How To Play the Rising Diabetes Epidemic?

Bill is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Diabetes is a taking its toll worldwide, with roughly 371 million people afflicted today. Forecasts for 2030 predict 552 million will suffer from diabetes.

Investors should try to find pharmaceutical and drugstore stocks which will benefit from this trend and also trade at attractive valuations currently.

Diabetes on the Rise

Type II diabetes now rivals cancer, cardiovascular diseases, and respiratory diseases, as a serious public health nightmare.

Though type II diabetes is often characterized as a western disorder, since it can be a result of a high sugar diet and lack of exercise, it is increasingly being diagnosed in not-so-developed nations, too. Four out of five diabetics now reside in developing or underdeveloped nations. This is tragic, but it is also a new market for the pharmaceuticals industry. There are 92.3 million diabetics in China, which has the largest national population of diabetics in the world.

As the global medical bill for diabetes reaches $48 to $53 billion by 2016, international pharmaceutical companies have targeted diabetes as an opportunity-in-tribulation for their market growth. The demand for diabetes resistance drugs (insulin) is growing, especially in new booming economies. China is second only to the U.S. in terms of consumption of insulin. There are many pharmaceutical companies like Eli Lilly (NYSE: LLY)Merck (NYSE: MRK), and Sanofi (NYSE: SNY) that are targeting China as a promising new market.

Insulin requires controlled refrigeration for its storage, making it increasingly difficult in places where basic medical facilities are scarce. Patients, starting with cheap generic diabetes pills such as Metformin, ultimately need insulin with the progress of diabetes, but they are unable to afford it.

Long supply chains are especially bad for insulin, because it must be kept cool or it will deteriorate. For poor countries like Kenya, Novo Nordisk (NYSE: NVO) has been able to shorten the supply chain by cutting down the number of intermediaries. A project involving local churches and local communities has reduced the cost of a monthly supply of Insulin to $6. Although the projects cover no more than 1,000 Kenyans so far, Jesper Hoiland, head of Novo Nordisk's International Operations, is confident that the company's low cost model can reap high benefits once sales increase. Similar schemes are in progress for rural India and Nigeria.

Meanwhile Sanofi, a major player in Africa, has also proposed a tiered supply program in for its African market, which will eventually help cut down Insulin prices. According to a report from Reuters, "Drugmaker Sanofi India is looking to export its Allstar reusable insulin pen to countries in South Asia, Africa and Latin America, Shailesh Ayyangar, its managing director, said on Tuesday, Oct. 9". According to the same report, "Sanofi India, a unit of France's Sanofi, launched the pen in India on Tuesday, Oct. 9 at a retail price of 650 rupees ($12.40). India has nearly 50 million diabetes patients, more than any other country, and the number is expected to reach 70 million by 2025." This represents a huge growth opportunity for Sanofi.

CVS taking ex-Walgreen customers

Healthcare distribution in the U.S. is much more straightforward. Drugstores offer pharmacy and over-the-counter healthcare products for a growing market. Investors should keep an eye out to see whether short-term hurdles or high valuations are reasons to stay away from stocks in this industry.

CVS Caremark (NYSE: CVS) reported its third quarter earnings above analyst estimates and the company raised its earnings estimates based on customer migration from Walgreen (WAG).

Net income rose by 16% from $868 million to $1.0 billion. It stepped up its marketing and promotional efforts after its renewal of its contract with Express Scripts (ESRX) in September. Walgreen did not renew its contract with Express Scripts. The company increased its revenue to $30.2 billion, representing an increase of 13%.

Guggenheim Securities Analyst John Heinbockel said, "CVS is retaining more Walgreen scripts than we originally expected." He also said the "retail segment results remained robust" and rated the stock a buy.

CVS Caremark said that it expects to keep at least 60% of the prescriptions that it gained from Walgreen's dispute with Express Scripts. Earlier, the company expected to keep only 50% of those prescriptions. The company also stated that the retail pharmacy same-store sales increased by 4.3%, benefiting from former Walgreen customers.

Merck's Star Diabetes Drug

Merck, another leader in the pharmaceutical industry, announced analyst-beating results for the third quarter. Its star product was the diabetes drug Januvia. Generic drugs sales have gone up, lowering the company's profit margins.

