During the last six months, shares of DaVita Healthcare Partners (NYSE:DVA) have underperformed the S&P 500 by around 18%. While in the short term this underperformance is unimpressive, over the longer term I believe that this presents a great buying opportunity.
The reason for my strong belief in DaVita's outlook is due to worrying health trends developing in the United States. Chief among these is the rise in the number of U.S. citizens who are developing diabetes.
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, the number of people with diabetes rose 50% in 42 states. 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.
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 in 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 knowing it. A lack of early detection compounds the problem and increases the risk of chronic kidney failure, requiring dialysis .
An industry leader
As one of the nation's leading kidney care specialists, DaVita is at the forefront of this pandemic. According to numbers supplied by the company in its third quarter earnings report, the number treatments the company provides continues to rise. Total dialysis treatments for the third quarter of 2013 were 6,034,647, or 76,388 treatments per day; this represents a year-on-year increase of 7.3%.
It is also worth noting that DaVita's recent acquisition, HealthCare Partners, noted a year-on-year increase in the number of patients treated by more than 15%.
It's not only DaVita that is fighting against the ever-increasing diabetes pandemic. Type 1 diabetes is the more series form of the illness and requires regular insulin injections.
Insulet (NASDAQ:PODD) sells the only commercially available insulin infusion system, and the company has become very popular with investors recently. The company's Omnipod system 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 revealed in its fiscal third quarter results that sales of its Omnipod device surged 40% year-on-year and the company had to open a new manufacturing facility to meet demand for the product.
That said, the company's operating losses widened during the third quarter of 2013 to $17.3 million. According to the company, these increased losses were mainly due to the rollout of the new Omnipod and one-time charges related to a legal settlement .
During the first half of this year, Insulet announced a partnership with Eli Lilly (NYSE:LLY) to combine the 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.
Rising rates of obesity, diabetes, and kidney disease are worrying trends in the United States. 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.
All in all, with these trends set to continue over the long term, DaVita's services should likely register increasing demand.