Obamacare uncertainty and pushback on drug prices sent shockwaves through the healthcare sector in 2016. Will 2017 be a better year for investors? Washington's passage of the 21st Century Cures Act, potential insurance reform, and key data on game-changing drugs could make or break returns next year.
In this episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes and contributor Todd Campbell kick off the show by analyzingAcadia Pharmaceuticals'(NASDAQ: ACAD) intriguing Alzheimer's disease drug. Then, the duo let investors in on their top healthcare stock picks for 2017, including stocks that could benefit from the 21st Century Cures Act. Kristine and Todd's shopping list includes top names likeCelgene Corporation(NASDAQ: CELG),UnitedHealth Group(NYSE: UNH), andRegeneron Pharmaceuticals, Inc.(NASDAQ: REGN), but they also like some surprising picks, such asGW Pharmaceuticals plc(NASDAQ: GWPH).
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This podcast was recorded on Dec. 21, 2016.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today isDec. 21, and I'm your Healthcare show host, Kristine Harjes. Next week, we'regoing to be replaying our favorite episodesfrom last year, sofor the last time in 2016, I amwelcoming our regular healthcare contributor, Todd Campbell, to the show, phoning in. Hi, Todd!
Todd Campbell: Hi! Happy holidays to you and everyone who's tuning in today.
Harjes: Thank youvery much, and happy holidays to you and your familyas well.
Campbell: Thanks! I tried to find an ugly holiday sweater to wear today, but unfortunately, all I could find was a red one, so I went with that.
Harjes: That counts for something, it's festive. I'm over here in my black and white checkers, maybe not as festive. Just wait until next week, though. Anyhow, we've been pretty news-y on our Healthcare show lately. I figured, in keeping with the trend, the first part of our show will be something interesting from the healthcare news scene in the past week. After that, we'll move on to a listener question about the 21st Century Cures Act, and also some stock picks for 2017. First things first: Some exciting Alzheimer's researchresults from a company calledAcadia Pharmaceuticalscame out yesterday.
Campbell: Really interesting data. I thinkit's very helpful to walk investors through the pluses andpotentially the minusesassociated with the information that was released by AcadiaPharmaceuticals. I don't think this is a stockthat we have talked about in the past on the show, Kristine, do you?
Harjes: I don't believe we have ever talked about them. The deal with them is, they have this one drug, it's called Nuplazid. It is already approved forParkinson's disease psychosis. Now, they'retesting it in Alzheimer's disease psychosis.
Campbell: Right. This year, they just launched this drug, Nuplazid, for the treatment ofhallucinations and delusionswithin Parkinson's patients. It'sestimated that about 40% of all Parkinson's patientssuffer from psychosisthat this drug can address. The company is researching this drugacross a number of different similarindications where they think they may also be able to help. One of those indications,obviously, is Alzheimer's disease, where they've beenevaluating the drug in treating Alzheimer's diseasepsychosis,which is estimated to affect between 25% to 50% of theAlzheimer's disease population.
Harjes: Correct me if I'm wrong,but that's a much larger number of people total.
Campbell: Yeah. You go from 40% of a million with Parkinson's, so that's 400,000, to even 25% of the 5 millionAlzheimer's disease patients, that's an extra million. So, you'retalking about potentially going from being able to address 400,000 people to being able to address 1.5 million.
Harjes: So,the news that came out yesterday was some data from phase 2, saying that they had success, and six weeks into the trialthere was a statistical benefit. The stock was up 12% on the news.
Campbell: Yeah, the stock was slated to open pre-market up as much as 40%.
Harjes: Wow! I missed that!
Campbell: Yeah, don't ever trust pre-market or after-market, they're illiquid market quotes, and they're not going to tell you anything other than, maybe, direction.They'll tell you if it's indicated up or down. ButI wouldn't count on up 40% or down 40% read.
Harjes: That's crazy.
Campbell: Yeah. Once it opened up, the shares traded pretty volitively. It got down to a single-digit gain, then went back up to a double-digit gain by the end of the day. I think the reason for all of that is that first of all we've beendesperate for new advances in Alzheimer'sdisease treatment. There's not a lot of good treatments out there. The only things we have out theretreat the symptoms, they don't curbor crimp the disease.
Harjes: Yeah. Every stockworking in this space has been extremely volatile,trading emotionally up, down, every which way onAlzheimer's news.