Merck earnings were 95 cents per share, two cents above analyst predictions. Merck's net income rose to $1.73 billion, approximately 2% more than $1.69 billion last year. Sales are down $11.5 billion, about 4%. Merck has gained revenue from emerging markets, such as China, where sales are up. Emerging market sales account for roughly a fifth of the Merck's pharmaceutical revenues.

Major Pharmaceutical Valuations

Of the drug and drugstore stocks discussed, some are reasonably priced and some are rich:

<table> <tbody> <tr> <td> <p><strong>Ticker</strong></p> </td> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Country</strong></p> </td> <td> <p><strong>P/E</strong></p> </td> <td> <p><strong>P/S</strong></p> </td> <td> <p><strong>P/B</strong></p> </td> <td> <p><strong>P/FCF</strong></p> </td> <td> <p><strong>EPS Growth Next 5 Years</strong></p> </td> </tr> <tr> <td> <p>LLY</p> </td> <td> <p>Eli Lilly</p> </td> <td> <p>USA</p> </td> <td> <p>12.97</p> </td> <td> <p>2.44</p> </td> <td> <p>3.45</p> </td> <td> <p>25.19</p> </td> <td> <p>12.74%</p> </td> </tr> <tr> <td> <p>WAG</p> </td> <td> <p>Walgreen</p> </td> <td> <p>USA</p> </td> <td> <p>13.67</p> </td> <td> <p>0.44</p> </td> <td> <p>1.71</p> </td> <td> <p>14.92</p> </td> <td> <p>-4.71%</p> </td> </tr> <tr> <td> <p>CVS</p> </td> <td> <p>CVS Caremark</p> </td> <td> <p>USA</p> </td> <td> <p>15.38</p> </td> <td> <p>0.48</p> </td> <td> <p>1.55</p> </td> <td> <p>19.37</p> </td> <td> <p>3.90%</p> </td> </tr> <tr> <td> <p>SNY</p> </td> <td> <p>Sanofi</p> </td> <td> <p>France</p> </td> <td> <p>15.47</p> </td> <td> <p>2.56</p> </td> <td> <p>1.63</p> </td> <td> </td> <td> <p>17.95%</p> </td> </tr> <tr> <td> <p>MRK</p> </td> <td> <p>Merck</p> </td> <td> <p>USA</p> </td> <td> <p>20.13</p> </td> <td> <p>2.81</p> </td> <td> <p>2.42</p> </td> <td> <p>28.85</p> </td> <td> <p>2.10%</p> </td> </tr> <tr> <td> <p>NVO</p> </td> <td> <p>Novo Nordisk</p> </td> <td> <p>Denmark</p> </td> <td> <p>25.25</p> </td> <td> <p>5.57</p> </td> <td> <p>17</p> </td> <td> <p>31.81</p> </td> <td> <p>12.77%</p> </td> </tr> </tbody> </table>

Since Walgreen fumbled the benefits provider Express Scripts, it should be substantially cheaper than CVS. However, it is only a little bit cheaper on a price-to-earnings basis and a price-to-sales basis. CVS is cheaper on a price-to-book basis. Without a head-turning discount, investors should choose CVS as a growth-at-reasonable price candidate over Walgreen.

Among drugmakers, only Eli Lilly is cheap. Unfortunately, its expected a drop in earnings growth that could inspire the firm's management to make acquisitions to bolster its drug development pipeline. Eli Lilly continues to face heavy competition in the treatment of Alzheimer's disease. It has been argued that Johnson & Johnson's (JNJ) Bapineuzumab does a better job of treating Alzheimer's. Recent studies have shown that Johnson & Johnson's drug reduces brain plaque by 9%. Johnson & Johnson's Bapineuzumab is also closer to gaining approval. Additionally, Eli Lilly's blockbuster drug Cymbalta will cost the company up to $4.9 billion annually going forward due to its patent expiration. For these reasons, I believe investors should avoid Eli Lilly.

Instead, investors should consider Sanofi as a buy candidate. It trades at a fair earnings multiple, while offering the best earnings growth prospects on this list.


BillEdson11 has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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