If you think that the opportunity available to companies that develop diabetes medicine and devices is big, you're right. Over 400 million people have diabetes worldwide, and tens of millions of people get newly diagnosed with diabetes every year. Because diabetes is among the biggest health crises facing us in the coming decades, companies like Novo Nordisk (NYSE:NVO) and Eli Lilly & Co. (NYSE:LLY) are developing new diabetes treatments to delay the disease progression and reduce diabetes-related deaths. By discovering new devices that can improve patient care, smaller companies like DexCom (NASDAQ:DXCM) are getting in on the action, too. Are these companies the best positioned to win in the war against diabetes?

On this episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell are joined by analyst Gaby Lapera to explain this disease and how healthcare companies plan to defeat it.

A full transcript follows the video.

This podcast was recorded on June 15, 2016. 

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's June 15th, a Wednesday, so we're all about healthcare today. Specifically, we're going to do a deep dive on the most costly disease in the United States on a per-person, per-year basis. I'm your host Kristine Harjes, and I'm joined today not just by our awesome healthcare contributor Todd Campbell but also a voice that will sound equally familiar to regular listeners. This is the host of Industry Focus: Financials, Gaby Lapera. Welcome to the show, guys!

Gaby Lapera: Hi, how are you?

Harjes: Doing great. We're really excited to be talking with you today. For those who missed it, Gaby did an amazing show on Monday this week about mutual funds that I highly recommend everybody to check out. If you're used to Gaby's financial sector expertise, you might be scratching your head. Why is she here to do a deep dive on the healthcare sector? This episode has actually been a long time coming. Gaby has been prodding me to have her come on the show and talk for ages about diabetes. Gaby, can you share some of your background and why exactly you're so excited to do this show?

Lapera: I actually got my master's degree in anthropology, specifically biological anthropology. My thesis was on how the endocrine system and metabolism and physical activity all kind of played into each other and how we have a mismatch between our evolutionary environment and our modern environment. As a result, I did a lot of research on diabetes and insulin and leptin and glucagon and all these great hormones that we're going to get to talk about today. I'm just very enthusiastic about the topic because it's so, so interesting and it's so important to the country right now as a matter of public health.

Harjes: Speaking of just how important it is, Todd, can you kick us off with some numbers about the scope of this disease?

Todd Campbell: Absolutely. It's a monster, if you will, of a disease. It affects hundreds of millions of people. It costs hundreds of billions of dollars annually to treat. It's a global problem. People are calling it an epidemic, if you will. There are forecasts out there among industry watchers suggesting that 200 million more people are going to end up being diagnosed with this disease through 2040. That means there will be 640-ish or something like that million people worldwide who are suffering with diabetes and therefore exposed to the risk of cardiovascular disease and some of the other diseases that can result from having diabetes for a lifetime, for a long time.

Harjes: It's really insane how these numbers have grown. There are 415 million people worldwide. That's roughly 9% of the world's population that have this disease and that's more than doubled since 2000. Todd, as you mentioned, this is expected to grow pretty substantially within the next 20 years or so.

Lapera: What's really interesting is that in 2012, at least in the U.S., the CDC estimated that around 30% of people who had diabetes weren't diagnosed with diabetes yet.

Harjes: That's insane.

Campbell: Right. The pre-diabetes population is massive.

Harjes: Seventy-nine million pre-diabetics just within the United States. This is a disease that has pretty serious health consequences, too. It's estimated that 5 million people will die from diabetes related diseases this year. Gaby, can you go into a little bit more depth on what exactly this disease is and what it does?

Lapera: Yeah, absolutely. Diabetes, in its most basic sense, is the body's inability to appropriately regulate its blood sugar levels. This is called glucose homeostasis. Homeo meaning inside, and stasis meaning the same. You want to maintain a fairly even blood sugar level, because if you have too much, that's called hyperglycemia, and you end up with a whole host of issues, but basically the end result is death, unfortunately. Then the other side of that is if you have too little blood sugar, then you have hypoglycemia. That also ends in... death. It's really, really important that your body get this right.

Fortunately, our body is a little bit better at tolerating hyperglycemia than hypoglycemia. Hypoglycemia, that lack of blood sugar, that results in death a lot faster, unfortunately, just because your body really needs sugar in order to run everything like muscles and heart and brain and all that good stuff. Hyperglycemia is tolerated for a little bit longer but not indefinitely. That's when you see diabetes, when you have this prolonged instances of hyperglycemia.

