3 Stocks Dominating the Future of Healthcare

By George Budwell, Keith Speights, and Cory Renauer Markets Fool.com

The healthcare sector is undergoing a revolution of sorts due to the advent of several game-changing new technologies, medical devices, and pharmaceutical products. To help investors get a grasp on this technologically fueled shift in healthcare, we asked three of our contributors to discuss which changes they think are the most critical to watch right now. Here's why Roche (NASDAQOTH: RHHBY), Kite Pharma (NASDAQ: KITE), and Express Scripts (NASDAQ: ESRX) may emerge as the big winners in this new era of healthcare.

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Image source: Getty Images.

A healthcare giant leading in precision medicine

Keith Speights(Roche):Dominating the future of healthcare seems like an impossible challenge for one company, considering how broad the scope of the healthcare industry actually is. If any company has a chance to do it, though, I'd say Roche does.

Roche certainly qualifies as a healthcare giant, with a market cap topping $200 billion. But this giant moves fast. Roche ranks as one of the most innovative biopharmaceutical companies in the world, with more breakthrough therapy designations over the last four years than any other drugmaker.

This healthcare giant has a robust pipeline spanning multiple therapeutic categories. It's already a major force in the oncology and eye care markets. If Ocrevus wins regulatory approval, Roche should also catapult into a leading role in the multiple sclerosis space.

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We could go on and on about Roche's pharmaceutical wins, but the main reason I think the company could dominate the future of healthcare is that Roche is also a leader in diagnostics. Roche has been on a buying spree over the past couple of years, scooping upCAPP Medical, Signature Diagnostics, Ariosa Diagnostics, Genia, and others, plus forging partnerships with genetic sequencing companiesPacific Biosciences (NASDAQ: PACB) and Stratos.

Precision medicine should play an enormous role in the future of healthcare. And it requires diagnostics to match the right therapies to the right patients. With Roche claiming lead positions in both the diagnostics and biopharmaceutical arenas, the mega-cap company has a pretty good shot at being a dominant force for years to come.

A new era of cancer treatment is dawning

George Budwell(Kite Pharma):Therapies that stimulate a patient's immune system, or immunotherapies, are by far the fastest-growing segment of the $100 billion cancer drug market. The explosive growth rate of this novel group of anti-cancer drugs stems from their ability to produce truly disease-modifying responses in many cases, rather than simply extending a patient's life by a matter of weeks or months, which is typical of standard chemotherapies.

Fortunately, the steady migration away from largely ineffective and highly toxic chemotherapies is about to kick into high gear with the potential approval of the first chimeric antigen receptor T cell (or CAR-T) therapy later this year.These modified cell-based cancer therapies, while suffering from their own serious toxicity issues, have produced unprecedented responses in several hard-to-treat blood cancers in the clinic.

Turning to the specifics, the mid-cap biotech Kite Pharma is attempting to gain the all-important first-mover advantage in this next wave of cancer immunotherapies with the recent regulatory filing of its lead CAR-T product candidate,KTE-C19, as a treatment for aggressive non-Hodgkin lymphoma. If approved, KTE-C19 will be sold under the brand name Axi-Cel, and itshould command a top-flight pricing point as the first CAR-T therapy on the market.

While this experimental cancer therapy is far from a slam dunk from a regulatory standpoint due to its problematic side effects, it does have the potential to be an enormous value-driver for Kite. But most importantly, KTE-C19 has a real shot at setting the stage for the future of treating blood cancers in general, and to help phase out the current standards of care for hematological malignancies.

A huge footprint

Cory Renauer(Express Scripts):This pharmacy benefits manager (PBM) is dominating the future of healthcare in ways that make most drugmakers nervous. As America's single largest PBM, Express Scripts dangles a mighty big carrot in the form of a preferred formulary placement, and it also wields a hefty stick in the form of an exclusion list for therapies with less expensive equivalents.

At the beginning of 2016, Express Scripts managed pharmacy benefits for 85 million Americans. Its preferred formulary, which dictates which drugs fall into which copay tier, applies directly to about 25 million Americans. Unofficial use of its formulary as a general guideline means its footprint could be even larger than these figures suggest.

You don't need to look far to see the effect Express Scripts is having on drug pricing throughout the biopharmaceutical industry. Perhaps the most famous example in recent years is its role in reducing the cost of treatments for hepatitis C virus (HCV). In 2015, Gilead Sciences reported $19.1 billion in HCV antiviral sales. Increasingly intense negotiations following the approval of competing treatments from AbbVie and Merck have largely been responsible for the decline in Gilead's annualized HCV sales to about $13.3 billion based on its most recent quarterly report.

More recently, Novo Nordisk, one of the best-performing big pharma stocks of the past decade, took a sharp turn for the worse. In a nutshell, the diabetes care leader cited tough negotiations with PBMs such as Express Scripts for revisions to its forward outlook, which include a halving of profit growth expectations.

At just 10.3 times forward earnings, Express Scripts stock is looking mighty cheap for a company with enormous sway over the pharma industry. As it increases in size, its negotiating power makes it more attractive to its subscribers. With a retention rate risingfrom already impressive levels, this stock dominating the future of healthcare in America looks well positioned for many years of steady growth.

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The author(s) may have a position in any stocks mentioned.

Cory Renauer owns shares of GILD. George Budwell has no position in any stocks mentioned. Keith Speights owns shares of Express Scripts and GILD. The Motley Fool owns shares of and recommends GILD. The Motley Fool owns shares of Express Scripts. The Motley Fool recommends Novo Nordisk and Pacific Biosciences of California. The Motley Fool has a disclosure policy.