This is Why Diabetes Treatment Costs Are Soaring

Diabetics are spending more on their treatment, and pharmacy benefit manager Express Scriptssays a new class of diabetes drugs is to blame. These drugs, which are known as SGLT2 inhibitors because they target the SGLT2 protein that helps the kidney reabsorb glucose, are more expensive than prior-generation diabetes medications.

In 2013, Johnson & Johnson's Invokana became the first SGLT2 inhibitor to notch FDA approval, and the federal agency signed off on two more inhibitors last year. Since these drugs are claiming an increasingly larger share of total diabetes spending, let's learn more about them.

Source: Express Scripts.

First, a bit of backgroundDiabetes today afflicts 29 million Americans. Another 2 million Americans are diagnosed with diabetes every year, and with 79 million Americans categorized as pre-diabetic, expectations are for diabetes prevalence to increase significantly in the coming decades.

According to the International Diabetes Federation, the total global population of diabetes patients will climb by 205 million people, to 592 million, by 2035.

Since diabetes is so widespread, it's probably not surprising that it is the most costly disease in the United States on a per member/per year, or PMPY, basis. According to Express Scripts, dividing the total dollars spent on diabetes medicine in 2014 by the total number of members in drug plans shows that PMPY jumped 18% to $97.68 last year.

Innovating treatmentThe previously mentioned Invokana is a once-daily oral medicine that reduces the ability of the kidney to reabsorb glucose. Thus, the drug increases how much glucose can be flushed from a patient's body.

Studies across more than 10,000 patients showed that Invokana, as both a stand-alone therapy and when used alongside metformin and insulin, can improve glycemic control. That's important because roughly half of all type 2 diabetics fail to adequately control their disease with prior-generation drugs such as metformin and insulin.

Since millions of patients struggle to control their blood glucose levels, doctors are increasingly prescribing Invokana. As a result, Invokana's sales jumped to $201 million in the fourth quarter.

Invokana's $804 million annualized sales run rate is pretty impressive for a drug that hit the market only two years ago, but total SGLT2 sales are likely heading much higher following the additional FDA approvals in 2014.

In January 2014, the FDA approved sales ofAstraZeneca's Farxiga;last August, the agency gave the go-ahead to Jardiance fromBoehringer and Eli Lilly and Co..

Source: AstraZeneca

Since AstraZeneca and Eli Lilly are global diabetes market share leaders, the marketing of SGLT2 drugs by their sales teams has significantly driven up the inhibitors' market penetration.Following the launch of Farxiga and Jardiance, the total number of new monthly prescriptions for SGLT2 drugs has more than tripled.

Looking aheadInvokana sales grew to $586 million last year; based on the drug's fourth-quarter annualized sales run rate, sales could increase by at least 37% this year. While AstraZeneca and Eli Lilly aren't breaking out numbers for Farxiga and Jardiance yet, sales of those two drugs are likely to spike meaningfully this year, too. As a result, the cost of diabetes medicine isn't likely to fall anytime soon. Express Scripts forecasts that SGLT2 inhibitors' ongoing script growthwill be a major reason why PMPY climbs 18.3% annually in each of the next three years. For that reason, investors ought to pay close attention to this new class of drugs and the companies that produce them.

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Todd Campbell has no position in any stocks mentioned. Todd owns E.B. Capital Markets, LLC. E.B. Capital's clients may or may not have positions in the companies mentioned. The Motley Fool recommends Express Scripts and Johnson & Johnson. The Motley Fool owns shares of Express Scripts and Johnson & Johnson. 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.

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