Healthcare Winners and Losers Following the AHCA's Failure

By Todd Campbell and Kristine Harjes Markets Fool.com

After Republicans in Congress failed to get enough support, they shelved a vote in the House of Representatives on the American Health Care Act (AHCA) last month. If the AHCA had eventually passed Congress, it would have significantly reshaped the healthcare sector, and shaken up healthcare stocks.

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In this episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss which healthcare companies benefit most (and least) from Republicans' decision to hold off on repealing and replacing the Affordable Care Act, also known as Obamacare.

Also, the two update investors onAmgen's (NASDAQ: AMGN) highly anticipated cardiovascular outcomes study, dig intoIonis Pharmaceuticals'(NASDAQ: IONS) approaching spin-off of Akcea, and they explain howTesaro(NASDAQ: TSRO) is changing how doctors treat ovarian cancer.

A full transcript follows the video.

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This video was recorded on March 29, 2017.

Kristine Harjes:Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your Healthcare show host, Kristine Harjes,and it's March 29. After two weeks of no Todd Campbell, I'm happy to welcome back my usual podcast partner, calling in to Fool HQ. Hi, Todd.

Todd Campbell:Hi! Yay, I'm back.

Harjes:What's been going on with you these past couple weeks?

Campbell:I haven't known what to do with myself on Wednesdays. I've got all this extra time. Great shows, by the way. If listeners didn't get a chance to tune in to them, go back and check them out, because it's interesting stuff.

Harjes:Yeah, Todd, thank you for the approval. I did really miss doing the show with you, but it was interesting to step outside of the box and film with some different people and get a different take on the healthcare sector.

Campbell:And, also, Kristine, all sorts of news floated by, we have so much stuff we can talk about today, right?

Harjes:Seriously, yeah. Guys listening, when I emailed Todd regarding what we should talk about today, he and I, between the two of us, we came up with so many different news items, because it's been a pretty busy couple of weeks for healthcare. Today's episode is going to be a little bit grab-bag-y. We're going to get you guys up to speed on what you need to know in healthcare, from all sorts of recent news. The first thing that we wanted to cover, and this is probably the most widely covered news item, is the American Health Care Act, which is sort of known as Trumpcare. First, some background, It's relatively well-known that Trump had pledged during his campaign to repeal and replace the Affordable Care Act, which is Obamacare. With the Republican majority in Congress, it seemed like a no-brainer that a replacement bill would pass pretty quickly. It turns out that wasn't the case.

Campbell:I guess you would say somewhat surprisingly. It was something he wanted to tackle early on, but some people were thinking he wouldn't jump right in and make this the first one he tried to push through Congress. I'm not sure now that the AHCA, getting ahead of ourselves, is back on the side burner, whether or not he regrets that choice or not. But from an investor's standpoint, we need to be able to take a look at what the AHCA would have done, and what the implications now are on different industries within healthcare now that it's no longer on the table.

Harjes:Right. Andthere are a whole bunch of different parts of healthcare that could be touched by this, as well as some companies that you might think would be impacted, and in discussing it, we kind of decided might not actually be that impacted.

Campbell:Yeah. We'll go through each one of these industries relatively quickly and hit the pros and the cons. Just to back up for one quick second so that our listeners have an understanding of what the AHCA would have done, there were a few different pieces to the puzzle, and I think that's important understand prior to diving right into them. One, it would have changed how consumers can buy their insurance. No longer would they be getting subsidies based on income. They wouldreceive tax credits. Those tax credits range from $2,000 per individual to $4,000 per individual, with a $14,000 cap. By most accounts, independent sources, Kaiser Family, etc., for many people, that would have caused their out-of-pocket insurance costs to climb. As a result, that had many people projecting that up to 24 million people would have lost their own insurance over time, if the AHCA had gone through and passed.Because of that, one of the areas that was under a lot of pressure was hospitals. As you may remember, Obamacare insulated hospitals against bad debt expense, an amount that they have to write off in charity care. Think about it. The more people that are insured, the less people showing up to emergency rooms without the ability to pay.

Harjes:Right, and those people are extremely expensive to the hospitals.

Campbell:Yeah, it's billions and billions of dollars, right Kristine?

Harjes:Right. So, industrywide, if you're looking at those levels remaining still at Obamacare levels, that's a net win for the hospitals.

Campbell:Right. You saw a lot of those stocks jump once the news came out that they weren't going to vote on it on that Friday. Hospital stocks reacted very positively, because there's less of a likelihood of them having to take big write-offs again, like they were doing in the pre-Obamacare days. That being said, on an individual stock basis,I don't have anything to recommend here. I think there's a lot of debt associated with hospital stocks. I think they have a lot of other issues that they're trying to deal with. I don't think I would run out, necessarily, and buy any one particular hospital stock on this news.

