The Obesity Drug
A Great Internet Stock
Last weekend's cover story in Barron's was about a couple of drugs designed to target Alzheimer's disease: Solanezumab, by Eli Lilly (LLY), and bapineuzumab, by the partnership of Pfizer (PFE), Elan (ELN) and Johnson & Johnson (JNJ).
Both drugs are delivered intravenously and both have a chance of being approved by the FDA in the year ahead.
But neither drug claims it will cure the disease, which affects roughly 26 million people globally; all they claim to do is slow the rate of progression of the symptoms. Still, with the current cost of Alzheimer's treatment estimated at roughly $150 billion per year, many investors are salivating at the prospects for commercial launch(es).
Here's my two cents.
Most important is to recognize that these are very large companies. Pfizer had $67 billion in revenues last year, Johnson & Johnson had $65 billion and Lily had $25 billion.
So even if these Alzheimer's drugs are approved and are home runs, they're still not going to budge these stocks in a big way.
Little Irish Elan, with $1.3 billion in revenues last year, could be attractive to growth-oriented investors ... but it has a rotten earnings record and its stock is quite volatile. I think the risk is too high with Elan.
Now, some investors will point to Pfizer's last home run, Viagra, which helped the stock soar from 4 in 1994 to 50 in 1999, and ask why Pfizer can't duplicate that feat. The difference is, when that run started, Pfizer was an $8 billion company ... and we were in a great bull market.
Furthermore, Viagra did not cure a complex disease; it enhanced lifestyles, so much that the drug is still popular. And the issues of diagnosis, effectiveness and reimbursement were and are relatively simple.
The expected Alzheimer's drugs, if approved, will face a more challenging environment on every front.
First is the question of diagnosis; how do you differentiate between simple forgetfulness, Alzheimer's and dementia? Where do you draw the line? And who gets to draw the line, the drug companies (and their lobbyists) or the reimbursers? Sadly, it won't be the doctors.
Second, how do you know the drug is working? Given that the only expected goal is to slow the progress of the disease, might the drug companies be able to claim success in every case by simply saying, "It would have been worse."?
And by extension, might the drug companies try to claim that everyone should take their drugs, as a kind of insurance policy against developing Alzheimer's?
Third is the very messy business of reimbursement. Supposing approval is granted, will private insurers and Medicare/Medicaid buy the drug companies' promises, offer coverage for the drugs (guesses peg the costs at $5,000 to $20,000 annually) and then pass the costs on in the form of higher premiums (taxes)?
Or will someone stand up and say, "This has gone too far. We can't afford this. It's better to invest health care dollars on young people than to squander them on the old, who are going to get worse, regardless."
I expect it will be interesting ... and because the stakes are high, a lot of money will be spent by these companies pushing their case.
In the meantime, my prescription for avoiding (perhaps just deferring) Alzheimer's is the cheap and sensible one. Eat lots of fruits and vegetables and fish and less of everything else. Maintain a healthy weight; mine is pretty much unchanged since high school. Exercise. And continue to exercise the brain as much as possible, too.
But I want to know what you think. Does the world need an Alzheimer's drug or two? How do you think these drugs will fare, and how might they affect your life?
Moving on, last week brought another recent announcement about a revolutionary drug. It's the obesity pill Qnexa, which came one step closer to FDA approval when outside advisers voted 20-2 in favor of approval.
The developer of the drug is Vivus (VVUS), a little California company that's been around since 1991, but hasn't made a profit in the past decade.
But that's irrelevant to the stock's supporters today ... who are a far different bunch from the institutional supporters of Eli Lilly, Pfizer and Johnson & Johnson.
For one, VVUS was trading under $10 a share just a couple weeks ago; now it's trading around 23. Volatility has always been part of this stock's story.
But for investors who can tolerate the volatility, might it be worth a flyer?
Again, my answer is no ...
