2 Stocks to Profit from Fighting America's Growing Obesity Epidemic: SNY, LLY, TEVA

America's growing obesity epidemic has been for years one of the primary concerns among health-care professionals and organizations. Right now, about one-third of adults and 20% of children in the country are obese, according to the U.S. Centers for Disease Control and Prevention. So it's easy to imagine the costs associated with obesity can only be overwhelming. In 2008, for instance -- which is the most recent data available -- medical costs associated with obesity totaled $147 billion, making obesity a great burden on U.S. health care spending.

Obesity has been directly linked to other costly conditions such as heart disease, stroke, certain types of cancer and Type 2 diabetes, which is also a growing disease among the U.S. population. In fact, scientists warn that if the obesity epidemic continues, the number of Americans with diabetes will double or even triple to 20% to 30% of the population within 40 years.

The skyrocketing costs of diabetes care are disturbing, but they also create huge growth and profit [1] opportunities for diabetes drugmakers and their investors. Most diabetes drugs are made of some form of insulin and, given the growing trend, demand for diabetes drugs tends to only increase. In the past 10 years alone, global insulin sales have risen a whopping 400% to $15.4 billion currently. And in the next five years they are estimated to rise another 37%.

Given this picture, here are two high-yielding drug companies that have sizable stakes in the diabetes treatment market [2].

1. Sanofi SA (NYSE: SNY [3])
Yield: 4%
Sanofi (formerly Sanofi-Aventis) is a French pharmaceutical company that develops and markets diabetes drugs, vaccines and other medicines. The company owns Lantus, the world's best-selling diabetes drug. In the first half of the year, Sanofi's diabetes drug sales rose 11.5% year-over-year to $3.02 billion. This represented 15% of overall sales, which totaled $21.3 billion. Sanofi has 55 drugs in various stages of development, including several new diabetes drugs.

The company's earnings per share (EPS) [4] have grown 20% in the past five years to $4.68 and dividends have climbed 10.5% to $1.32. Despite patent expirations on Plavix, its well-known blood thinner whose 2010 sales brought in $2.8 billion, and Avapro, a blood-pressure medicine whose sales totaled $436 million in 2010, Sanofi still expects to grow sales 5% a year and boost profits with new diabetes drugs -- Lyxumia, in particular -- vaccines and consumer health-care products. Much of this anticipated growth should come from six new drugs Sanofi plans to launch within the next year. The company will also likely benefit from $2.9 billion in anticipated cost savings resulting from its merger [5] with biotech firm Genzyme Corp.

The company's $13 billion cash flow [6] last year easily handled $5.9 billion of research and development (R&D) spending and $4.3 billion of dividend [7] payments. With a yield [8] exceeding 4%, the stock should be attractive to dividend lovers. Even better, CEO [9] Chri Viehbacher says dividends will keep rising as Sanofi moves beyond patent cliffs next year. Sanofi is valued at a trailing price-to-earnings (P/E) ratio of 15, but just 7 times forward earnings [10].

2. Eli Lilly (NYSE: LLY [11])
Yield: 5%
Like Sanofi, U.S. pharmaceutical giant Eli Lilly plans to offset patent expirations of top-selling medicines with new drug developments for diabetes, Parkinson's disease and cancer -- all of which are already in late-stage clinical trials. Lilly's current diabetes drug, Humalog, generated sales of $2 billion last year and accounted for 9% of the company's total revenue, which reached more than $23 billion.

A recently-signed drug development pact with German drug-maker Boehringer Ingelheim is replenishing Lilly's pipeline with new mid- and late-stage diabetes treatments. The agreement covers five medicines, at least four of which the companies plan to develop and commercialize jointly.

In the first six months of 2011, Lilly's sales rose 8% year-over-year to $12.1 billion, due in part to a strong contribution from Humalog, whose sales rose 10% to $1.1 billion in the same period. However, Lilly's income declined 13% to $2.2 billion, mainly because of licensing fees and restructuring charges. In the past five years, Lilly's earnings [12] have risen 20%, while dividends have grown 5%.

With a reasonable dividend payout of 46% of earnings, Lilly could readily afford a dividend hike, especially with the stock's yield being already exceptionally good at 5.3%. Lilly is bargain-priced at a P/E ratio of 9 and price to cash-flow (P/CF) ratio of 7.

Risks to consider: My main concern with these two drugmakers is that patents on their flagship diabetes drugs are due to expire in the next three years. The good news is these drugs are forms of insulin, which is considered a biologic product and therefore is protected by law from generic versions even after patents expire. If the laws protecting biologic drugs change, then generic drugmakers such as Teva Pharmaceuticals (Nasdaq: TEVA [13]) could benefit.

Action to take --> My top pick for growth investors is Sanofi because of its deeper pipeline of drugs under development. Income investors may find Lilly more appealing due to its richer yield. If dividends don't matter to you, then you should also consider investing in Novo Nordisk (NYSE: NVO [14]), a Danish drugmaker that owns 50% of the insulin market share [15].