Harjes:So, another part of this bill that was talked about a good bit is Medicaid, the Medicaid expansion was something that Republicans really strongly pushed against. The latest on that news, I saw just this morning that Kansas voted today to expand Medicaid, which is incredibly surprising, because that is such a red state. But, thegovernor is probably still going to veto it. Still, interesting stuff going on here. How would you view that through the lens of an investor?

Campbell:I think for the most part, the big winners there were the Medicaid insurers, who make their money by running state Medicaid programs. What the AHCA would have done is it would have capped enrollment in 2020, and then block-granted money to the states, and the stateswould have been responsible for finding the savings and figuring out who they wanted to insure. As a result, that could have caused fewer people to be on Medicaid rolls. Now,Molina,Centene,these insurers make their money based on how many people are enrolled in these programs. So, obviously, had the AHCA passed, that would have been a net loss for them. Now that it's off the table, that's good for them, especially now, like you said,some of these other states continue to warm up to the idea of allowing more people to get into the Medicaid Program.

Harjes:Really quickly, before we move on from this news segment, what are some companies that are surprisingly neutral?

Campbell:Neutral? Drugmakers. If the AHCA had passed, and uninsurance rate would have climbed, they would have seen a drop off in demand. But they also have to pay billions of dollars in fees to participate because of Obamacare. So, that's a little bit of a wash. It's probably a net positive. But we'll call it a wash. Then, also, the big diversified insurers, the guys likeUnitedHealthcareandAnthem, kind of a wash for them. They do business in the Medicaid side, they do business in the Obamacare side. They have been losing money on Obamacare, so that would have been a win, if they were able to redo their plans so they would become much more profitable. But again, the hit to Medicaid might have offset some of those gains.

Harjes:All right, great. News item No. 2 relates to something we had teased in our Valentine's Day show, which is thatAmgenhad some data about their cholesterol-lowering medication, it's a PSK9 inhibitor. We said there was going to be a data readout in March. Indeed there was, so we figured we owed you guys some follow-up.

Campbell:Yeah. Most people, if you look at just the raw number,they say, "Wow, that's a pretty good finding." Essentially, what they found is, usingRepatha, which is a drug that helps lower badcholesterol levels, reduced the risk of things like heart attack and stroke by about 20% versus a placebo. That'spretty significant when you think about how many millions of people areaffected by heart disease.

Harjes: Right. At first glance, that's positive data, right? This isexactly what they were looking for. They did this very long-termcardiovascular risk study. There were 27,500 people in it. They waited years, until 1,630 of them had a heart attack oranothercardiovascular disease-related event. And they get this number that says,definitively, statistically significantly,our drug does lower the risk. And yet.

Campbell: It was a snoozefest for investors, right?[laughs]

Harjes: Yeah! It wassuper interesting. So, why did that happen?

Campbell: I think really, what it came down to was,there's a couple different things. If you include hospitalization in the metric, the net benefit falls to about 15%. OK, maybe that's not as big of a needle-moving number as people would have liked to have seen. Again, huge study, andobviously, we're talking aboutsaving people's lives, so we don't want to diminish that. That being said, if you look at news that has come out of other companies on other drugs that have also shown thatthey reduce the risk of cardiovascular events,it really hasn't translated into atremendous uptick in the sales of those drugs.

Harjes: Yeah,it's kind of crazywhen you look at some examples.Eli Lilly'sdiabetes medication Jardiancealso showed a cardiovascular benefit. The drug sold just over $200 million last year, whichsounds like a lot of money, but in the world of drugs, it's really not.

Campbell: Yeah, for ahuge patient population, too, right?

Harjes: Yeah,exactly. The diabetic population isenormous. I think something that could be really driving theshortfall in -- for thisoptimism about Repathais that it's still so expensive. It's $14,000 a year. Even with Amgenpotentially thinking about doing a money-backguarantee if the drug doesn'tlower your overall healthcare costs,something to keep in mind is, there's not really a reason for insurers,as far as financial incentives go, to pay upfront to try and reduce long-term risks. That's messed up, but when you look at the financials, if I have to pay $14,000 a year now, and maybe down the road you won't have a very expensive heart attack, statistically, you'reprobably not going to still be on that same insurer at that time. You go through a bunch of different insurers in your life. So why would one want to pay to save another one money? It's socynical, but it's problematic.

