3 Reasons to Focus on Diabetes

With demand for diabetes drugs set to increase rapidly, AstraZeneca, Bristol-Myers Squibb, and Pfizer appear to be well placed to benefit.

Jan 26, 2014 at 2:30PM

This week saw the release of positive news flow for AstraZeneca (NYSE:AZN) and Bristol-Myers Squibb (NYSE:BMY), with the two global pharmaceutical majors announcing the marketing authorization for diabetes drug Xigduo by the European Commission.

The drug in question, Xigduo, is a combination of Forxiga, a selective and reversible inhibitor of SGLT2, and metformin hydrochloride. The former works by inhibiting the reabsorption of excess glucose in the kidney, inhibiting SGLT2 (a sodium-glucose cotransporter found predominantly in the kidney), which is responsible for the majority of glucose reabsorption. Meanwhile, the latter works through suppressing glucose production by the liver.

The combination of the two drugs is the first regulatory approval for a fixed-dose combination of an SGLT2 inhibitor and metformin.

This is an important step for both companies, with it potentially being more significant for AstraZeneca, as it recently agreed to take over Bristol-Myers Squibb's share of the two companies' diabetes alliance joint venture. However, Bristol-Myers Squibb should still benefit from further upbeat news (and profits) as it agreed to take milestone payments and a cut of future royalties from the diabetes drugs developed through the alliance.

Even so, shares in both companies didn't react strongly to the news, with share prices being only marginally firmer following the news, before tailing off at the end of the week, in line with the wider market.

The news, though, highlights the opportunity for both companies to benefit from further positive developments in the diabetes space. Indeed, in 2013 type 2 diabetes was estimated to affect more than 380 million people worldwide, with this figure expected to reach close to 600 million over the next two decades.

Furthermore, both AstraZeneca and Bristol-Myers Squibb, as well as sector peer Pfizer (NYSE:PFE), appear to be well positioned in terms of the strength of their fundamentals, enabling them to benefit from long-term growth in demand for diabetes drugs (Pfizer is also developing treatments for type 2 diabetes).

Indeed, all three companies have strong balance sheets, as evidenced by the moderate levels of debt being held.

For example, AstraZeneca's debt-to-equity ratio is currently 43%, while the corresponding figures for Bristol-Myers Squibb and Pfizer are 54% and 46%, respectively.

Such moderate levels of debt compared with net assets could prove to be crucial for the long-term health of the three companies, since, when interest rates do eventually rise, they are more likely to be able to afford the interest charged on their debt. In other words, all three companies appear to be running balance sheets that are not overly leveraged, which puts them on a sound footing to benefit from further positive news flow.

Of course, while interest rates are low, it does make sense to refinance and to take advantage of the low cost of servicing debt. This is exactly what Pfizer has done, with the company increasing its debt-to-equity ratio from 30% in 2008 to the aforementioned 46% in 2012. This has enabled the company to increase returns to shareholders through the capital structure being made up of a greater amount of debt over the past five years, but it still remains at a sensible level to safeguard the long-term health of the company.

Indeed, the moderate debt levels of AstraZeneca, Bristol-Myers Squibb, and Pfizer seem likely to put the companies on a sustainable long-term footing with which to benefit from the expected increased demand for diabetes drugs. With the number of people affected by type 2 diabetes expected to increase by over 50% over the next 20 years, this could prove to be a highly lucrative space for the trio.

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Fool contributor Peter Stephens owns shares of AstraZeneca. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.

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