The Heartland Value fund watches biotechs, drug companies, and medical-device makers that develop treatments for diabetes and other ailments
From Standard & Poor's Equity Research
Americans are growing larger, and there seems to be no end in sight to this alarming trend. According to the American Obesity Assn. (AOA), obesity has risen in all ethnic and socioeconomic groups and age segments in the U.S.
In fact, 64.5% of the adult population, roughly 127 million Americans, are now overweight. Of that total, 60 million are obese and 9 million are severely obese. Even more alarming: Children are getting heavier. Just over 30% of children ages 6 to 11 in the U.S. are overweight, and 15.3% are obese.
MORE FOOD. "We've seen people in the U.S. and around the world getting heavier," says Standard & Poor's chief economist David Wyss, who views obesity as a "health trend" rather than a demographic trend, and thinks it will have a big impact on the health-care sector. Like many, Wyss attributes obesity to a combination of factors: "wealthier lifestyles, more food to eat, lack of self-control, and more sedentary lifestyles."
The AOA says obesity is now the second-leading cause of "unnecessary deaths" in the country, with an associated $100 billion price tag for the health-care industry. Obesity increases a person's risk for developing many illnesses, including high blood pressure, type 2 diabetes, heart disease, stroke, gallbladder disease, and breast cancer.
Fast food, one contributor to this health trend, has become more popular overseas, particularly in Western Europe, Japan, and even in some developing nations, helping to make obesity a global epidemic.
INSULIN INNOVATION. Eric Miller, co-manager of the $1.5 billion Heartland Value fund (HRTVX ), says the rising tide of obesity is leading some drug and biotech companies to develop pharmaceuticals to treat diseases caused by it, particularly type 2 diabetes, the most common form of that malady.
"Inhaled insulin products are a promising area in the treatment of type 2," he says. "Although inhalants don't have more efficacy than the traditional forms of injected insulin, they're more appealing to patients with a fear of needles."
Exubera, an inhaled insulin drug created through a joint venture by Sanofi-Aventis (SNY ) and Pfizer (PFE ), was recently approved by the Food and Drug Administration. Standard & Poor's Equity Research estimates peak annual sales of $1.9 billion for Exubera.
Another established biotech company, Amylin Pharmaceuticals (AMLN ), currently has two injectable diabetes drugs, Symlin and Byetta, both launched last year. Byetta, designed for the type 2 diabetes market, allows the pancreas to produce more insulin while also increasing how long insulin remains in the bloodstream, thereby postponing the need for injections of synthetic insulin.
"This could be a blockbuster because type 2 diabetes is such a huge market," Miller says. Symlin is for patients with type 1 diabetes, so its sales prospects are lower, he says.
PURE FOCUS. Miller points out that other big pharma companies with diabetes franchises like Eli Lilly (LLY ) and Abbott Laboratories (ABT ) have similar products in their pipelines. But he notes that at such large companies, a diabetes drug represents only a small portion of overall business.
Instead, early-stage biotech companies exploring treatments for type 2 diabetes represent purer plays. One example is MannKind (MNKD ), which is developing an inhaled insulin drug called Technosphere Insulin System, currently in Phase 3 clinical trials in the U.S. and Europe.
"MannKind has no products in the marketplace yet," Miller says. "They will either sink or swim on their inhaled insulin product." Moreover, MannKind currently has a market cap of $1 billion -- a huge premium for an early-stage biotech company with no commercial products and, therefore, no profits.
STAKE IN KIDNEYS. "They're probably several years away from getting their inhaled insulin drug approved," says Miller. "We think, eventually, MannKind's drug will be on the market, and it will be one of the best products of its kind, a potential billion-dollar blockbuster. But the stock poses some big risks for investors."
Another pure play Miller named is Keryx Biopharmaceuticals (KERX ), which is in Phase 3 testing of a drug named Sulonex, designed to treat diabetic nephropathy, a kidney disease that is a result of diabetes. Given that 50% of diabetes patients develop kidney problems, Sulonex could also become hugely successful.
"Sulonex has been shown to be efficacious in keeping patients out of end-stage renal disease and avoiding cumbersome and costly dialysis treatments," Miller says. "This is a very exciting drug and would fill a desperate unmet need in the diabetes market."
He believes Sulonex is a potential blockbuster but adds that it's not yet approved, and it may take another year and a half to find out if it will make it. Keryx currently has a market cap of just $660 million, and Miller ascribes virtually all of that value to Sulonex.
ORAL MEANS. Emisphere Technologies (EMIS ), which focuses on drug delivery systems, is also on Miller's radar. The company takes existing drugs and attempts to design a better way to deliver them, primarily through oral means, he says.
"They are testing an oral form of insulin, as there are no 'insulin pills' in existence yet," says Miller. Emisphere is engaged in Phase 2 trials for "oral insulin" in India. "If it works, and that's a big if, it will be a huge advance," Miller says. Emisphere has a market cap of only $180 million.
Miller's colleague at Heartland, portfolio manager Rodney Hathaway, believes obesity will have enormous, far-reaching ramifications in virtually every sector and industry, most obviously in health care. He thinks that medical-device companies, which manufacture artificial hips, knees, implants, and joints, will likely flourish from the surge in the number of obese patients who will need operations that rely on these devices. Stryker (SYK ), a maker of specialty medical products including orthopedic implants, looks poised to benefit.
Hathaway also foresees profits for companies that are trying to educate people on how to live better and more healthy lives, or those working on disease management. Says Hathaway: "Some of the large managed-care companies, like UnitedHealth Group (UNH ) and Humana (HUM ), are investing in disease-management infrastructure designed to teach patients how to live healthier lives."
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