Campbell: Yeah. Alot of these events are probably happening to peopleonce they get into their mid to late 60s and beyond, and when they'd be on Medicare. So,that's absolutely a great point,and it's sad. I think what we need to recognize is that Amgen is going to work with payers to try and figure out some sort of a payment system that makes sense. Right now, more than 80% ofprescriptions for this drug are being rejected. So,they have to figure out some way to get this druginto the hands of consumers and turn a profit on it. AndI don't know if that means even more significant cuts in pricing, orlike you said, these other paymentschemes or whatnot. But, there's a question mark. I guess, from aninvestor standpoint, you're going to have to watch the nextcouple quarters and seewhether or not there is a big pop in sales. As it stands today, I think the drug is selling around $240 million annual run rate. So, you want to watch and see whether or not that annualized run rate picks upin the next couple quarters.

Harjes: Agreed. So, onto Ionis. Theyrecently announced earlier this week that they arespinning off their lipid disorder subsidiary.

Campbell: Yeah,Akcea isgoing to be the name of the new company. It's going to IPO. So,individual investors will be able to go out and buy stocks specifically in this company that's going to be working on drugs that can, again,improve cardiovascular outcomes. They're focusing on rare lipid disorders,so they have a couple of interesting compounds. This is a weird decision, in my view. If you think about it, it's not like Ionis needs the money by IPO-ing this companyto be able to facilitatecommercialization of their drugs or research on these drugs. They're spinning it out, and lumping all of these lipiddisorder drugs together. I'm not entirely sure why they're doing this,to tell you the honest truth.

Harjes: Especiallybecause they will keep some stake in Akcea. This isso frustrating to me. In the S-1, which is the IPOdocumentation,there are literal blank spots in itwhen it comes to some of the specifics and the numbers involved in this IPO. Such as: What sort of stake Ionis is going to keep in the new spin-off.

Campbell: [laughs] Right. It sayssomewhere in there that --I think, the language, if you read it,it looks like they're going to splitwhatever they collect in money,both in milestones from Novartis,becausethere's a deal that goes alongside that Akcea is going to end up having a collaboration deal withNovartison a couple of these drugs, andI think they're going to end up splitting a lot of the money with Ionis. Ionis is giving up 50%, let's say, ofits exposure to these drugs to launch thisseparate entity, and they're collecting $100 million in IPO raise? It's a weird situation to me, on why they'redoing it this way,rather than just owning the drugs100% outright and doing the collaboration themselves with Novartis.

Harjes: Yeah. Something that Ionis isvery good at is pursuing collaborations. Novartis is, already, fully partnered here. Now that they're doing the spin off, Novartis has agreed to a $50 millionfunding commitment of that $100 million IPO.

Campbell: Actually,it's going to be concurrent,so it's going to need additional, you can get up to $150 [million] gross of fees and stuff that they'llhave to pay out to the brokers to get this done. But,that's not going to be enough money. By their own account, in the S-1, it says, "Eventaking into consideration the IPO and the money from Novartis, we're still going to need to raise money to commercialize our lead drug," which is volanesorsen --I can't say this. This is alphabet soup. Volanesorsen is their lead candidate. It just put up good -- we'll call it good -- phase 3 numbers for a rare condition that affects up to 5,000 people globally called FCS --again, alphabet soup,I'll just break out the abbreviation. I think investors just need to know thatit's a relatively small indicationwithout a lot of different treatment options,and of course, that could obviously begingenerating out revenue for this companyas soon as next year. But it's not a slam dunk that'sit's going to pass through the FDA,because there were some safety concernsrelated to platelet counts. Maybe that's why they're spinning this out,they want to insulate themselvesagainst this drug running into a stumble.

Harjes: Yeah,I totally agree. Lots of unanswered questions here. I know personally,I will definitely be looking in Ionis'next conference call to seesome of the details behind this. It drives me nutsto see those literal blank spaces in the S-1. So,it will be interesting to watch both that and more data coming out of the four different trials that this IPO money will fund.

Campbell:Yeah,and the other thing that investors should know is,let's assume, best-case scenario, that volanesorsen gets the FDA nod and hits themarket for this small patientpopulation of 3,000 to 5,000people globally. Good news. They go out andstart marketing this drug. A,there's no guarantee that this drug,depending on how they priced it, isgoing to get prescribed andbecome a commercial hit of any magnitude. Also, B, you have to recognize that one of the drugs that'spartnered up with Novartis actually has the samemechanism action, same target and everything,it's just a little bit more advanced. If that drug issuccessful, why would doctors still end up prescribing volanersorsen instead of this other drug down the road?

Harjes: Exactly. And you do see, frequently,companies cannibalize their own drugs by making even better versions. But when the new version is a partnered drug versusthe older version which was wholly owned,that's not good financially.

Campbell: Correct.

