Diabetes Small-Caps: Defusing the Diabetes Time Bomb

Jan 18th, 2006 | By Penny Sleuth Contributor | Category: Investing Strategies, Technology

Jonathan Kolber discusses Diabetes and reveals a couple of Small-Cap companies doing research on it that may be worth looking into.

The New York Times has recently been running a series of articles on the exploding diabetes epidemic. Not only is the disease extremely costly to treat, but the disease has been hurting ever younger people. Even teenagers are suffering from it.

Few who are not personally affected by the disease realize that it is a wasting condition of devastating proportions. The body’s ability to regulate blood sugar levels is lost, and then vital cells are killed by extreme variations in these levels. Affected cells include nerves of the hands and feet, as well as vital organs such as the eyes.

My father has diabetes. Fortunately, we can provide him with the expensive medical care he needs. Others are not so lucky.

Victims can suffer from amputation and blindness. As organs become weaker, the body’s ability to perform vital functions fails. For many, it’s a slow, excruciating route to death.

Diabetes Small-Caps: deCODE Genetics

Agora Financial’s Emerging Capital Report portfolio is holding deCODE Genetics (DCGN: NASDAQ)– a small-cap company, which means it’s worth between $500 and $1.5 billion. This company, currently worth just $547 million, has achieved a breakthrough in diagnosing type 2 diabetes. Research published in the journal Nature Genetics highlights evidence that a particular variant gene greatly increases the risk of developing this disease later in life.

deCODE plans to offer a diagnostic test for the gene soon. Approximately 21 million Americans have been diagnosed with diabetes, and many more have either undiagnosed diabetes or a condition called “prediabetes” in which blood sugar characteristics are becoming dangerous.

According to the study, almost 40% of Americans have at least one copy of the dangerous variant gene. They received it from one parent, but not the other. This raises the risk of developing diabetes by 45%. On the other hand, 7% of the U.S. population received the gene from both parents. These unfortunate people have a 141% greater risk of developing the disease.

deCODE calculates that replacing these variant genes with healthy ones would eliminate 21% of all the diabetes in the American population.

Diabetes Small-Caps: TCF7L2

Historically, medical researchers have believed that diabetes is caused by the complex interactions of a number of different genes. According to geneticist David Altshuler of Massachusetts General Hospital, this remains true. What’s different now is that this particular gene has been identified as having a far greater impact than the others.

Surprisingly, the culprit gene, called TCF7L2, was not previously believed to have an impact on diabetes. It’s a gene that controls other genes.

In addition to the opportunity for early testing that can encourage people at especially high risk to make important lifestyle changes, this new discovery clarifies a biological pathway by which diabetes is developed. At every step along that pathway, different genes make different proteins.

An exciting implication of this is that it should be possible to develop new drugs that target the stages along the pathway, thereby offering a laser-like method of preventing diabetes without the serious side effects of current drugs.

DeCODE is already working on such research. The new discovery merely strengthens its hand in terms of a richer array of possible drug targets.

According to Dr. Kari Stefansson, CEO of deCODE, the variant gene has been with humanity for at least 50,000 years. Therefore, it’s probably present to some degree in all races and population subgroups.

Diabetes Small Caps: Why Invest in Diabetes Research?

From an investment standpoint, the new discovery makes deCODE an even more valuable company. Since everyone on Earth is potentially at some degree of risk for possessing one or even two copies of this gene, and since diet and exercise changes are more effective at prevention when adopted earlier in
life, the potential market for this genetic testing is vast.

Practically speaking, the near-term market includes people in the middle and upper classes living in Western democracies as well as the burgeoning middle and upper classes of India and China. (Many forget that India today has a middle class larger than the entire U.S. population.)

Estimates of the impact on deCODE’s bottom line will have to wait until the test is packaged for commercial distribution. However, it’s likely that deCODE will license the test to a pharmaceutical giant that will then pay it royalties in the range of 5% of sales. It’s not unrealistic to think that
this test could add $100 million a year in net profit to deCODE’s bottom line within five years.

This work has some broader implications. I note that the gene in question is not one that regulates blood sugar. Rather, it is a master gene that regulates the activities of groups of other genes.

This is not the first such master gene to be discovered as having huge significance in recent years. Dr. Cynthia Kenyon, an esteemed biochemist at the University of California, San Francisco, has identified another master gene that controls the activities of about 100 other genes and appears to be central to the entire aging process. Switch this gene off,
and she believes that aging can be halted in its tracks.

How many other such master genes are central to intractable diseases? I expect this to become an increasing focus of research in the medical community in years to come.

Diabetes Small-Caps: Microcaps Regulating Blood-Sugar Levels

PhytoMedical Technologies (PYTO: OTCBB) is a microcap company (meaning it’s worth less than $500 million — in this case, $217 million). It is working on developing drugs based on unique blood sugar-regulating properties discovered in cinnamon.

While the work of deCODE and PhytoMedical progresses through the labyrinthine FDA approval process, those who have (or are at risk for developing) type 2 diabetes can do a simple thing to benefit their health. They can take a quarter teaspoon of cinnamon powder twice a day as an addition to their diet.

USDA research proves that cinnamon helps to stabilize blood sugar levels, reducing insulin dependence and slowing the progression of the disease. Although not a cure, cinnamon buys the victim precious time until one is found and approved for medical use.

To your profitable future,

Jonathan Kolber
January 18, 2006

On another subject, while deCODE is developing tests and drugs that focus on the genetic aspects of diabetes, another one of the companies I’ve recommended to my Emerging Capital Report readers has taken research from the U.S. Department of Agriculture and is turning it into drugs for controlling blood sugar levels.

Penny Sleuth Contributor

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