Is Big Pharma Really Trying to Cure Diabetes? We're Seeking Profits and Debunking Myths

Jun. 27, 2011 2:14 PM ETNVO, SNY, LLY, JNJ, MDT, TEVA, BIIB, PFE, OSIR, DMYDY, CVS, RAD, BMY, WBA9 Comments
Sean Farhy profile picture
Sean Farhy

There is a saying that there is more money in the treatment of a disease than there is in the cure. There is also a widely suggested conspiracy that pharmaceutical and biotechnology companies refuse to bring known cures to market because they make more money treating the symptoms. Let's not only see if this is true, but also see if we can profit from this through the disease of diabetes.

There are approximately 33 million diabetics in the United States, of which 90% or 30 million have Type 2 Diabetes, also known as Adult Onset Diabetes. Type 2 Diabetes is typically associated with obesity and sedentary lifestyle. The other 10% or three million Americans have Type 1 Diabetes, an auto-immune disease also called Juvenile Diabetes. The treatments for both Type 1 and Type 2 Diabetes often overlap, but the causes and eventual cures of both diseases are completely different. We'll talk about both of them, but our main focus will be on Type 1 Diabetes.

The Big Business of Treating Diabetes:

Insulin is the only known way to treat Type 1 Diabetes. Over the years, treatments have improved with the development of synthetic analog insulins. The major manufacturers of theses insulins are Novo Nordisk (NVO), Sanofi-Aventis (SNY), and Eli Lilly (LLY). Last year Lilly's Humalog generated $2 billion in sales for the treatment of both Type 1 and Type 2 Diabetes. Global insulin sales are now $15.4 billion annually, increasing 400% since the beginning of 2000. Insulin sales are expected to keep increasing exponentially, and it is predicted that by 2050, 20% - 30% of the U.S. population will have diabetes with the increase largely associated with Type 2. United Healthcare estimates that over the next decade the United States will spend $3.4 trillion in costs related to diabetes.

The skyrocketing costs are no doubt disturbing, but to the pharmaceutical giants, it is these costs that are generating them their huge windfall profits. Lilly's insulin Humalog currently represents 9% of Lilly's current sales. Novolog and Levemir are insulin drugs made by the world's largest insulin maker, Novo Nordisk. Novo Nordisk has had annual gains of 20% or more on its insulin drugs since 2009. Sales are not expected to slow anytime soon, as global diabetes drug sales are expected to increase 37% from now to 2015.

The other advantages these large international companies have are deep global footprints. A Lancet Journal report study found that China, India and Russia make up for half of the world's Type 2 diabetic population. Strictly looking at this data from a demographic perspective- These are two large and relatively untapped markets that create excellent growth opportunities. Amylin Pharmaceuticals (AMLN) is biotech company mainly focused on the treatment of Type 2 diabetes. Even though Amylin is not profitable, we believe Amylin's pipeline and relatively small market cap ($1.1 Billion) could fit nicely into a big pharma's portfolio.

Our biggest concern with these three pharmaceutical companies is that all of their flagship insulins come off patent by 2014. The good thing about insulin is that it is a biologic drug. Current laws protect biologic drugs from generic versions even after patent expiration; however, these laws could potentially change. We believe that Novo Nordisk, Sanofi-Aventis, and Eli Lilly are the best places to put your money. If the biologic laws are overturned we recommend that you take a look at the generic manufacturers such as Teva Pharmaceuticals (TEVA) as a better option.

Johnson & Johnson (JNJ) and Medtronic (MDT) are the two largest insulin pump manufacturers, making up 70% of the insulin pump market. Both companies are in early stages of creating an "artificial pancreas". An artificial pancreas is a pump that will work in tandem with a continual glucose monitor. The two combined will imitate the function of a real pancreas. This device is expected to be the next big breakthrough technology in the insulin delivery arena. FDA approval of the artificial pancreas is expected to take at least five more years, a relatively long time. We would take a wait and see approach on these two companies until we have more data.

Competition is especially high in the retail diabetic supply arena. For instance, there are more than 15 companies that manufacture blood glucose meters and test strips. These companies compete in a market made up commoditized of products, that offer little brand loyalty as consumers are forced to buy an insurance mandated brand or the least expensive brand because of economic hardship. We caution against investing in these types of companies unless you know of the company's distinct competitive advantage.

There are three industries that we would stay away from: managed health care stocks, hospital stocks and retail pharmacy chains. We dislike hospitals and managed health care because:

  • Rising coverage costs and declining benefits have consumers paying more out of their pocket.
  • Too much political uncertainty with Medicare, Medicaid, and the PPACA.
  • Increased uninsured / underinsured patient delinquency forces hospitals to pick up the bill.
  • Type 2 diabetic complications are more frequent among the uninsured and extremely costly.

The other area we would avoid is the retail pharmacies such as CVS (CVS), Walgreens (WAG), and Rite-Aid (RAD). We would opt not to invest because:

  • Online suppliers have been gaining market share from brick and mortar stores for years.
  • Retail margins have been shrinking due to increased competition from big box stores and diabetic supply market is becoming very saturated.
  • U.S. citizens are losing health insurance.
  • These companies have limited access to the international growth market such as China, India and Russia.