Harjes: Lastnews item of the dayinvolvesTesaro, whichI believe we've talked about on the podcast before as well. Theyannounced that their drug Zejula was approved early.

Campbell: Yeah, this was,I guess if you look at it,it's not a complete and utter surprise. Regulators had already approved two different drugs that have the same target that Zejula does. So, maybe they're very confident in theirunderstanding of what these drugs do. But, yes,early approval. The decision wassupposed to come on June 30. Instead, we got itmore than three months ahead of time. That's great news for patients,because this is the firstone of the drugs of its class that can be used right after patientsfirst respond to a platinum-basedchemotherapy. This is for ovarian cancer patients.

Harjes: Right,it's a maintenance drug for these patients. I think, besides the early approval, another thing that caused thevery positive reaction to this news is,it was a wider-than-expected label. It was approved for ovarian,fallopian tube, andprimary peritoneal cancer patients with theirdisease in complete or partial response to aplatinum-based chemotherapy.

Campbell: Andeven more importantly, it was approved for use in eitherBRCA-positive or non-BRCA-positive patients, which is a first for drugs of this class. We'retalking about something called PARP inhibitors, which, Kristine,you and I have talked about before on the show. PARP inhibitors, basically what happens is, the cancer cells, once they getdamaged by chemotherapy, they can use those --those nasty little beasts -- they can use the human body's repair system torepair the damage that's been caused to their cells. This helps stop that. So, these drugs have been shown in trials to be very effective at crimping cancer. In trials, this drugspecifically did a great job of increasing the amount of time that it takes for the disease to recur. So, prolongingprogression-free survival versus standard of care today. That's so huge for ovarian cancer patients. 85% ofovarian cancer patients end up relapsing. As they go throughadditional platinum-based chemotherapy treatments, the duration of the benefitcontinually shrinks. So, being able to insert a drugearly on in the use --in this case,in the second-line setting -- is a big win for patients, and potentially, a big win for the company. PARP inhibitors right now are racking up salesnorth of $200 million a year. Obviously, that's for a much more limited patient population, because they're only approved right now for BRCA-positive patients. So, this could be a nine-figure drug, at leastwithin the first year or two.

Harjes: Right. Andwhen you consider that it's also being studied in the first-line setting,then those numbers could get even bigger, potentially.

Campbell: Mm-hmm,they could get biggerbecause of the expansion into the first-line setting,and they could also get bigger because PARPinhibitors are being studied in other types of cancer --breast cancer,pancreatic cancer. Now, Tesarojust reported they're going to study it innon small-cell lung cancer. So, PARPinhibitors may end up having a lot of value in being used as part ofcombination therapy acrossa lot of different cancer types. But that doesn't mean, Kristine, that Tesaro is the de facto winner in its class.

Harjes: Right. They're not the only player in this space. You also have other players, such asAstraZeneca. They have a PARP inhibitor called Lynparza, which was also verysuccessful in showing the same sorts of effects that Zejula was able to. So, as aninvestor,how are you looking at the competition there?

Campbell: It's really a wait-and-see game here. Tesaro has run upremarkably on excitement surrounding the launch of its drug. Anargument could be made that you have to now see sales come in to back up that valuation.AstraZeneca just announced this week that the FDA has accepted for review, priority review, its application to expand Lynparza's use to include maintenance therapy. Probably would just end up in BRCA patients. But, a lot willdepend on the label. And obviously, thattakes away a little bit of the advantage that Tesaro has, andthat approval could come as soon as September. There's all sorts of movement that's going to be going on in the next year or two in this class of drugs, and that could very well shift the landscape as far as market share. So, investors should keep a cautious approach to all of these companies,because I don't know if it's necessarily clear who the winner will ultimately end up being. If Tesaro can prove that its drug has enough unique properties that it's not a classwide effect, then,obviously, it would be the best-selling drug,because it can be used in both BRCA and non-BRCA patients. Again, being able to treat 100% of the patients is way better than being able to treat the 15% to 20% that happen to be BRCA positive.

Harjes: For sure. So,the waters are still a little bit muddy on this oneas far as investing takeaway goes. But for patients,this is indisputably great news, that PARPinhibitors are gaining approvaland picking up steam. Again, they block tumors' ability to repair DNA. That is fantastic from a patient perspective. We will definitely be rooting for all ofthese companies to succeed from that standpoint. As always, people on the programmay have interestsin the stocks that they talk about,and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Thanks a bunch to our producer, Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!

Kristine Harjes has no position in any stocks mentioned. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Ionis Pharmaceuticals. The Motley Fool recommends UnitedHealth Group. The Motley Fool has a disclosure policy.