Campbell: Right. Big disclaimer,even the data were giving you today is phase 2 data. If any indication has shown that phase 2 data does not hold a lot of water, it'sAlzheimer's disease. So you have to take thiswith a big grain of salt. But there's another reason that I wantinvestors to take this with a big grain of salt.
Harjes: Yes there is.
Campbell: What was that, Kristine?
Harjes: Yes there is,I was going to say it if you weren't going to, lay it out.
Campbell: Well,I don't know if it's the same thing you're going to mention,but I wasn't thrilled with the P value.
Harjes: Yep.(laughs) That's where I was going, as well. The P value here for the six weeks was 0.045, which,reminder about P values, it's astatistical measure. Basically, you want to see less than 0.05. We had 0.045, that's green light, in the clear, you're fine. But it'skind of close to that threshold of 0.05.
Campbell: Especially with a small patient population. I mean, I don't want to call it tiny --
Harjes: It's 181.
Campbell: Yeah. Butcompared to how big this indication is, andhow big previous Alzheimer's disease studies have been,this doesn't feel like a lot of patients to me.
Harjes: Right. And some other things to note here is that in theParkinson's disease trial, you had a P value of 0.001. That is way, way below the 0.05 that is the traditional threshold.
Campbell: Right. That's the gold standard number. That'swhat you would want to have.
Harjes: Absolutely. Theother detail that's worth mentioning,I mentioned this data was from six weeks -- when you look at the 12-week numbers, the treatment group that wasreceiving this drug, their numbers held steady. But theplacebo group experienced aplacebo effect that brought them in line with the treatment group,essentially closing the delta between the two groups, and then eliminating even that 0.05.
Campbell: Right, so you look at this, you have a P value of 0.045,you have a benefit thatloses its statistical significance between the six week and 12 week mark. What does that mean? The approval inParkinson's disease was based on six week data. So you could make an argument that six week is fine. Theother thing I'm curious about is the choice of the study or the scale or the score that they used forevaluating these patients. It was a nursing home score,because all of these were nursing home patients. That isn'tnecessarily one that you see typically usedin psychology trialsorAlzheimer's disease trials. They were asked about it on the conference call, and they did say another more common scoring system that was used didn't show a significant benefit. So, there's a lot of question marks here that make me say: Rein in someenthusiasm and let this thing play out,because we have seen,way too often, investors get excited about Alzheimer's disease drugs that just do not pan out in large studies.
Harjes: Yep,it's a lesson that watchers of this space are learning again and again lately. So,keep an eye out for Acadia. But we'll move on from them for now. Before we do,I want to let everybody know thatThe Motley Fool is now accepting applications for their summer internships. Ifyou or somebody that you know islooking to spend the summer at a company that isconsistently rated one of the best places to workin the whole country, careers.fool.com is the URL that you need to know. Ipersonally started my career here as an intern, so I can attest, it's anamazing program. Again, if you're interested or you know somebody that might be, the posting is at careers.fool.com.
Without further ado, thenext segment of our show is inspired by a listener question that came in through Twitter. Ifyou guys aren't already following us, our handle is @MFIndustryFocus. This question comes from Harris Arshad. He asks us, if we were to create our own ETF based on the 21st Century Cures Act, what would be included?There's some backgroundnecessary before we dive in and actually answer this question. Todd,do you want to give an elevator pitch?We probably need to describe both the Cures Act really quickly, and also what an ETF is.
Campbell: I'll start with the Cures Act. We'll keep it very high level here. The Cures Act waspassed by Congress and signed by the president. What it's designed to do is to reduce theregulatory burden on drug and medical device discovery and development, to increase the speed of reviewing those products that have been researched through the FDA, and to get them into patients' hands more quickly. So, they're doing that through a lot of various different carrots, including billions of dollars ofadditional spending that they're going to besending to both the National Institute of Health and the FDA.
Harjes: Andif you're curious about more, we did an entire half of an episodeon the 7th of December. If you missed that episode, be sure to go back and check it out. Meanwhile,the second piece of background necessary for answering this question is: What is an ETF? An ETF is an exchange-traded fund. It'sessentially a basket of stocks that trade for a single price. It'skind of similar to a mutual fund,but instead of having its value determined by the underlying assets once per day like a mutual fund does, an ETF is traded like a common stock, so its price will go up and down throughout the day. Basically,all you need to know if you're notsuper familiar with ETFs is,it's a handful of stocks that we're looking at here.