Myth Busting:

We just saw how expensive it is to treat diabetes. So before we talk about what it would take to cure Type 1 Diabetes, let's debunk that myth that there is more money in the treatment than the cure. I'll stop at 10.

  1. The net present value of these types of projects makes it more lucrative for the beneficiary to receive the "immediate" windfall cash infusion versus earning that same amount in equal sized payments over an extended period of time. That is why it's recommended that lottery winners take the smaller lump sum instead of the larger cash annuity paid over a period of many years.
  2. There are hundreds of pharmaceutical and biotech companies that cater to the diabetic marketplace, each company competing for market share-- Collusion among hundreds of companies to keep a cure hidden would not only be impossible, it would also be counter-intuitive.
  3. Non-profits, hospitals, universities, and charities also work in this field, and despite being a non-profit, a cure would mean a substantial cash boost to their institution's balance sheet or endowment.
  4. Pharmaceutical companies often make discoveries in unison. The product launches of NSAIDS, E/D and Statin drugs all came to market around the same time. Hiding a cure would ultimately give billions of dollars to their competitors.
  5. Researchers passionately spend their whole lives in search of a cure, so it would be impossible to silence not one, but all of them that know of a cure.
  6. A cure could generate billions more if there are carryover benefits to other diseases.
  7. A cure could also make for lucrative licensing agreements and exclusivity pacts for future drugs, grants, and strategic alliances.
  8. New discoveries create an intangible amount of good will to its stakeholders.
  9. Small biotech firms may only have funding for one or two projects. They typically place all their eggs in a few baskets --so an FDA approval is a necessity for that company to remain as a viable going concern.
  10. A Type 1 Diabetes cure would not cure Type 2 Diabetes -- so 90% of the diabetic marketplace would still exist.

Risk Reduction:

A large pharmaceutical company is oftentimes similar to an individual stock investor. Both diversify their portfolios by spreading risk out to different investments. Many companies lower risk by diversifying their R&D portfolio in a multitude of projects. The profits from treatment medication often go to fund other research projects, some which seek a cure.

Another common risk management technique is to enter into a strategic partnership with other firm(s). Partnerships and joint ventures allow for corporations and even non-profits to share in the upside of a potential finding while limiting their overall investment. Currently, Pfizer (PFE) and Biogen (BIIB) are two of many companies involved in partnerships with the Juvenile Diabetes Research Fund ((JDRF)), a non-profit charity. The JDRF is currently involved in more than 20 projects that have the potential to be big winners in treating and eventually curing Type 1 Diabetes.

The Cure:

I estimate that to a large pharmaceutical or biotechnology company, a cure for Type 1 Diabetes could generate $160 billion in initial revenues. A cure would most likely involve several procedures including a stem cell islet transplant.

My calculations are as follows:

(70,000,000 global diabetics x 1/2 are eligible for the procedure) X ($4,550 or 1/2 of one year's estimated treatment cost) = roughly $160 billion dollars.

There are a handful of companies out there that have been seeking a cure for Type 1 Diabetes. These companies are not for the conservative investor. You will either strike out or hit a home run, there is no in between.

Osiris Therapeutics (OSIR) is a U.S. based biotech company that is in a Phase II trial of its drug Prochymal. Prochymal is designed to protect newly grafted islet cells via stem cell transplant or for those that are newly diagnosed and are in their "diabetic honeymoon period". This drug is also in other clinical trials for other conditions not related to Type 1 Diabetes.

Living Cell Technologies is an Australian based company that is in Phase II of an insulin producing cell product called Diabacell. Diabacell seeks to replace islets that were destroyed during initial onset of Type 1 Diabetes.

Diamyd (DMYDY.PK) is a Swedish biotech company that was involved in a vaccine, eponymously named. The Type 1 Diabetes vaccine was unsuccessful in a European Phase III drug trial. The failure sent the stock price from $20 to under $3, erasing almost a $500 million dollars market cap overnight. It is doubtful that any more research will be done on this vaccine. Diamyd's partner in this venture was Johnson & Johnson.

Previous trials seeking a Type 1 cure have obviously been unsuccessful. Failure is not only disappointing, but it is also extremely expensive, with some trials costing in the hundreds of millions of dollars. The diabetic treatment market will soon be a trillion-dollar-a-year global industry, if it's not already. So it's good to know that along with better treatment options, there are companies out there that are actively seeking a cure for Type 1 Diabetes.

How do I know so much? I am the father of a 3 1/2 year old Type 1 diabetic. My son was diagnosed just one week after his second birthday.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. As stated my son is a Type 1 Diabetic and I am also involved in several diabetes charities, including the JDRF.

This article was written by

Sean Farhy profile picture
Sean Farhy is a the Head Trader / Senior Equity Analyst for Rhodes Capital Management. Sean Farhy received his MBA from Drexel University in 2007 and has been trading stocks and options for almost twenty years. Sean also writes for, a subsidiary of Rhodes Capital Management.

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