Vivus’s Weightloss Drug is a Flop and 2 Hot Healthcare Stocks to Watch

HealthcareServicesShares of UnitedHealth (NYSE:UNH), Intuitive Surgical (NASDAQ:ISRG), and Vivus (NASDAQ:VVUS) are all on the move on Wednesday.

UnitedHealth: Current Price $54.10

UnitedHealth is an industry barometer for important healthcare trends, as it it is the largest managed-care provider by revenue and usually the industry’s first company to report quarterly results.

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For the three-month period ending December, UnitedHealth reported a profit of $1.24 billion, or $1.20 per share, a decrease from the $1.26 billion reported in the year-ago quarter. However, revenue for the fourth quarter rose 11 percent to $28.77, slightly beating expectations. Analysts polled by Thomson Reuters had predicted earnings of $1.19 per share on revenue of $28.24 billion.

The company’s fourth-quarter results were strengthened by the addition of approximately 600,000 new members, increasing the number of customers UnitedHealth serves to 83.7 million from 77.6 million in the prior quarter and 78.1 million a year earlier. The rise in the number of customers using its medical services bodes well for the industry as a whole, because it indicates that “former healthcare usage patterns” are picking up as the economy recovers, said The Wall Street Journal.

That trend was also evident in the company’s consolidated medical-care ratio for the quarter, a measurement that represents the portion of insurance premiums used for patient care. During the economic downturn, medical insurers were able to keep a greater portion of premiums because customers used fewer medical services. However, for the most recent quarter, UnitedHealth’s ratio grew to 80.5 percent from 79.7 percent in the previous year.
gal_intuitive_surgicalIntuitive Surgical: Current Price $515.40

While Monday saw shares of Intuitive Surgical trading up slightly after an upgrade from Lazard Capital, those gains were reversed on Wednesday after a concerning report was published by Citron Research. The firm predicted that the number of da Vinci procedures will “dramatically soften” and new machine sales will “flatline” as insurers become more aware of how much treatment cost differentials will change under Obamacare and how dangerous the surgeries are for patients.

Da Vinci procedure is a robotic surgical system used increasingly for cardiac valve repair and gynecologic surgeries. Lazard Capital saw the system as an industry leader, with very little competition, and as a result increased its rating on shares of Intuitive Surgical from Neutral to a Buy.

However, Citron’s report argued that the company had made “outrageous marketing claims” about its surgical system that leave Intuitive Surgical in danger of legal proceedings. The firm claimed that the device manufacturer failed to disclose the number of fatalities and injuries that were caused by the procedures.
Once this knowledge becomes public, the company’s profitability and share price could be significantly affected.

In the report, Citron wrote:

“What happens when it becomes clear that insurance companies will no longer pay huge reimbursement premiums for robotic surgeries? Or the FDA initiates an inquest into the patient burns and perforations unique to robotic surgeries, as yet undisclosed in Intuitive’s one-sided marketing blitz? Or the litigation against the company from injured and deceased patients gains class action status? It is Citron’s belief that none of these risks are currently priced into the stock, and they are all very real risks indeed.”Vivus: Current Price $13.65

Insurance coverage for the company’s weight-loss treatment Qsymia is the biggest driver of success for Vivus. Wall Street expected the newly launched treatment to be a success. In fact, Bloomberg healthcare analyst Andrew Berens had predicted the drug could generate as much as $1 billion per year by 2016. After all, it was only the second obesity medicine to receive regulatory approval by the U.S. Food and Drug Administration and the first to reach the market in more than ten years.

However, as recent financial results show, the company has had difficulties getting insurers to cover the drug. In the latest-reported quarter, the company’s pharmacy database showed that 30 percent of pending prescriptions were abandoned by patients due to out-of-pocket costs, which amount to $160 for a 30-day supply without insurance and $62 with a co-pay. At the time, Vivus stated that because the drug was launched only a short time before the end of the third quarter, the majority of targeted healthcare providers had had little chance to adopt the drug. But Berens disagreed. “The Street expects the drug to be a blockbuster, but it looks like a very slow launch,” he said to Bloomberg.

Berens appears to have been correct. Brean Capital downgraded shares of Vivus from Hold to Sell and reduced the price target to $7, close to 50 percent below where the stock is currently trading. In the accompanying research note seen by StreetInsider, the firm’s analysts wrote that the lack of insurance coverage had created “sticker shock” among patients. This problem will likely become worse as “the competitive environment is only going to increase” when Arena Pharmaceuticals (NASDAQ:ARNA) and Orexigen Therapeutics (NASDAQ:OREX), each with larger salesforces, release rival obesity therapies.

More than three months have passed since the drug was launched, and still only one in five patients are covered for Qsymia.

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