Arena, Vivus Look Good (And It Has Nothing to Do With the AMA)

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Score another one for weight-loss pharmaceutical makers Arena Pharmaceuticals (ARNA), Vivus (VVUS) and, eventually, Orexigen Therapeutics (OREX).

The American Medical Association — against a recommendation not to — has deemed obesity to be a disease, with all the rights and privileges thereof. Specifically, the AMA believes the “disease” designation will change the way the healthcare and insurance industries treat the disease now that it’s recognized as more than a mere “condition.”

Translation: Doctors should start prescribing medicine as an obesity treatment, and insurance companies should start reimbursing it.

No pun intended, but fat chance.

Reality Check

Before visions of weight-loss-drug-driven profits start to dance in investors’ heads, chew on this: The American Medical Association has no legal authority to make insurers cover certain treatments. That’s still essentially up to the insurance companies, though it’s under the scrutinizing eye of the FDA, with the U.S. legal system being the final authority on the matter in the rare case where major coverage disputes materialize.

Moreover, the AMA has no authority to dictate how a doctor addresses a particular condition, whether or not it’s officially deemed a disease. That matter still (mostly) falls under the FDA’s jurisdiction when a drug is prescribed.

Oh, and by the way, there’s not even an official and widely accepted definition of the term “disease,” underscoring the uselessness of the American Medical Association’s decision.

In that light, today’s early-morning pop in shares of Arena Pharmaceuticals, VIVUS and Orexigen Therapeutics would seem errant, and doomed for a pullback once investors realize how irrelevant the announcement is (in fact, OREX had already slid back into the red as of this posting).

It’s not necessarily a reason to throw in the towel, though.

On the Other Hand

Just for the record, it’s likely that a grand total of zero doctors in the United States are going to alter their view on the obesity epidemic, or how to treat it.

The fact of the matter is, doctors know obesity is a problem that is fairly common in the United States, and largely attributable to the American lifestyle. There are exceptions to that norm, but by and large, Americans eat too much, exercise too little and, broadly speaking, make poor health decisions. Some obese patients simply have metabolism problems beyond their control, but doctors generally know the difference between the two reasons for obesity, and make appropriate — and realistic — treatment recommendations. Naming obesity a disease doesn’t improve a physician’s diagnosis capacity, nor does it offer new treatment options.

It’s also unlikely that the insurance companies will suddenly clamor to cover obesity prescription costs. The AMA ruling certainly will nudge the insurance industry in that direction, but it’s a small nudge … and insurers were already pointed in that direction to begin with.

As proof of that low-fat pudding, VIVUS’ Qsymia is in fact already covered by insurance companies in some cases — about a third of the time an insurance claim is made to purchase it. Those still aren’t mainstream-caliber statistics, but it’s a start — and an impressive start given how most obese people got that way by their own hand.

Bottom Line

If Arena and VIVUS shares behave as they historically have, this encouraging news might get a couple of days’ worth of traction, then fizzle out as investors once again make sales-growth their key concern. Don’t worry about the surge or the subsequent fizzle — they’ll become as irrelevant as the American Medical Association’s decision is within a couple of days.

Both stocks are long-term ideas, as Orexigen Therapeutics will be if it can win the FDA’s approval for Contrave later this year. They’re long-term ideas, however, based on the growing willingness of insurers to help patients pay for it. That’s something insurers seem to be willing to do, but still are trying to figure out how to do cost-effectively.

One solution to that end has been the growing movement to charge different monthly insurance premiums for customers of different weight levels. It’s a decision that has ruffled the obvious feathers, but not a decision that has been reversed or argued. Given enough time, weight-based insurance costs might well become the norm, the way the industry offers different premiums for smokers and non-smokers.

In the meantime, the fact the FDA (an agency with more political and legal clout than the AMA) has approved two weight-loss drugs within the past year after not approving any over the prior 10 years certainly implies a slow shift toward a mainstreaming of weight-loss drugs. And as Obamacare continues to wiggle its way into how insurers do business and what they cover, prescription weight-loss drug coverage could become the norm rather than the exception.

Arena and VIVUS will be just fine, but it’s got little to do with the AMA’s call.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2013/06/arena-vivus-look-good-and-it-has-nothing-to-do-with-the-ama/.

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