Harjes: You hear about glycemia and you think glucose. You hear a lot about insulin. What is the relationship there?

Lapera: There are two major hormones that are involved in helping regulate your blood sugar. The first is insulin and the other one is glucagon. These guys are involved in this intricate dance that help with the regulation. Now, glucagon's main job is to make sure that there is plenty of blood sugar or plenty of sugar in your blood, so that your body can do things. Your body uses sugar to make energy, basically. Your body needs that in order to move your muscles, and have your heartbeat, and your brain work. You want some sugar in your blood. Insulin comes in and helps the body take away sugar from the blood. It does that by transporting sugar into the liver and muscles where it can be stored or into fatty tissue is the other option for it. That's a really important process as well.

Harjes: That suggests that a mechanism for treating this could be to directly reduce your levels of glucagon. In fact, that is exactly what a classic drug called the GLP-1 agonists do. These are drugs like Novo Nordisk's Victoza. These are surprisingly very effective, despite there being lots of other ways to go about tackling this disease. Is this the best way? How do these work? What should we look for in these drugs?

Lapera: I can speak to how they work. GLP-1, if you want to look it up on the Internet, it's GLP-1. It stands for glucagon-like peptide-1 because there's also a 2. Glucagon-like peptide-1 is a hormone that's actually naturally secreted by your body, by your gut. When food hits your gut, your body starts secreting GLP-1. The GLP-1 basically preps your body for receiving a big rush of sugar. That way, it can start releasing insulin from the pancreas earlier. Now, this exogenous... Exogenous means a medication or a hormone that comes outside the body. It's not one that your body naturally produces. This exogenous GLP-1, which is the drugs that Kristine is talking about, works in the exact same way.

It's really interesting, because GLP-1 has been shown to, obviously, start the pancreas secreting insulin, but it also looks like it increases insulin sensitivity in the alpha cells of the pancreas, which are the ones that are responsible for producing glucagon. That means the pancreas is more sensitive to changes in blood sugar levels. It also increases sensitivity in the beta cells. Not only that, this is really wild and I don't know if they've proven this in humans yet, but it looks like GLP-1 increases the mass of the beta cells in the pancreas, which are the ones responsible for producing insulin. That means that they get bigger and that means they are... It also increases the expression of insulin. More insulin is being produced. The post-translational modification, so turning it into insulin is also increased, and the secretion of insulin is also increased. GLP-1 is working through all these different methods. Then on top of that... This is so cool. It's amazing!

Harjes: I love your enthusiasm, by the way.

Lapera: Good. GLP-1 also looks like it decreases glucagon in the body, which makes sense. Not only that, this the most mind-blowing part of GLP-1, is it also has effects on the brain. It looks like it also decreases hunger. This is huge for people with type 2 diabetes.

Harjes: That's something we haven't talked about yet is the relationship between obesity and diabetes, which is absolutely a factor here.

Lapera: They are definitely comorbidities. Just to back up a little bit, in case you don't know, there are two types... Well, there's three types of diabetes technically. The third is gestational diabetes, and we're not going to talk about that today. The type 1 and type 2 diabetes are the ones that are most widely known. Type 1 diabetes used to be called juvenile diabetes or early-onset diabetes, because it would typically start happening in kids when they are young. We're pretty sure that it's an autoimmune response, and it's T-cells attacking these beta cells in the pancreas, the ones that are responsible for producing the insulin. These people are left with little to no ability to produce insulin. They must receive all of their insulin exogenously.

Then type 2 diabetes is a type of diabetes that you can basically give to yourself. It's kind of a mix between both not being able to produce enough insulin and becoming insulin resistant. Insulin resistance basically means that the receptors on your cells can't hear the signal of insulin anymore. A good way to think about this is, for example, when you got dressed this morning, you put on your shirt. You maybe felt your shirt for like the first couple of minutes and then until I brought it up again, you weren't thinking about how the shirt felt on your body. The same thing happens to your cells. They basically become exhausted from hearing the signals. They just block it out. This happens when there's too much insulin in the blood all the time from having really high blood sugar levels. With type 2 diabetics, it's a mix. It can be more of the insulin resistance and less of the inability to produce insulin or the other way around.

Harjes: For context, 90 to 95% of diabetics are type 2. That's by far the most common of them.

Lapera: Absolutely.

Harjes: Bringing it back around to these GLP-1 agonists. Todd, can you help us understand here what the market looks like for these drugs?

