The Next Wave Of Blockbuster Diabetes Drugs

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

Note: This article previously misstated the current status of Johnson & Johnson's drug, canagliflozin. The error has been corrected.

Pharmaceutical companies have traditionally relied on patented drugs as a path to profits. This is changing as many blockbuster treatments have gone through patent expiration and others are following suit. Companies seem to employ three strategies to cope with this:

1) Pursue new, patentable drug treatments through internal R&D

2) Embrace generic competition and generic drug production

3) Acquire new, patentable drugs from other companies

The first two strategies are defensible and potentially investable, while the last one can be treacherous. Acquisitions can be expensive. Investors should try to find pharmaceutical companies with promising internal pipelines trading at reasonable valuations.

Diabetes Treatments: The Next Blockbusters

Diabetes and obesity are health nightmares, and drug companies could potentially make huge profits by developing treatments. Many pharmaceutical companies are trying to add such drugs to their portfolios.

Recently, the Endocrinologic and Metabolic Drugs Advisory Committee of the U.S. Food and Drug Administration (FDA) voted 10 – 5 on Jan. 10 to recommend approval for Johnson & Johnson’s (NYSE: JNJ) proposed diabetes treatment canagliflozin. There was some concern about canagliflozin increasing the risk of heart problems within 30 days of taking the drug. Johnson & Johnson hopes this pill will become a new diabetic medicine that does not have the side effects of other diabetes treatments.

Thirteen heart events occurred during the 30 day trial on canagliflozin, and only one occurred on placebo. Furthermore, the drug fueled an increase in bad cholesterol levels, which is not favorable for the heart. The U.S. Food & Drug Administration (FDA) staff said, “It is unclear whether this is a spurious finding or a true increased risk of early CV events.” Statistics obtained from the Centers for Disease Control and Prevention indicate that diabetes is the seventh deadliest disease in the U.S. By 2012, 26 million people had been affected by this disease. It is characterized by high levels of blood sugar.

More risks can mean more required testing and a delayed launch. Lawrence Biegelesen, a Senior Medical Device Equity Research Analyst at Wells Fargo (WFC), in his note to clients, insisted on the importance of speeding the risk assessment process, as further delays could have a negative impact on Johnson & Johnson's market position. On his note, he said “A first-to-market position is an important marketing advantage in this arena.”

Johnson & Johnson hopes to sell canagliflozin under a different name, Invokana. This strategy worked well for Merck (NYSE: MRK) when it conducted clinical trials for its second-best selling drug, Januvia and another drug known as glimepiride. Ernie Knewitz, a spokesman for Janssen, said “Results from our nine Phase 3 studies suggest that canagliflozin has the potential to help control blood sugar levels in a wide range of people with Type 2 diabetes while also offering other possible benefits like weight loss and reductions in blood pressure.”

According to Osama Hamdy, director of the Obesity and inpatient diabetes programs, Joslin Diabetes Center, there are 11 sets of drugs for diabetes on the market and they work by stimulating insulin production by the pancreas. Insulin helps in regulating the blood sugar level.

Teva Redefining Women’s Healthcare

Instead of developing blockbuster drugs, some companies are trying to reposition themselves by redefining areas of healthcare. According to Jeremy Levin, Teva Pharmaceuticals (NYSE: TEVA) Chief Executive Officer, plans are underway to increase the company’s research work in Women’s health beyond the current focus on fertility. In an interview conducted at the annual healthcare conference in San Francisco, Levin said, “Contraception is really important, fertility is important, but there are many other diseases…Nobody has taken leadership; this is where we want to go.”

The new plan that Levin unveiled to investors in December indicated that more focus will be directed to certain areas like respiratory problems, and neurology in female healthcare. Teva, the world’s number one generic drug manufacturer, estimates its revenue from women health sales will increase by 6% this year. Some of the drugs that are to be manufactured by the Israel based Petach Tikva include oral contraceptives and hormonal drugs for menopause. The CEO added further that that Teva may consider venturing into fibroid treatment as it affects many women when they at their peak of their reproductive years. Symptoms include painful menstruation and discomfort during sexual intercourse.

A report released by Teva in October at the annual meeting of the American Society for Reproductive Medicine indicates successful final tests results for Milprosa. This is a weekly analysis for women who are put through vitro fertilization. The company’s best-selling product, Copaxone, which generated 21% of its third quarter revenue, will lose patent protection in 2015. It also faces stiff competition from other newly developed oral medicine. During a Q&A session, Levin said, “Our understanding of women’s health stems from that. It’s a huge opportunity. Women are great consumers of medicines, they understand what it is that they need to make themselves happier and healthier.”

