Obesity: A Heavy Burden on Healthcare

Drug and biotech companies seeking pharmaceuticals to treat resultant diseases

Americans are growing larger and there seems to be no end in sight to this alarming trend.

According to the American Obesity Association, all ethnic and socioeconomic groups in the U.S. in all age segments have experienced a significant rise in obesity. In fact, 64.5% of the adult population, roughly 127 million Americans, is now overweight. Of that total, 60 million are obese and nine million are severely obese. Even more alarming: Children are getting heavier. Just over 30% of children aged 6 to 11 in the U.S. are overweight and 15.3% are obese.

"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 significant impact on the healthcare 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 U.S. with an associated $100 billion price tag for the healthcare 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, just 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.

Eric Miller, co-manager of the $1.5-billion Heartland Value Fund (HRTVX), says that 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 said. "Although inhalants don't have more efficacy than the traditional forms of injected insulin, it is 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 FDA. Standard & Poor's 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 noted. "Symlin is for patients with type 1 diabetes, so its sales prospects are lower."

Miller points out that other big pharma companies like Eli Lilly & Co. (LLY ) and Abbott Laboratories (ABT ), each with big diabetes franchises, have similar products in their pipelines. In such large companies, however, he notes that a diabetes drug represents only a small portion of their overall business. Instead, early-stage biotech companies exploring treatments for type 2 diabetes represent purer plays. One example is MannKind Corp. (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. "They're probably several years away from getting their inhaledinsulin drug approved. 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 Inc. (KERX), which is in Phase 3 testing of a drug named Sulonex that is 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 thediabetes market." He believes Sulonex is a potential blockbuster, but added that it's not yet approved, and it may take another year and a half to find out whether or not it will make it. Kerex currently has a market cap of just $660 million, and Miller ascribes virtually all of that value to Sulonex.

Emisphere Technologies Inc. (EMIS), which focuses on drug delivery systems, is also on Miller's radar. The firm takes existing drugs and attempts to design a better way to deliver them, primarily through oral means, he said. "They are testing an oral form of insulin, as there are no 'insulin pills' in existence yet." Emisphere is currently engaged in Phase 2 trials for "oral insulin" in India. "If it works, and that's a big if, it will be a huge advancement," Miller says. Emisphere only has a market cap of $180 million and nobody covers it on the sell-side.

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. For example, he said 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, is an example of a provider in the field.

Hathaway also foresees profits for companies that are trying to educate people on how to live better lives, i.e., firms committed to disease management. "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."

Investors looking for exposure to companies developing drugs to fight diabetes could also purchase broad-based health care mutual funds. For example, the Vanguard Health Care Fund (VGHCX), ranked 5 Stars by Standard & Poor's, holds Pfizer, Sanofi-Aventis, Humana and UnitedHealth Group, though it is currently closed to new investors.

Other health care funds ranked 5 Stars and that are open to new investors include BlackRock Health Sciences Portfolio/Inv A (SHSAX), Hartford HLS Global Health/IA (HIAHX) and Fidelity Select Medical Delivery (FSHCX). Health care ETFs include S&P Select Health Care SPDR Fund (XLV), iShares DJ U.S. Health Sector Index Trust (IYH), Vanguard Health Care VIPERs (VHT) and iShares S&P Global Health Sector Index Trust (IXJ).

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