Campbell: Absolutely. The market for medicine in treating diabetes is big. You're talking about massive patient population. Historically speaking, diet and exercise are your first weapons against the disease. Then you get moved on to some tablets. Metformin is commonly used. Then you can be prescribed a number of other things including injectable insulins. Insulin itself, for example, is a $17 billion a year market. Just in selling injectable insulin, you're talking about $17 billion.

As we said previously, the GLP-1 drugs are incredibly interesting because they may have a lot of benefits on outcomes. That's so important in treating this disease. If you're able to reduce the number of cardiovascular events, then you're saving people's lives. GLP-1 drugs may be able to do that. Of the GLP-1 drugs that are on the market, the granddaddy or the one that jumps out is Victoza, which is Novo Nordisk's GLP-1 drug.

I think from an investor's standpoint, looking at the different players that are involved in treating diabetes is important. Novo Nordisk is probably the largest, we'll call it "purist play." They do have some other drugs in hemophilia. For the most part, the vast majority of the revenue comes from diabetes drugs like Victoza, like NovoLog, other injectable insulins that they sell. Eli Lilly has got drugs out there that treat diabetes. Johnson & Johnson (NYSE:JNJ) sells a drug called Invokana, that's a billion-dollar drug. For investors looking to have exposure to diabetes treatment, Novo Nordisk would be the one that I think that they should spend the most of their time researching.

Harjes: You mentioned the cardiovascular outcomes. We actually just heard earlier this week from Novo about Victoza, that they were able to cut cardiovascular risk by 13% in a long-term outcome study. This was the first of the GLP-1s to demonstrate this sort of benefit. It's known to not be a classwide benefit which is really interesting, because we hear also about a totally different class of drugs to treat diabetes called the SGLT2 inhibitors. These drugs have a totally different mechanism that I will soon ask Gaby to explain. There is some speculation with these drugs that are newer that they could have a classwide cardiovascular benefit.

Lapera: See, that's really interesting. SGLT2, to begin with, stands for sodium/glucose cotransporter 2. It's a transporter protein that's dependent on sodium to basically ferry glucose wherever it's going. These guys are in the kidneys. What happens is that if you block the SGLT2, these are SGLT2 inhibitors so you inhibit their function, that means that they're not letting the glucose that's coming through the kidneys go back into the bloodstream. Basically, you're going to urinate most of your excess glucose out, which is a lot safer than having it build up in your bloodstream and do bad things.

Harjes: These are used alongside Metformin and insulin just to improve your control over your glucose.

Campbell: Right. It's Johnson & Johnson that makes the best-selling of that SGLT2 drug. That's Invokana, the one that has a $1.3 billion run rate today.

Harjes: I think a large part of that is they were the first to market with this sort of drug. It's already been on the market for about a year and a half. That's not even true. They've actually been on the market for almost three years. They beat everybody else to market by a year and a half. It is by far the best-selling of this class. You also have a couple of competitors. You have AstraZeneca with Farxiga. I might be saying that wrong as usual with these drug names. That's the second most popular in this class.

The one I think is really interesting, particularly because we're talking about these cardiovascular outcomes is Eli Lilly's Jardiance, which somewhat recently they announced that it actually did have great outcomes in this long-term trial. The other two that we mentioned, Farxiga and Invokana, we're not going to have long-term data on their cardiovascular outcomes until 2019. It's perceived that this could be a classwide effect, but we don't know for sure yet.

Campbell: It's going to be really interesting to see how the doctors react to that news, if they're going to assume that it's a classwide effect and continue to prescribe Invokana instead of Jardiance or not. Jardiance's sales kind of trickle compared to these other drugs. I think they did about $38 million in sales last quarter. It will be interesting to watch and see how that plays out among prescribers.

Lapera: In case you're wondering why we're all so obsessed with the cardiovascular effects of these drugs, it's because when you have diabetes, your risk of dying from cardiovascular disease is conservatively doubled, I believe. Don't quote me on that number but it is increased by a lot. Anything that reduces that chance is huge.

Campbell: The majority of deaths that are caused by diabetes are caused by cardiovascular issues. It means microvascular stuff that gets affected, so that makes a lot of sense.

Harjes: Yup, that is insane. We've talked about a couple of different classes within the treatment space. One other element, too, investing in this space from a treatment perspective that I find intriguing, is in medical devices, because convenience is super important as this is a chronic condition.

