Seeking Alpha

2 Diabetes Growth Stocks And 1 Moonshot To Hold Through 2025

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Includes: AZN, LLY, ORMP
by: Christiana Friedman
Summary

The two companies with the fastest growing projected diabetes revenues through 2022 are Eli Lilly and AstraZeneca.

Both stocks have been range-bound for four years but could break out once the fear of the effects of patent expiration runs its course.

Oramed is the moonshot, and is just now starting the very first oral insulin trial with an endpoint of HbA1c ever conducted, to be completed by May 2019.

HbA1c measures blood glucose over 90 days, and is the primary endpoint of virtually all pivotal trials for insulin candidates.

The two fastest growing diabetes companies may surprise you. Since 2015, the two pharmas projected to grow diabetes revenues the most by percentage are Eli Lilly (NYSE:LLY) and AstraZeneca (NYSE:AZN). Both stocks have been out of favor for about 4 years and stuck in a trading range due to fear of patent expirations on blockbusters, but both have kept their finances relatively healthy despite this, plus they pay a high dividend for pharma stocks.

Their share prices being held down for so long now could make them both good long term holds as investors realize that patent expirations won’t doom them to the extent that many have feared.

The third long term hold I’ll get in to is Oramed (NASDAQ:ORMP), which I’ve held long for over a year. The reason it deserves attention specifically now is that it is conducting the first ever diabetes trial with an HbA1c primary endpoint of an oral insulin pill. HbA1c, a proxy for 90-day blood glucose levels, is the primary endpoint of nearly all pivotal insulin trials. If this trial succeeds, Oramed will be much higher by mid 2019. It has high cash levels and a tight trading range for a trial stage company also for the last 4 years as well, making it a less volatile speculative investment.

Chart LLY data by YCharts

Eli Lilly

Eli Lilly is of course a leader in insulin products and other diabetes drugs, but it is still only the 4th largest company by actual diabetes revenues. Despite being only fourth now, it is poised to take second place by 2022 and grow its diabetes segment top line by 55% over 7 years since 2015.

What makes this particularly encouraging for Lilly is that the strong growth projected for diabetes by the company’s internal estimates won’t even be the strongest area of growth. In its latest conference call, Lilly estimated that it would grow by 5% annually into the next decade, which would put revenue at around $29B by 2022. Taking into account the 2022 projection for diabetes revenue specifically, diabetes would account for about 27% of those revenues. That’s less than the 33% that diabetes drugs account for now. Meaning, more and faster growth is projected to happen elsewhere for Lilly.

This is despite losing exclusivity for Cialis, which accounted for 10% of 2017 revenues, and Straterra, which accounts for another 3%. 2018 growth is already being attributed to the three diabetes drugs Trulicity, Basaglar, and Jardiance, so Eli Lilly has much to celebrate going into the next decade.

An added plus is that Lilly has four late stage diabetes drugs in Phase III, with a new ultra rapid insulin lispro set to complete Phase III in September of this year. Basically, the company has shown lots of growth since 2015 but its stock price has stagnated since then due to fears of the impact of patent expirations. It doesn’t look like its growth potential into the next decade has been priced in. Add in a 3% dividend yield and it looks like a good deal.

AstraZeneca

AstraZeneca PLC (AZN) is not primarily a diabetes company, but nevertheless its diabetes revenue is projected to increase 47% to $3.7B by 2022, the second highest growth rate in diabetes revenues of a public company for the top 10 pharma stocks by market cap. This is mostly thanks to Farxiga, a SGLT2 inhibitor that blocks glucose reabsorption by the kidneys. While AstraZeneca is not a diabetes-focused firm, this makes its projected growth in this area all the more impressive.

Its pipeline is replete with 22 Phase III candidates, 11 new molecular entity drugs in late stage development, and 144 candidates in all. This gives it lots of potential growth markets going into the 2020s, the bulk of them in oncology.

Consider also that 2017 earnings were more than double those of 2014, and yet the stock is lower now than it was then. It also pays an above average dividend for a pharma firm at nearly a 4% yield at current prices. Nobody is going crazy about AstraZeneca now nor have they been for years, also fearing the impact of patent expirations. The fact that it is one of the fastest diabetes growth companies would catch most investors by surprise.

Oramed

Still in the development stage at this point, the main reason Oramed could be a good speculative hold into the next decade is that it is conducting the very first HbA1c-focused trial for an oral insulin candidate ever. It has already succeeded in another Phase II trial with other blood glucose endpoints compared to placebo. The only other company to succeed in Phase II for an oral insulin candidate was Novo Nordisk (NYSE:NVO), but that trial had a change in fasting plasma glucose as its primary endpoint. HbA1c was not measured. Novo has since discontinued its oral insulin program for what it claims are reasons of economics, despite succeeding in Phase II.

The file for Oramed’s Phase II trial was just uploaded on Clinicaltrials.gov, set to start this month and complete by May 2019. It will enroll 240 insulin-naïve type II diabetes patients over 12 weeks to properly measure HbA1c, which tracks blood sugar over a 90-day period.

So what? Isn’t this just another diabetes trial? HbA1c is the gold standard endpoint for almost every insulin pivotal trial. If Oramed can show that oral insulin can lower HbA1c for those not yet on insulin injections or even keep HbA1c stable against placebo, the chances of it being granted approval following a larger Phase III trial significantly improve.

Oral insulin could greatly extend the time diabetes patients have before they must resort to daily injections, creating a new market between metformin and other oral therapies like SGLT2, and direct insulin treatment. An oral option for insulin could also increase patient compliance, significantly lowering one of the most expensive aspects of diabetes treatment worldwide – hospitalizations.

Preliminary evidence from a previous Phase II trial shows that after 29 days, HbA1c was lowered for patients on oral insulin by 0.01mg/dL versus placebo. HbA1c for patients on placebo rose by 0.20 mg/dL by comparison.

Oramed being a developing stage company means cash is an issue, especially if planning a long term hold. The company has $38M in cash and a burn rate of $8.6M annually over the last four years. That gives it enough cash to sustain itself for another 4 and a half years at this rate, well past the completion of its first HbA1c trial in 2019.

The other risks with Oramed are, of course, if the trial fails, which would devastate the stock. Longer term, there is the issue of price. If oral insulin ends up being significantly more expensive than subcutaneous, then even if it gets approved it will have trouble penetrating the diabetes market. This may be why Novo discontinued its program. This consideration is a long way off though, and the primary value inflection point will be the HbA1c trial starting now, with data by the middle of next year.

Disclosure: I am/we are long ORMP, LLY. 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.