China’s Diabetes Market Could Become A Big Focus For Pharma Companies

Big pharmaceutical companies such as Pfizer (NYSE:PFE), Merck (NYSE:MRK) and Johnson & Johnson (NYSE:JNJ) are banking on oncology and immunology drugs for their future growth. However, there is significant opportunity in the metabolism disorder market, especially in the treatment of diabetes which is affecting tens of millions of people worldwide. The statistics around pre-diabetes condition point towards an epidemic which could boost the sales of drugs such as Invokana and Januvia.

China is going to be the focal point as a latest reports suggest that 11.6% of Chinese adults have diabetes and around 40% of adults between the age of 18 and 29 are on the verge of developing it. ^[1] That puts China’s diabetes patient count at 114 million individuals, and this figure is likely to go higher. According to IMS health, China’s diabetes market is expected to grow 20% annually and reach $3.2 billion by 2016. ^[2] Many patients in emerging markets such as China tend to be unaware of their medical conditions. As education and health awareness increases, we expect these patients to seek medical treatment at an early stage, thus boosting the sales of diabetes drugs.

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J&J Diabetes Drug ‘Invokana’ May Find Success

In early 2013, J&J was granted FDA approval for its blockbuster potential type 2 diabetes drug, Invokana (commonly known as Canagliflozin). The approval marks J&J’s first entry into the huge diabetes market. Despite overall strong efficacy in reducing blood sugar in diabetics and market potential being significantly higher, we currently expect the drug to achieve over $1 billion in expected peak sales. However, Invokana is the first diabetes treatment approved by the FDA in a new class, which essentially implies that medical specialists and doctors are likely to take their time to see the drug’s efficacy.

With obesity climbing , diabetes is affecting more people globally. In the U.S. alone, roughly 26 million people suffer from the condition. Owing to these factors, the global diabetes drug market has seen rapid growth rate in the last couple of years. According to GBI Research, a leading business intelligence provider, the type 2 diabetes drug market, which constitutes a significant chunk of the total diabetes drug market is expected to grow from $26 billion in 2011 to $50 billion in 2021, in developed markets including the U.S., Japan and Europe

While most of the business is likely to come from developed markets, emerging markets cannot be ignored, as evident from the recent diabetes statistics in China. The healthcare spending is likely to increase going forward, and the growth in health insurance services will make the market more attractive for pharmaceutical giants such as J&J. While the market is crowded with several major drugs available for the condition, the fact that the disease is often associated with several other disorders, limits its target patient population. This presents an opportunity for new drug compositions such as Canagliflozin. It is a member of a new class of diabetes drugs known as sodium-glucose co-transporter-2 (SGLT2) inhibitors that lower blood sugar by blocking the re-absorption of glucose by the kidney and increases the excretion of glucose in urine.

Merck’s Januvia Can Get A Breather In China As Competition Gets Tough In The U.S.

Merck’s blockbuster diabetes drug Januvia, with over $4 billion in revenues in 2012, is losing sales in the U.S. According to BMO Capital Markets, the three week prescription data for the third quarter suggests that Januvia franchise’s prescriptions have declined by 1.7%. ^[3] The drug’s sales have suffered following Invokana’s launch by Johnson & Johnson in April, and the research firm expects the prescription volume to continue declining in the second half of 2013. It appears that Invokana is taking away some volume from Januvia.

We currently account Januvia’s revenues under Alimentary & Metabolism drugs division, which constitutes roughly 15% to our price estimate for Merck. Januvia’s importance can be gauged from the fact that the exclusion of the drug’s sales from Merck’s revenue forecast leads to downside of about 5-10% to our price estimate. That’s a lot of value for a single drug in a diversified company like Merck. To reduce the risk of potential sales decline in the U.S., Merck can tap the growing diabetes market in China.

Merck’s pharmaceutical sales in China stood at $1.04 billion in 2012, constituting roughly 2.5% to the company’s overall revenues. This figure increased to 3.1% in the first half of 2013 as the business in the region grew in double digits.

Our price estimate for Johnson & Johnson stands at 90, implying a slight premium to the market price.

1. China ‘Catastrophe’ Hits 114 Million as Diabetes Spreads, Bloomberg, Sept 4 2013 [↩]
2. China Diabetes Triples Creating $3.2 Billion Drug Market, Bloomberg, Nov 5 2012 [↩]
3. Merck & Co., Inc. (MRK): Why Investors Should Be Cautious On Januvia?, iStockAnalyst [↩]