Lapera: Absolutely. That really helps people manage it. Devices help people manage their diabetes a lot better than they did before. There is a new, well, I guess, a new-ish class of device that can be inserted on the body, on the skin somewhere, and it continuously monitors your blood sugar, and will administer insulin depending on what your current blood sugar level is.

Harjes: These are called CGMs, continuous glucose monitors. The big company that's making them right now that I know is one of your favorites, Todd, to talk about is DexCom.

Campbell: Right. DexCom is making these continuous monitors that are allowing you to basically chart your blood sugar over time, which is amazing. Gaby, you brought up the fact that if you put on a shirt, you feel it at first. Then you don't feel it the rest of the day. Yes, you may be able to tell when you're out of sorts or when your blood sugar is off, but DexCom has found that 70% of the time most diabetics are outside of their desired range in blood sugar. I think the analogy makes sense to be used here, too. You just don't know sometimes what you're getting in creeping up closer to those problem zones that that's actually happening. By charting the data, being able to keep better track of it in this way, then you can better control it. If you can better control it, maybe then you can delay the progression of the disease and delay things like cardiovascular events.

Harjes: Another point to make here is that this is becoming a pretty hi-tech space, where you get companies that are coming in and want you to be able to see your continuous glucose levels on your iPhone and to be able to send that to your doctors, send that to your parents, send that to the people that really matter.

I had a conversation earlier this year with the CEO of a company called Livongo, which they're a privately held company. You might recognize the CEO's name, Glen Tullman. He's the former CEO of Allscripts. Anyway, this is also mentioned in a March interview that I did with MuleSoft, for those of you who have been listening to the podcast for a couple of months now or longer.

Anyhow, Livongo is making a... What their goal here is to monitor chronic conditions remotely via a connected device. Then you can send the data to your doctors for analysis. You can share it with people that matter to you, as we were just mentioning. They also have a staff of coaches that's available for support and monitoring.

This is a company that has a reach in general chronic conditions, but they started off just in diabetes, mostly because it's such a humongous disease. It really, really matters. Plus, 70% of people with diabetes that are 50 years or older have one or more other chronic diseases.

You get companies that are coming into this space because they recognize that there's a huge unmet need. They're really changing the way that we treat this disease and the lives of the people that have to manage it every single day, which leads me to my final question of the day which is: what's coming next? What do you guys see coming up for the diabetes space in the next, say, 10 years or so? Will this disease be more prevalent or less prevalent?

Campbell: It's going to be more prevalent in my opinion. I think that from a treatment standpoint, you just touched on it. People are going to take a more holistic view of watching, tracking and treating this disease. That's going to mean that you're going to have a convergence between the medical devices such as monitors, the insulin pumps that are used with them, and the medicine that can be used to treat them. I think you're going to see a much more integrated approach. I think you're also going to see some advances in the way drugs are dosed.

Injections have been the standard for insulin in some of these other medications. Companies like Novo Nordisk have fairly advanced clinical trials going on to make oral tablet formations of these that could really reduce patient burden. If they're able to do that, then you could see combination therapies. Now you don't have to take a separate insulin from a separate GLP-1 from a separate whatever. You can take one pill that combines all three.

Lapera: I totally agree with Todd that the incidents of diabetes is going to increase mostly because I think that the global incidents of obesity is going to increase. Since those diseases are so highly linked, and that's a controversial thing calling obesity a disease, but since those two conditions are so highly linked, especially in developing nations, I think that you're going to see an increase in diabetes.

What I think would be really interesting to come out in the next two years, they started doing experiments in this, is looking at a way of mediating the autoimmune response that causes type 1 diabetes, so somehow inhibiting the T-cell response that is causing the destruction of the beta cells in the pancreas that lead to type 1 diabetes. I don't know if that's going to happen in the next 10 years, but they started doing the science for it, which is really exciting.

Harjes: That's a start. Yeah, that is fascinating. This has been a really, really interesting discussion today. Thank you both so much for being here! Folks listening, if you have any questions, or show ideas for us, or you just want to say hello, shoot us an email at industryfocus@fool.com, or reach out on Twitter @MFIndustryFocus. As always, people on the program may have interest in the stocks they talk about. The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Gaby Lapera and Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!

Editor's note: CGMs at this time do not dose insulin themselves.

Gaby Lapera has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson and Johnson. The Motley Fool recommends Novo Nordisk. 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.