When we talk about companies focused on diabetes care, many investors will probably think of insulin makers like Novo Nordisk, Sanofi (NYSE: SNY ) , and Eli Lilly.
Medical giant Johnson & Johnson (NYSE: JNJ ) , best known for its pharmaceuticals, consumer health care products, and medical devices, is often overlooked. However, Johnson & Johnson has slowly but steadily expanded into the diabetes market over the past few years.
Let's take a look at three important ways the medical giant is changing diabetes treatments, and how its efforts relate to industry peers AstraZeneca (NYSE: AZN ) , Bristol-Myers Squibb (NYSE: BMY ) , Medtronic (NYSE: MDT ) , DexCom (NASDAQ: DXCM ) , and Sanofi.
A new class of diabetes drugs
The first treatment that J&J investors should be familiar with is Invokana, a new treatment for patients with type 2 diabetes that was approved in the U.S. in March 2013 and in the EU in November 2013. Invokana belongs to a brand-new class of drugs known as SGLT2 (sodium glucose co-transporter) inhibitors, which help patients excrete excess blood sugar through the urine.
The ultimate hope is that SGLT2 inhibitors could help diabetics achieve better control over their blood sugar levels, which could lead to fewer daily insulin injections. Since this is a potentially game-changing treatment, analysts believe Invokana could eventually generate peak sales of $2.5 billion -- if it overcomes future competitors.
For now, Invokana's only competitor is AstraZeneca and Bristol-Myers' Forxiga/Farxiga, which was approved in Europe in November 2012 and in the U.S. earlier this month. However, the outlook for Forxiga is less rosy than Invokana, with peak sales estimates around $1 billion.
Investors should also note that Forxiga will soon belong solely to AstraZeneca, after it bought out Bristol-Myers' stake in their diabetes joint venture for up to $4.1 billion in December.
An artificial pancreas
In September 2013, Medtronic made history when its wearable artificial pancreas for type 1 diabetes patients was approved by the FDA. The device, known as the MiniMed 530G, connected a continuous blood glucose monitor to an insulin pump -- allowing the pump to shut off for two hours once blood sugar levels fell below preset levels.
Medtronic's device was a huge step forward for type 1 diabetics, but it cannot be considered a fully automatic artificial pancreas, which would ideally deliver insulin continuously according to fluctuating glucose levels.
That's where Johnson & Johnson's Animas division and insulin pump maker DexCom come in. Together, the companies are developing a competing first-generation artificial pancreas that would go a step beyond Medtronic's device with a partially automated system.
Although patients using J&J and Dexcom's device will have to manually instruct the pump to deliver insulin at certain times (such as after meals), it will have a system that can keep blood sugar levels between a preset range -- such as 80 mg/DL and 180 mg/DL -- increasing insulin at the higher end of the range, and slowing down or turning off insulin delivery at the lower end.
Once approved, J&J and Dexcom's device could force Medtronic to answer with a fully automated system that doesn't require any manual operation at all -- dramatically improving the lives of type 1 diabetics across the world.
Wireless diabetes management via Bluetooth
J&J subsidiary LifeScan also recently launched a fascinating new wireless blood glucose monitoring solution for Apple iOS devices, known as the OneTouch Verio Sync Meter. The device was originally approved in March 2013.
The Verio Sync Meter reads blood test strips, then wirelessly relays them via Bluetooth to LifeScan's OneTouch Reveal mobile app. The app then records the data, turning them into visual charts and logs, and provides high and low glucose pattern alerts accordingly.
The app also records information about food consumption, physical activity, and medications. The data can then be sent over the Internet to health care professionals or other people via text messages or email.
The OneTouch Verio Sync Meter competes against Sanofi's iBGstar, a similar product that plugs directly into the bottom of the phone, rather than communicating through a Bluetooth connection. The iBGstar was approved by the FDA in December 2011.
It remains to be seen if LifeScan's wireless solution will really be any more convenient than Sanofi's plug-and-play version, but LifeScan is apparently aiming to undercut Sanofi's device with a slightly cheaper price -- The OneTouch costs $19.99, while the iBGStar costs $24.99 (without test strips).
However, both devices are sold on the razor to razor blades model -- although the devices themselves are inexpensive, the test strips are not. A package of 100 test strips for the iBGstar costs $69.99 -- an average price of $0.70 per strip.
The Foolish takeaway
Although these three diabetes products only represent a small percentage of Johnson & Johnson's revenue, they are examples of interesting new ways the company can expand its footprint in diabetes care. More importantly, Invokana, an artificial pancreas, and a Bluetooth monitoring system can all substantially improve the lives of diabetic patients.
Looking forward, J&J is still a top investment for conservative health care investors -- the stock has climbed 30% over the past 12 months, despite negative PR regarding tainted batches of infant Motrin and Risperdal, a $2.5 billion hip implant settlement, and another $2.2 billion settlement over off-label marketing.
J&J's core strengths -- strong growth in its pharmaceuticals and consumer health care division, complemented by its robust cash position of $25.2 billion -- more than offset those weaknesses. In addition, its forward annual dividend yield of 2.8% still makes it a top choice among income investors.
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