Scientists from the University of Melbourne and the city's St Vincent's Hospital said the drug had been shown in animal trials to prevent fibrosis, the build-up of irreversible scarring on internal organs.
There are currently no treatments on the market for fibrosis and the new drug, called FT-11, could be as important a discovery as blood pressure drugs if effective, said Professor Darren Kelly of the University of Melbourne.
"It would be an enormous blockbuster drug with an initial market of around 2.0 billion dollars," he said.
Kelly said while the drug would not prevent diabetes -- a chronic illness in which the body fails to produce enough of the hormone insulin to process sugar -- it could prevent complications such as kidney or heart disease.
"We are hoping to delay or prevent those complications which would basically keep those patients off dialysis -- which would have a huge benefit for their lifestyle," Kelly told AFP.
The drug, expected to be tested in clinical trials within 12 months, could be used to prevent diabetic kidney disease, heart disease and potentially other health problems such as liver and lung fibrosis, he said.
Speaking to the Australian Broadcasting Corporation, Kelly said about 45 percent of diseases in the developed world could be associated with some sort of pathological fibrosis.
"We know at the moment in rat studies that our compound inhibited the development of fibrosis, and the interesting thing in the future would be to see whether we can actually reverse fibrosis," he said.