The Best Company for Investing in the Diabetes Market

By Markets Fool.com

The Centers for Diseases Control and Prevention estimates that 29.1 million Americans suffer from diabetes, with that number reaching as high as 387 million around the globe. By 2035, the worldwide number is estimated to grow to as many 592 million patients.

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Diabetes is a chronic disease caused by the body's inability to produce or effectively utilize insulin, which prevents the body from adequately regulating blood glucose levels.

Diabetes is typically classified into two major groups: type 1 and type 2.

Type 1 diabetes is an autoimmune disorder characterized by the body attacking its own insulin-producing cells of the pancreas. Without any natural insulin production, patients with type1 diabetes must rely on frequent insulin injections in order to regulate and maintain blood glucose levels. As of 2012, about 1.25 million American had been diagnosed with Type 1 diabetes.

Type 2 diabetes is a metabolic disorder that results when the body is unable to produce sufficient amounts of insulinor becomes insulin resistant, and this type is much more common than type 1. About 19 million Americans have been diagnosed with type 2 diabetes, and a further 8.1 million have type 2 but remain undiagnosed.

Treating diabetes is both complicated and costly. The most recent estimates from the American Diabetes Association indicate that total costs to treat diabetes in the U.S. reached $245 billion in 2012 alone, up from $174 billion in 2007.

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It's no surprise that a market with that level of spending has attracted investors' attention.

There are plenty of ways for investors to gain exposure to the diabetes treatment market, such as Big Pharma companies like Sanofi, Novo Nordisk,and Eli Lilly, who produce a range of drugs used to treat the disease. On the opposite end of the diversity spectrum, MannKind Incorporated joined the game recently with its launch of Afrezza, an innovative inhaled insulin that eliminates the need for patients to take shots. Since MannKind has only this one drug approved, it is higher risk than its larger competitors, but it is more of a pure play on the diabetes treatment market.

On the drug delivery side, investors can take a stake in insulin pump manufactures like Medtronic, Insulet, or Tandem Diabetes, all of whichhave products on the market for insulin delivery to diabetics.

However, there is another company I've had my eye on for a few years, and its been one of my biggest mistakes as an an investor that I've never personally bought shares. The company has been a massive long winner, up a market-crushing 560% since going public in 2005, leaving investor favorite MannKind in the dust. That company isDexcom .

DXCM Chart

Dexcom produces and sell a product called a continuous glucose monitor, which is a two-part device designed to shows users what their blood glucose level iscontinuously. Currently, most patients with diabetes check their glucose levels with a meter that requires the user to add a drop of blood to a strip to get a point-in-time reading. The problem with this method is that patients and providers do not get an accurate reading on what is happening with the patient's blood sugars throughout the day, as glucose levels can fluctuate rapidly.

Dexcom's system shows a continuous graph of the patient's blood sugars levels, which can lead to better decisions about insulin dosages, ultimately providing for much better blood sugar control.

Source: Dexcom.

Dexcom offers investors the terrific razor-and-blades business model, as it sells its Dexcom Seven Plus starter kits to patients, who then use the sensor for up to seven days before they throw the sensor away and put another one on.

Source: Dexcom 2014.

Dexcom's solution has enjoyed rapid adoption since launching in 2006, and full-year revenue jumped an impressive 62% in 2014 to $259.2 million. Gross margins for the company have been going up, and in Q4 2014, they hit a very impressive 70%, which allowed the companyto generate a profit for the first time ever. The balance sheet is strong as well, with $83 million in cash and equivalents versus $3 million in debt.

Huge opportunity ahead
Dexcom is giving investors plenty of reasons to believe growth will remain strong in the years ahead. The system received expanded approval in February 2014 for the pediatric market,providing a meaningful tailwind for the company.

The company also has announced partnerships with several insulin pump manufacturers that will allow for the displaying of Dexcom's sensor readings directly on the pump itself, which eliminates the need to carry a separate Dexcom receiver.

Source: Animas

Animas Corp.'sVibe insulin pump has this feature built in and received FDA approval in December 2014.Tandem DiabetesCare'sT:Slim pump is slated to have this feature as well, and this version is currently pending FDA approval. Dexcom has also announced a similar agreement with Insulet Corp.'s OmniPod system.

Dexcom is only scratching the surface internationally, as well -- the company only generated 14% of its revenue outside the U.S. in 2014. Lastly, Dexcom has announced that its systemwill work with the Apple Watch, giving patients a much more convenient way to monitor what is happening with their blood sugar.

Analysts predict the good times are going to continue to roll, with revenue expected to climb another 39% this year to $360 million and reach $489 million in 2016. As the company matures and economies of scale set in, margins should expand nicely, providing a big boost to the bottom line.

All for a price
Dexcom shares can hardly be called cheap, as they are currently trading at about20 times2014 sales.

However, given the opportunity presented by such a large market, Wall Street is understandably excited about the company's future, and it's been bidding up shares to match the opportunity, particularly given that the company is finally profitable.

There is a chance the stock price has gotten ahead of itself, but given that Dexcom has proven its technology is well-liked by patients and providers, and has plenty of room for growth ahead, the company remains my favorite way to invest in diabetes.

The article The Best Company for Investing in the Diabetes Market originally appeared on Fool.com.

Brian Feroldi owns shares of Apple and Insulet. The Motley Fool recommends Apple and Insulet. The Motley Fool owns shares of Apple. 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.