... which doesn't mean the drug and/or the stock is destined to fail, but that the stock's risk/reward parameters are unacceptable to me ... and to all of Cabot's various investment disciples.
First, there's medical risk, which is substantial given that previous diet drugs have been sidelined because of nasty side-effects on users' hearts, and given that half of Qnexa is phentermine, which gained notoriety as half of the Fen-Phen diet pill, which was pulled from the market because of its links to heart disease.
Qnexa combines that same phentermine with the epilepsy drug topiramate, sold under the name Tomamax. To date, the main side-effects of the combination appear to be dry mouth, tingling in fingers and toes and constipation. Less frequent side effects include increased heart rate, heart attacks and arrythmias, as well as the possibility of birth defects like cleft lip and palate. Vivus has said it will formulate a plan to ensure pregnant women do not take the drug.
Second, there's company risk. Though Vivus is working on drugs to treat obesity, diabetes, sleep apnea and erectile dysfunction, the sad truth is that the company has not had a profitable year since 2000. Furthermore, we note (and we remember!) that from 1995 through 1997, at the same time Pfizer stock was shooting ahead on the strength of Viagra, VVUS was soaring because it had a competing injectable drug for treating erectile dysfunction. The market spoke, (the pill was highly preferable to the injection) and VVUS has never been as high since.
Third, there's market risk. As mentioned earlier, the investors in VVUS (to date) have not been institutions; they've been individual investors who are hoping to get rich quick. The doubling of the stock in the past few weeks has made some of them "rich," but it's also created a new group of owners, who bought after the surge, and now impatiently await their profits. What this stock won't be is stable, so for most investors the stock simply carries too much risk.
Now, as a human concerned about the obesity problem in the U.S., I hope Vivus hits a home run. I hope the side effects of Qnexa are minimal, and I hope other companies piggyback on its success to rein in the epidemic of overweight diabetics in the U.S.
But as an investor, I know the best prospects for success come by following the tried-and-true investing rules used by Cabot advisories ... which lead to exciting (and successful) companies like ... Equinix (EQIX).
Equinix is one of those invisible companies that make the Internet work but seldom show their faces to retail users. You can think of Equinix as the landlord of the Internet, in that it rents space and services to a variety of commercial entities.
What those companies get when they locate their servers in an Equinix facility are reliable electrical power, security and access to telecom lines from a variety of providers. They also get the functional advantage of being very close to other providers; Equinix, for example, is now advertising that if you place your servers in their Washington, DC facility, you'll have direct access to Amazon Web Services.
Today Equinix hosts more than 4,000 enterprises in 39 data centers in 12 countries on five continents. These include:
7 of the top 10 video sites
8 of the top 10 websites
9 of the top 10 advertising sites
5 of the top 5 social networking sites
4 of 5 smart phone platforms
300+ cloud providers
500+ IT service providers
And business is growing!
In the fourth quarter, revenues grew 25% to $431 million and earnings grew 21% to $0.35 per share.
Plus, the chart is strong!
Equinix has been in Mike Cintolo's Cabot Market Letter Model Portfolio, for over a month, and subscribers who've followed his advice already have a profit of more than 20%.
Here's what Mike wrote in his initial buy recommendation:
"The stock was one of the first to lift off, which is always a good sign; shares reached a four-year price high last week. As for the story, the company is attractive to us because of its position at the heart of the Internet; the firm's six million square feet of data center space and its various co-location and interconnection services make it the go-to player for companies doing business online. Cloud computing is helping the cause, of course, but the idea is broader than that--as Internet usage picks up, Equinix is sure to benefit as companies look to expand their networks or speed up their applications. The business is capital-intensive, and Equinix is still spending plenty of money expanding its data centers. Most of its revenue is recurring (monthly or quarterly payments), resulting in at least 15 straight sequential quarterly gains in the top line."
So, you could just take a flyer and buy it now, but then you'd be on your own.
I recommend you join Mike's happy subscribers. Details here.
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory
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