According to recent data, the type 2 diabetes market will grow to $50 billion by 2021. This, of course, does not take into account type 1 diabetes, which also is a large industry. Therefore, with this market being so large, there are clearly great gains to be created, with new leaders and drugs that will emerge to reap the benefits. The problem is that this market is well saturated with numerous products, as it has produced some of the biggest blockbusters, but also quite a few duds that were unable to compete with the long-line of current diabetes drugs. With that said, for a product to be successful in the next decade it must bring something new to the table --be transcendent -- in order to compete with the big pharmas that own this space. Hence, let's look at why this is a fact and explore a couple of companies that might have what's needed for success.
Even Innovating Insulin Products Face Risk
MannKind (NASDAQ:MNKD) was one of the better performing biotechs of 2013, as investors anticipated both final data on two Phase 3 trials in treating type 1 & 2 diabetes, and also a hopeful FDA approval. Turns out, everything worked in MannKind's favor. Thus, it prepares to take Afrezza as an inhaled form of insulin into a massive market.
Yet, despite this excitement, we've seen a lot of doubt, and shares of MannKind have lost nearly 40% of their valuation during the last six months. But why?
The reason for this loss really stems from competition and the lack of a large and determined partner. MannKind does not have the cash to market Afrezza -- MannKind has an accumulated deficit over $2.2 billion that's been spent developing Afrezza -- or the many millions, possibly billions, it would have to spend just to make a dent in this space. Not to mention, there is the well-documented failure of Exubera from Pfizer, another inhaled insulin that Pfizer spent $2 billion to market. Hence, there are a lot of fears that no large company will be willing to take the risk and front that kind of cash on marketing such a product.
With that said, there are a few notable benefits to Afrezza. Its newly designed inhaler is smaller compared to the one used when Afrezza was declined by the FDA the last time. The newer inhaler makes for a better delivery, so much that the dosage used was cut in half from prior studies. Also, MannKind's insulin is self-made, and the company has about $10 billion worth in a freezer, meaning supply won't be an issue.
Lastly, it is out of the body in two hours and is active within five minutes, meaning patients can use the inhaler right after eating, versus waiting or having to be taken prior to meals. While these things serve as an advantage, the question still remains of whether a large partner will take a chance on Afrezza and if the market is already too saturated with similar products for MannKind to succeed with this product. While the answer may be "yes," it creates quite a risk given the company's $1.85 billion market cap.
Something Different is Needed to Achieve Success
As you might have guessed, most of the dominance in this space comes from big pharma. Merck (NYSE:MRK) has the $4 billion a year Januvia, which by mimicking the incretin hormones that the body usually produces naturally stimulates the release of insulin. Merck also has a combination of Januvia with metformin called Janumet that adds another $1.6 billion a year.
Novo Nordisk (NYSE:NVO) might be the best up-and-coming star in the space, looking to own the diabetes market. It already has a fast-acting insulin called NovoRapid that yields $2.8 billion annually, and also Victoza and Levemir, both, which earn more than $1.5 billion a year. However, the big catalyst for Novo might be Tresiba, which was rejected by the FDA due to the need for a cardiovascular study. If successful -- Novo is investing more than $3.5 billion in this space -- then Tresiba would directly compete with long-lasting Lantus, which earned more than $6.5 billion last year as the top-drug in this space.
With that said, any small company developing an insulin product might as well be avoided, as companies like Merck, Novo, and Sanofi spend hundreds of millions marketing to solidify their positions. As a result, if you're looking for a small-cap investment in this massive market, then you better not look to insulin or to an agent that works in a similar fashion.
Therefore, where do you invest? With massive companies like Merck, Novo, and J&J, a single product with blockbuster potential doesn't do much to significantly impact the top-line growth of these companies, meaning that stock performance tied to the market share of this industry might not be evident over the next 10 years for the market leaders. As a result, if you're looking in biotechnology you need to find a company with a unique approach, something different that may work in tandem with FDA approved blockbusters. So, after searching through the market, I have found two companies that may fall in this category.
A Known Drug With an Unexpected Benefit
Regeneron Pharmaceuticals (NASDAQ:REGN) is biotech royalty, carrying a market cap of nearly $30 billion with one of the most promising pipelines in the market. If we look just at the company's late-stage pipeline, it has a rheumatoid arthritis product that could earn $800 million in sales by 2020, a Phase 3 "bad" cholesterol lowering drug that tested far superior to Lipitor, and an asthma-treating drug that prevents the disease rather than controlling the symptoms. In addition, Regeneron has three FDA approved products, including the blockbuster Eylea.
Eylea is FDA approved for indications that cause blindness, neovascular (wet) age-related macular degeneration (AMD) and macular edema following central retinal vein occlusion, and is being tested to treat a slew of other diseases. Currently, analysts expect that sales of Eylea will near $1.9 billion in 2014. However, Eylea could grow much larger, as there are certain indications not figured into any revenue model, one being diabetes.
Aflibercept is the clinical name assigned to Eylea, as Regeneron markets aflibercept for different purposes. To eliminate confusion we are going to call it aflibercept, but just know that aflibercept is Eylea when being marketed for AMD, and then Zaltrap when treating colorectal cancer. So, aflibercept is known as a VEGF inhibitor, and when treating cancer it starves tumors of oxygen. This function is important because of its link to a Stanford University study that found a link between a low-oxygen condition called hypoxia and the ability of cells in the liver to respond to insulin.
