3 Ways to Trade Diabetes Treatment

by Will Ashworth | June 26, 2013 7:00 am

The American Diabetes Association announced a new program June 23 called Pathway to Stop Diabetes[1], established to provide research grants to a minimum of 100 diabetes researchers during the next 10 years.

The $27 million in funding from individuals and corporations will allow the best and brightest to seek a cure for a disease that affects 26 million Americans and another 79 million who are living with pre-diabetes.

It’s great news, especially if you’re one of the many companies looking to capture a piece of the profits. I’m not trying to be cynical, but diabetes is big business and growing every day. Who are the winners in this highly contested field? I’ll give you my large cap, mid cap and small-cap recommendations.

Large Cap

You don’t have to be a medical expert to know that Novo Nordisk (NVO[2]) is the grandaddy of pharmaceutical companies when it comes to the treatment of diabetes. In business since 1925, it’s always been focused on the production and sale of insulin. In 2012, its diabetes care segment generated $10.8 billion in revenue, or 78% of its overall sales. In just two years its diabetes business has grown by 33%, with North America playing a vital role in its growth — in 2012, North America was responsible for 80% of its diabetes-related revenue. If you’re looking for a pure-play in diabetes — this is it.

Tresiba — Novo Nordisk’s latest insulin product that’s currently selling in Europe and parts of Asia — was hit with a setback in February when the FDA required it to undergo a 12-month clinical trial to evaluate the cardiovascular effects of its new drug. Originally expected to be available in the lucrative U.S. market sometime in 2013, it now could be on the sidelines until 2018. The threat of competing products from both Sanofi (SNY[3]) and Eli Lilly (LLY[4]) hitting the market sooner has NVO’s stock down 6.4% year-to-date through June 24 (compared to positive returns for both its rivals).

It’s important to remember that the setbacks currently faced by NVO will also happen to other companies looking to bring diabetes drugs to the U.S. market over the next several years. Novo Nordisk’s position within the diabetes marketplace should ensure Tresiba’s success here once it’s available. I would continue to buy its stock on weakness until its eventual green light. It’s the best of the big boys.

Midcap

While I hate being a bandwagon-jumper, I’m going to have to go with Isis Pharmaceuticals (ISIS[5]), whose ISIS-APOCIII-Rx antisense drug is currently in Phase II clinical trials. Its stock gained 20%[6] Monday on news the drug was able to reduce the triglyceride levels of 11 diabetes patients over a 13-week period. High triglyceride levels is a major cause of cardiovascular disease and strokes. In addition, the drug exhibited that it improves blood sugar control. Given that obese people are more likely to suffer from diabetes and heart attacks, this is welcome news for those unable to control their triglyceride levels.

BMO Capital believes the drug could add $11 per share to its stock price and ultimately generate $850 million in peak annual sales. Given it’s never had revenue of more than $122 million, the upside potential is tremendous. That said, it’s important to remember we’re talking about a company with no profits and a drug that’s still got Phase III trials and subsequent approval ahead of it.

For those who like the stock but want to play it a little safer, I’d consider the PowerShares Dynamic Biotechnology & Genome Portfolio (PBE[7]) instead. ISIS is a top-10 holding at 3.74% of the portfolio and the average market cap in the fund is $15 billion, providing some protection from its large-cap biotech brethren.

Small Cap

My final pick is so small you really have to wonder why it’s a public company. Decision Diagonostics (DECN[8]) is a little-known, California-based business whose primary product could rock Johnson & Johnson’s (JNJ[9]) world. According to Forbes, DECN’s Pharma Tech Solutions subsidiary has a test strip[10] product called Genstrip that’s designed specifically for JNJ’s LifeScan Ultra glucose monitoring meters. Over the past decade, JNJ has sold something like $5 billion worth of meters; the test strips are used anywhere from two to eight times per day and selling for $1.25 a pop. DECN, whose own product was approved by the FDA last November, sells for about half the J&J product’s cost, prompting the healthcare giant to sue.

JNJ practically has a monopoly on this market. However, if DECN is able to successfully get its product into the hands of those who need it, it will simultaneously save diabetes patients money while making investors rich. Currently trading around 24 cents, let me remind you that this is an entirely speculative investment, and because of its low trading volume should only be dealt with using tight stop-losses. Do not consider it for your retirement portfolio.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Endnotes:
  1. Pathway to Stop Diabetes: http://www.marketwire.com/press-release/pathway-stop-diabetes-the-american-diabetes-associations-bold-new-research-initiative-1804747.htm
  2. NVO: http://studio-5.financialcontent.com/investplace/quote?Symbol=NVO
  3. SNY: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNY
  4. LLY: http://studio-5.financialcontent.com/investplace/quote?Symbol=LLY
  5. ISIS: http://studio-5.financialcontent.com/investplace/quote?Symbol=ISIS
  6. stock gained 20%: http://www.bloomberg.com/news/2013-06-24/isis-gains-most-in-five-years-on-diabetes-drug-results.html?cmpid=yhoo
  7. PBE: http://studio-5.financialcontent.com/investplace/quote?Symbol=PBE
  8. DECN: http://studio-5.financialcontent.com/investplace/quote?Symbol=DECN
  9. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ
  10. test strip: http://www.forbes.com/sites/genemarcial/2013/03/11/jj-faces-potentially-disrupting-competition-in-its-lucrative-glucose-monitoring-business-from-tiny-diagnostics-outfit/

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