Please ensure Javascript is enabled for purposes of website accessibility

These Companies Are Set to Benefit From Worrying Health Trends

By Rupert Hargreaves – Sep 27, 2013 at 9:50AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

These three companies are set to benefit from rising rates of obesity within the United States.

At the end of 2012, a federal report about health trends in the United States revealed that the number of people who have diabetes has skyrocketed. More than 15 years of data was studied for the report, and the results showed that 18 states saw their diabetes rates double. Furthermore, in 42 states the number of people with diabetes rose 50%. In six states and Puerto Rico, 10% of the population now has diabetes; if historical trends continue, this will be 20% by 2028.

What's more shocking is the fact that this trend is set to continue. Approximately 40% of the U.S. population is now estimated to be obese, and obesity is a leading cause of diabetes. Unfortunately, the outlook is gloomy. 

Constant treatment
While type 2 diabetes is the most common form of the disease, type 1 is still prevalent and requires constant insulin injections.

Insulet  (PODD -1.28%) sells the only commercially available insulin infusion system, Omnipod. It is a handheld device that can be worn on any part of the body to hold and deliver insulin. Unfortunately, the company has not been profitable since its inception. Things could be starting to turn a corner, however.

Insulet's sales expanded 12.5% during the recent third quarter after four quarters of decline. On a cash flow basis, the company produced a positive operating cash flow of $3.2 million during the first six months of the year; this was up from negative $20 million during the same period last year. After excluding CAPEX spending, the company was cash flow positive.

Insulet's gross margins were positive during the quarter. The margins came in at 55%, but admin and selling costs were high as you would expect with any company that was ramping up production. This hit overall net profit. The company is significantly ramping up production as sales of the Omnipod are expected to be around 1.5 million during the quarter. The company's manufacturing capacity is only about 500,000 units per month, so Insulet appears to be struggling to keep up with demand.

Teaming up
During the first half of this year, Insulet announced a partnership with Eli Lilly (LLY -0.50%) to combine Insulet's Omnipod technology with Eli Lilly's new drug, Humulin R U-500. Humulin is a form of insulin that is highly concentrated, designed to treat people with highly insulin-resistant type 2 diabetes.

As the number of people with diabetes rises, so does the number of people with severe insulin resistance. This means that diabetes sufferers require a higher dosage of insulin to control their blood glucose.

Currently, there are no insulin pumps designed to deliver the Humulin R U-500 insulin. Because of this, Insulet's development work with Eli Lilly is crucial.

Insulet's rising sales, the partnership with Eli Lilly, and manufacturing facilities operating at full capacity have led analysts to forecast that Insulet will produce earnings before interest and tax of $18.3 million during 2014. The company will still show a loss for the full year in 2013, however. That said, earnings per share are set to explode by 875% to $0.39 by 2015.

Long-term health trends are worrying
Unfortunately, diabetes is often the precursor to kidney disease. During 1999, 44% of all dialysis patients cited diabetes as the underlying cause for their kidney disease. Sadly, this is yet another trend that is only set to worsen over the next few decades as more and more American's succumb to diabetes.

Kidney disease is caused by having too much sugar in the blood stream, the main side effect of diabetes. The longer this problem persists and the longer diabetes goes undetected within the body, the more damage this causes. Type 2 diabetes is hard to detect without tests, and this leads to many sufferers having the disease for years without noticing. A lack of early detection compounds the problem and increases the risk of chronic kidney failure, requiring dialysis.

One of Warren Buffett's core holdings is DaVita HealthCare Partners (DVA -0.60%) . DaVita is one of the nation's leading kidney care specialists and is likely to see a rising demand for its products and services over the next few decades as the prevalence of diabetes rises. At the end of June, the company has 2,010 outpatient dialysis centers within the U.S. and 159,000 patients.

As a long-term investment that has a wide moat, high barriers to entry, and many decades of guaranteed revenue growth, DaVita looks well placed. The company's revenue per share has expanded 290% during the past 10 years, or approximately 29% per year .

Foolish summary
Rising rates of obesity, diabetes, and kidney disease are worrying trends within the U.S. Eli Lilly, DaVita, and Insulet are there to help. These three companies all have strong positions in the market and should only see sales rise in the future.

Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Eli Lilly and Company Stock Quote
Eli Lilly and Company
$363.95 (-0.50%) $-1.82
DaVita Stock Quote
$71.65 (-0.60%) $0.43
Insulet Stock Quote
$288.56 (-1.28%) $-3.75

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/29/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.