If aflibercept is proven successful in treating diabetes, it would be running a tight race in being one of the most diversified agents in modern medicine. Yet, despite this promise, diabetes could be its biggest indication, as this particular function would no doubt be a preferred treatment, with strong efficiency and limited side effects. Ironically, aflibercept is the agent used to support this hypothesis, as it increased hypoxic cells in mice. As a result, these mice were better able to handle a boost in blood-glucose levels.
With that said, since no other proteins aside from HIF-2alpha are affected, aflibercept might become a diabetes treatment without, or with very minimal, side effects. At the very least, aflibercept could be used in conjunction with insulin to minimize side effects and likely with smaller doses to create better effects. And with global marketing partners Sanofi and Bayer, Regeneron would have a great marketing team. Given the theoretic potential for combination therapies, aflibercept could command a large piece of the diabetes market, or help those patients on treatments with adverse side effects. Regardless, Regeneron still has to undergo human testing on large patient populations. But if successful, aflibercept's revenue could accelerate rapidly.
Using Very Important Cells to Control T1D
The final company that could be on to something as grand as Regeneron is a $200 million biotech I've talked about before called NeoStem (NBS). This company has a segment called Athelos, which uses regulatory T cells (Tregs) to treat autoimmune diseases. Among the diseases that NeoStem hopes to treat are steroid resistant asthma and type 1 diabetes (or T1D).
Now, a product or technology focused on T1D, is not something we see every day, or ever. The reason is because T1D is a much smaller indication, approximately 5%-10% of all diabetes cases. But given the fact that Diabetes Care estimates 366 million worldwide cases in the next 15 years, it is still a large patient population. Also, companies don't focus on this indication because there are a lot of differences between T1D and type 2: T1D has an autoimmune component while type 2 diabetics develop insulin resistance for an array of genetic or environment factors.
With that said, let's revisit the concept behind fewer treatments and a minimal clinical focus: Developers essentially choose one type or the other. Thus, there are therapies for T1D, but not one that treats the underlying cause, as insulin does not treat autoimmune-driven destruction of the production of insulin cells in the pancreas. But (bringing NeoStem's Treg therapy into the spotlight), if Tregs can control these T cells in the pancreas, then they could reverse the immune response.
Tregs naturally influence immune cells and maintain optimal levels of immune response, but in many autoimmune disorders that balance is disrupted; the number of Tregs are lowered. Hence, by using a Tregs therapy, balance can be restored. NeoStem proved this notion in preclinical trials with mice. But in humans, the biggest key will be isolating and expanding these Tregs, which has been accomplished using a collaborator, Dr. Jeffrey Bluestone. In two different expansion models, Tregs were increased 1,200 fold, which is more than enough to be considered therapeutic for T1D patients.
Albeit, emerging data provides some evidence that may have a role in the development of TID. Published animal data has provided pre-clinical evidence that Tregs can protect pancreatic function and a small trial in Poland comparing 10 patients treated with and without Tregs showed a statistically significant preservation of c-peptide levels, along with 20% of the patients in the Treg arm being in remission i.e. off insulin. Another study of 14 recent onset T1D patients has been performed at UCSF and Yale with results expected in June. Still, despite this early promise and the appearance that Tregs can essentially stop the development of this disease, larger trials must be conducted.
Therefore, it is worth noting that the University of California San Francisco (UCSF) and collaborator Dr. Bluestone – who discovered the isolation method being used – are beginning a Phase 2 trial that includes four cohorts each using different numbers of cells in an attempt to find a threshold dose and will include a dozen other institutions. With that said, Tregs are deep within the pipeline at NeoStem, we should get some data on the Treg program later this year. If positive, it could serve as a huge catalyst for the company.
Currently, NeoStem would have very few competitors in this TID space, as no other product approved or used works in the same way as Tregs. Understandably, there are risks, but given the natural impact of Tregs on not only TID but several autoimmune diseases it is sensible that a surplus of these cells would naturally increase the function in an environment where Tregs have become unstable or are lower in quantity.
One can't deny the immense revenue from the likes of Merck and Novo with their diabetes franchises. Yet, for another company to steal share, replicate their performance, or see any return on the investment put into such drugs, competitors must be willing to market aggressively and hope that the new drug has some measurable advantage. Unfortunately, with insulin, this simply isn't the case, as we've likely seen all that insulin has to offer from an efficacy standpoint. However, that doesn't mean that other approaches to enter this massive market won't be successful: Both Regeneron and NeoStem are using an approach that does not conflict, challenge, or compete with insulin products, hence both would likely be commercially successful.
Ironically, both of these companies are well positioned for success, having products with good data, strong clinical support, and solid biological reasoning. Yet both of these programs are significantly under-the-radar relative to the valuation of each company. Regeneron and NeoStem have the opportunity to transform the industry with new treatments that lead to the development of drugs outside what's considered the norm -- both in T1D and T2D. In a market that's expected to be worth $50 billion annually, such innovation could produce billions of dollars, meaning that both are worth your time and due diligence.
Disclosure: I am long REGN, NBS. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.