2 investors bet big on boomer biotechs

Phillip Frost backs SafeStitch and Warren Buffett holds DaVita.

By Minyanville.com May 1, 2013 2:21PM
Droplet Falling from Pipette into Test Tube copyright Andrew Douglas, Radius Images, Getty ImagesIn New York City, you can't walk into a Starbucks (SBUX) and feign dietary ignorance while ordering your favorite Frappuccino. The calorie cost stares back at you as clearly as the price. 
 
From Wall Street to the White House -- with obesity strongly linked to the steep rise in diabetes  -- the slimming of America has taken on national importance. In some states like Mississippi, located in the geographic region known as the "diabetes belt," the incidence of obesity is as high as 30% and over 11% of the adult population has been diagnosed with type 2 diabetes. Along with weight gain, age is another leading risk factor. The large proportion of aging baby boomers emphatically correlates to this epidemic.
 
"I know of no other disease increasing by about 8% per year," said Dr. John Anderson, President of Medicine and Science for the American Diabetes Association. Throughout the country, about 79 million people with prediabetes are at risk for developing full-fledged type 2 diabetes. 
 
Yet amid all of the troubling symptoms and statistics, there is good news: Movements are afoot to raise dietary awareness and to spread knowledge about the importance of exercise in order to help deter the onset of type 2 diabetes. In the meantime, "Although diabetes costs are growing, we're spending the dollars effectively," according to Matt Peterson, a spokesman for the American Diabetes Association. “We're picking it up earlier and caring for it better. We're getting the right value for our money."
 
Legendary investor Warren Buffett and visionary pharma billionaire Phillip Frost have both voted with their pocketbooks to support biotechs that help to treat and contain the rising epidemic. Buffett's top biotech holding is dialysis services provider DaVita HealthCare Partners Inc. (DVA).
 
Dr. Phillip Frost, of Teva Pharmaceuticals (TEVA) and Opko Health (OPK) fame, founded SafeStitch Medical Inc. (SFES) in 2006. Frost has the largest stake in the small biotech, which develops minimally invasive anti-obesity (bariatric) surgical procedures, markets innovative disposable medical devices to treat obesity, and advances surgical procedures for hernia repair. 
 
Currently about 400,000 bariatric surgeries are performed worldwide each year. Existing procedures are high risk, can cost as much as  $70,000, and involve open abdominal surgery. SafeStitch has an an alternative outpatient procedure in the pipeline that is not only safer and has a faster recovery time, but also represents a significant reduction in cost.
 
Recently SafeStitch reported positive findings in a seven patient preliminary pilot clinical trial using its proprietary transluminal devices to restrict gastric acid reflux in three patients and to cause meaningful weight loss of  30% to 60% in two obese patients after two years. The company plans to extend the pilot study and will submit an Investigational Device Exemption (IDE) to the FDA this year. "We plan to seek FDA approval in due course," stated Dr. Jane Hsiao, current Chairman of SafeStitch Medical.
 
Dr. Charles Filipi, Chief Medical Officer at SafeStitch, reported, "To the best of our knowledge, no other transoral devices have achieved these results. By going through the mouth, there is less risk of infection, and only conscious sedation is required. This should result in lower costs for bariatric (weight loss) and GERD surgery."
 
Overall, the biotech sector is predicted to swell from the current $950 billion in spending per year to $1.2 trillion by 2016. Baby boomer spending on anti-obesity and diabetes-related meds should continue to benefit certain biotechs, especially those associated with diabetes, where costs have mushroomed by over 40% since 2007, totaling about $245 billion in 2012. 
 
Buffett's top biotech holding
Along with hypertension, diabetes is the biggest cause of kidney failure, which necessitates expensive dialysis treatments for those who aren't lucky enough to receive a transplant. Currently almost half a million Americans depend on kidney dialysis to stay alive. One in three patients receive treatment from DaVita HealthCare. 
 
Buffett's Berkshire Hathaway Inc. (BRK.A) continued to buy DaVita throughout 2012, increasing its stake by 127%. Like most of Berkshire's "bets," it has paid off well, rising by over 41% to date. In early April, DaVita earned a continued vote of confidence from Deutsche Bank, which upgraded the biotech and forecast earnings growth greater than $9 per share in cash EPS.
 
Most of DaVita's patients -- more than 80% -- are covered by Medicare. Among the challenges the company faces is increased pressure from insurance companies to lower its rates for those with private insurance. If insurers succeed in negotiating better rates, it could have a negative impact on the company's earnings. So far this year, Davita reported net income for the first quarter that was 7% higher than it was a year earlier.

"The aging of America ... is going to lead to more demand for our services," said Kent Thiry, DaVita's CEO. "Our mission is, however, to help prevent prevent kidney failure, to help prevent other chronic illnesses, and at the same time, reduce costs and improve quality once people have them."

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