Valuation Diagnosis

Among big drug stocks, there are some that stick out as being cheap for their projected earnings growth:

<table> <tbody> <tr> <td> <p><strong><span>Ticker</span></strong></p> </td> <td> <p><strong><span>Company</span></strong></p> </td> <td> <p><strong><span>P/E</span></strong></p> </td> <td> <p><strong><span>P/S</span></strong></p> </td> <td> <p><strong><span>P/B</span></strong></p> </td> <td> <p><strong><span>P/FCF</span></strong></p> </td> <td> <p><strong><span>D/E</span></strong></p> </td> <td> <p><strong><span>EPS Growth Next 5 Years</span></strong></p> </td> </tr> <tr> <td> <p><span>LLY</span></p> </td> <td> <p><span>Eli Lilly</span></p> </td> <td> <p><span>14.61</span></p> </td> <td> <p><span>2.75</span></p> </td> <td> <p><span>3.89</span></p> </td> <td> <p><span>28.37</span></p> </td> <td> <p><span>0.34</span></p> </td> <td> <p><span>-4.5%</span></p> </td> </tr> <tr> <td> <p><span>AZN</span></p> </td> <td> <p><span>AstraZeneca</span></p> </td> <td> <p><span>10</span></p> </td> <td> <p><span>2.08</span></p> </td> <td> <p><span>2.77</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>0.5</span></p> </td> <td> <p><span>-3.5%</span></p> </td> </tr> <tr> <td> <p><span>BMY</span></p> </td> <td> <p><span>Bristol-Myers Squibb</span></p> </td> <td> <p><span>31.61</span></p> </td> <td> <p><span>3.01</span></p> </td> <td> <p><span>4.09</span></p> </td> <td> <p><span>11.65</span></p> </td> <td> <p><span>0.53</span></p> </td> <td> <p><span>1.8%</span></p> </td> </tr> <tr> <td> <p><span>PFE</span></p> </td> <td> <p><span>Pfizer</span></p> </td> <td> <p><span>21.23</span></p> </td> <td> <p><span>3.22</span></p> </td> <td> <p><span>2.39</span></p> </td> <td> <p><span>21.26</span></p> </td> <td> <p><span>0.48</span></p> </td> <td> <p><span>2.1%</span></p> </td> </tr> <tr> <td> <p><span>SNY</span></p> </td> <td> <p><span>Sanofi</span></p> </td> <td> <p><span>15.8</span></p> </td> <td> <p><span>2.62</span></p> </td> <td> <p><span>1.73</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>2.6%</span></p> </td> </tr> <tr> <td> <p><span>NVS</span></p> </td> <td> <p><span>Novartis</span></p> </td> <td> <p><span>18.54</span></p> </td> <td> <p><span>3.09</span></p> </td> <td> <p><span>2.37</span></p> </td> <td> <p><span>32.34</span></p> </td> <td> <p><span>0.31</span></p> </td> <td> <p><span>3.0%</span></p> </td> </tr> <tr> <td> <p><span>MRK</span></p> </td> <td> <p><span>Merck</span></p> </td> <td> <p><span>19.54</span></p> </td> <td> <p><span>2.73</span></p> </td> <td> <p><span>2.35</span></p> </td> <td> <p><span>28</span></p> </td> <td> <p><span>0.35</span></p> </td> <td> <p><span>3.6%</span></p> </td> </tr> <tr> <td> <p><span>GSK</span></p> </td> <td> <p><span>GlaxoSmithKline</span></p> </td> <td> <p><span>13.69</span></p> </td> <td> <p><span>2.5</span></p> </td> <td> <p><span>10.64</span></p> </td> <td> <p><span>NA</span></p> </td> <td> <p><span>2.81</span></p> </td> <td> <p><span>6.2%</span></p> </td> </tr> <tr> <td> <p><span>JNJ</span></p> </td> <td> <p><span>Johnson & Johnson</span></p> </td> <td> <p><span>24.09</span></p> </td> <td> <p><span>3.08</span></p> </td> <td> <p><span>3.17</span></p> </td> <td> <p><span>33.37</span></p> </td> <td> <p><span>0.26</span></p> </td> <td> <p><span>6.4%</span></p> </td> </tr> <tr> <td> <p><span>TEVA</span></p> </td> <td> <p><span>Teva Pharmaceuticals</span></p> </td> <td> <p><span>15.45</span></p> </td> <td> <p><span>1.72</span></p> </td> <td> <p><span>1.43</span></p> </td> <td> <p><span>14.24</span></p> </td> <td> <p><span>0.6</span></p> </td> <td> <p><span>8.9%</span></p> </td> </tr> <tr> <td> <p><span>AGN</span></p> </td> <td> <p><span>Allergan</span></p> </td> <td> <p><span>30.7</span></p> </td> <td> <p><span>5.66</span></p> </td> <td> <p><span>5.66</span></p> </td> <td> <p><span>25.55</span></p> </td> <td> <p><span>0.28</span></p> </td> <td> <p><span>12.5%</span></p> </td> </tr> <tr> <td> <p><span>NVO</span></p> </td> <td> <p><span>Novo Nordisk</span></p> </td> <td> <p><span>26.63</span></p> </td> <td> <p><span>5.88</span></p> </td> <td> <p><span>14.43</span></p> </td> <td> <p><span>33.57</span></p> </td> <td> <p><span>0.03</span></p> </td> <td> <p><span>18.0%</span></p> </td> </tr> </tbody> </table>

Teva is one stock that is trading at a reasonable 15.45 price multiple while having projected earnings growth near 9%. It also has the lowest price-to-sales ratio and price-to-book ratio of stocks on this list. In contrast, Merck and Johnson & Johnson are much more expensive than their peers with the nearest growth projections

Based both on strategy and valuation, Teva is a buy candidate worthy of further research.

BillEdson11 has no position in any stocks mentioned. The Motley Fool recommends Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. 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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