From: Nicole Urken
Sent: Tuesday, July 10, 2012 12:51 PM
To: James Cramer
Subject: Derby: The Mad Money Metrics... and ARNA
Nicole Urken, Mad Money Research Director
Important to note that ARNA has a big-time retail investor cult following. not surprising at all that it leads the voting. So when we present it as viewer-choice winner, we will make sure to present the caveats even though there is a lot of hype
From: James Cramer
Sent: Tuesday, July 10, 2012 1:41 PM
To: Nicole Urken
Subject: RE: Derby: The Mad Money Metrics... and ARNA Balance!
Good and the bad. The fears -the moves—why we said sell half and are sticking by it. I also don’t like the enthusiasm
From: James Cramer
Sent: Tuesday, July 10, 2012 8:51 PM
To: Nicole Urken
Subject: RE: Derby: The Mad Money Metrics... and ARNA
True ARNA believers all over me tonight about how VVUS is a fraud and that I am a fraud
Nicole Urken, Mad Money Research Director
From: Nicole Urken
Sent: Tuesday, July 10, 2012 8:58 PM
To: James Cramer
Subject: RE: Derby: The Mad Money Metrics... and ARNA
Such a cult stock. Amazing.
On "Mad Money" last week, we chose to honor (and exploit) Major League Baseball’s All-Star Game by announcing the "Mad Money" Home Run Derby, looking at the five best-performing all-star stocks of the second quarter: Arena Pharma, Pharmacyclics, Onyx Pharma, U.S. Airways and Mellanox Tech. Given the outsized performance of these big hitters, we turned to viewers to vote on which would be the best performer for the remainder of 2012. Arena Pharma, the “hot new name” with a recently approved anti-obesity drug, received an overwhelming 67 percent of votes, with the other candidates trailing well behind.
Ultimately, the enthusiasm for Arena by the retail investor community is unsurprising, particularly in a market like this one with many macro overhangs. The 'animal spirits' reach for potential pockets of profit — such as a hot specs — is certainly intriguing, particularly in such an uncertain market. Additionally, a biotech stock with an anti-obesity drug is naturally going to attract retail investors given the mass consumer appeal of such a drug.
However, as Cramer noted last Wednesday after we had revealed the results, the outsized enthusiasm for Arena is troubling as well. All speculation must be tempered and adjusted for risk factors. While the tides have turned for the anti-obesity drug names — leaving fen-phen nightmare memories in the past — risks remain. First off, the stock is up about 500 percent year-to-date. So, true believers should take some profits even if they think upside remains. "Mad Money" dogma: Bulls make money, bears make money, pigs get slaughtered.
Second, market size. Some enthusiasts have likened the anti-obesity drugs to the statin market with blockbusters like Lipitor, given overlaps in patient population. However, those that would take drugs like Arena’s Belviq have to seek out the drug (“agency required”) while a drug like Lipitor will be prescribed by doctors. Not to mention that anti-obesity drugs are not covered by insurance companies currently and will likely not be covered. Plus, after it is prescribed, Lipitor is often taken either over the course of many years or for the rest of a patient's life, while the anti-obesity drugs have a much shorter usage period — likely one year at most.
Third, economics. While Arena has a $2 billion market cap, it will share the economics for Belviq with the Japanese company Eisai. So while the market cap may not seem stretched when thinking about $2 billion in potential sales, Arena doesn’t capture this upside fully. As a point of reference, peer and competitor Vivus, at an almost $3 billion market cap, does have full economics but also likely has a smaller patient population, given higher safety concerns with its anti-obesity treatment.
Fourth, competition. Arena has lower efficacy than Vivus, whose drug Qnexa is expected to face its FDA approval decision Tuesday. Arena’s drug, with a 5 percent average weight loss, is about half that of Vivus’ trials. And Vivus’ drug likely will come out before Arena’s if approved, because it will not need approval from the Drug Enforcement Agency (DEA) due to usage abuse potential like Arena does. Then, there’s Orexigen. The company’s drug Contrave is much further out (targeted 2014 approval), but this one is butting up against the others as well, with its light study enrolling faster than originally projected. Side note: While Vivus’ drug is widely expected to be approved — and while the stock will likely pop on the announcement — it is important to keep in mind that much of the potential upside is already factored into the stock. Oh, and not to mention, competition from other anti-obesity alternatives like gyms — Lifetime Fitness — or weight-loss programs — think Weight Watchers.
Competition, above all else, is key to consider, particularly looking beyond initial FDA approval. When looking at the biotech space, the stocks that have continued to outperform after FDA approval have tended to be ones where there is limited or no competition. We have seen flops from many after initial pops. Look no further than Human Genome Sciences, a name catching headlines today after GlaxoSmithKline finally completed its $3 billion bear hug embrace. While the stock got a nice boost on the original take-out rumors that are finally complete, the sale remains a disappointment relative to HGSI’s earlier stock levels — the name sold off after the approval of its lupus back in 2011. Or Dendreon, whose sole product Provenge (approved in 2010) has struggled with commercialization issues and encroaching competition from Johnson & Johnson and Medivation. The names that have outperformed post-approval — think orphan drug name Alexion and Regeneron — are ones that have had very minor competition.
All this is not to say that the anti-obesity drug companies — Arena, Vivus and Orexigen — don’t have upside remaining. With about one-third of Americans categorized as obese, there is certainly enough of a market for multiple drugs. And ultimately, as these drugs are rolled out, they will garner much attention on the news wires and beyond, ramping up hype. But the enthusiasm we saw from viewers on the names doing the "Mad Money" derby, even after huge runs, is cause to reiterate caution, diversification and tempering emotions — even for the most exciting of names. In the end, the tradeoff of higher side-effects for Vivus’ drug and lower efficacy for Arena’s drug, should instill some skepticism of the multi-billion dollar sales targets put forth by some analysts, as biotech analyst Adam Feurestein — who has covered these names carefully — has noted.
As for the novel idea of eating less and exercising more? Some of the more mainstream "Mad Money" anti-obesity plays that have been very strong performers — albeit lacking the speculative “hot” card — include GNC, Whole Foods and Hain Celestial. Non-speculative anti-obesity names to keep in mind.
The bottom line: The enthusiasm on the anti-obesity stocks has heightened, but it is key to remain non-emotional when it comes to stock picking, even when it comes to speculative names in the heat of summer. Ultimately, when it comes to obesity or the stock market, there is no magic pill. Speculation is key to remaining in the game and giving yourself some optionality on outsized return — which is why on Fridays on "Mad Money," we introduce speculative names to research. But it is also key to lock in profits and keep your enthusiasm in check. Managing risk should never fly out the window.
"Inside the Madness" appears twice a week at madmoney.cnbc.com
Follow Nicole Urken on Twitter @nicoleurken
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