? (WMT)

    Walmart is enjoying a short-term rally. Is it sustainable? Is Amazon still a better bet?
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center