Campbell: Right. We haveplenty of coverage on The Motley Fool's website ifanybody is interested in looking more into different ETFs. It was a fascinating question to me,and it really got me thinking aboutwho's going to benefit most, potentially, from the Cures Act.
Harjes: Yeah,absolutely. For me, the first one that came to mind were drugmakers.I'm not going to pick every single drugmaker, but I would pick a couple of them to throw into this basket. One thatI would throw out there isBioMarin. This is a company that's focused on rare-disease drugs. One of the things that came up in the Cures Act is that now, the FDA isallowed to consider real-world evidenceabout a drug's efficacy. So, outside of trials, do we see this drug working? And that could lead toexpedited approval, especially for patients with an unmet need. So, yourpatients that are looking at receiving rare-disease drugs. So,I could definitely see them benefiting from this act.
Campbell: Itotally agree with you. I'm actually going to cheat withone name that I would like to include in there. It's going to be an ETF of ETFs. I thinkpeople should look at the medical deviceETF, the iShares Medical Device ETF-- symbol is IHI -- and that's becauseone of the most vocal lobbyists involved in creating this act was the medical device lobby. There are lots of different things in this act that help to increaseeverything from breakthrough designationto the ability to use new devices in more rare diseases. There's a lot of goodies in this act that could help prop upmedical device stocks. If youwanted one in particular, I guessMedtronicis kind of the grand-daddy of medical devices.
Harjes: If you think we're cheating by choosing the IHI, then the biggest holding -- this is a guess, but I think it's a pretty strong guess -- is Medtronic.
Campbell: It is. Medtronic is No. 1 at 12%.Abbott Labsat7.7%, andThermo Fisherat 7.7%.
Harjes: Yeah,that sounds right. So at Medtronic,they make cardiac devices,diabetes devices, and more. They're a huge company. They'revery diversified. They're a Dividend Aristocrat. If you'reonly looking for one medical device company,that would be my pick.
Campbell: Yep. Andif you want to go with a bigger basket, just go with the IHI.
Harjes: Indeed. Another company that I'll throw into our broader ETF isJohnson & Johnson. That's because it has devices and it also has drugs, so you're getting two for one there.
Campbell: Yeah, that's a good pick, and it's a Goliathwithin both of those areas. I guess I would toss in the ringBiogen, because Biogen is doing atremendous amount of research and development onneurodegenerative diseaseslike Alzheimer's and Parkinson's disease. Specifically in the Act,there's a lot of money that's being set aside for the BrainInitiative, and also for the Precision Medicine Initiative,both of which could increase the number of drugs that end up in the clinictargeting cognitive decline.
Harjes: Right. There'sa lot of money in here going toward those initiatives, which aretrying to harness the power of datato create personalized treatments. Basically, whatprecision medicine is doing istaking into account the individual variability in your environment and your lifestyle and your genes. You can even see there some genetic companies getting into the mix. Maybe something like anIllumina that does gene sequencing.
Campbell: Absolutely. And they're sayingone of the biggest advances, potentially, in Alzheimer's research could come from deepsequencing,which is something relatively new. We have finally gotten the technology now to really dive even deeper than we ever have before into the genome. Perhaps, in doing that, we'll find some more of these common threads that connectdifferent patientswho are suffering from this devastating disease.
Harjes: Right. So, thanks again to Harris Arshad for writing in to Twitter andasking us that great question. We were actually inspired by the question to also put together a 2017 healthcare ETF, with a handful of stocks across all sorts of risk spectrums that we thought would be greatheading into the new year. Do you want to kick us off with a least-risky pick for the ETF?
Campbell: Yeah!I thought it would be fun and maybe kind of helpful for listeners to break it into three groups: less risky, more risky, and most risky. Because, we know,no matter what, when we're talking about stocks, there's going to be risk. No one has a crystal ball. I went through, and for my least risky pick of 2017, I settled onUnitedHealth, which is the largest U.S. health insurer. The reason that I picked UnitedHealth is because of a few different reasons. One, they backed awaysignificantly from the Obamacare exchanges after losing hundreds of millions of dollars in providing those plans to patients. They will not have that drag on their earnings in 2017. And,following the election of Donald Trump and the potential repeal ofObamacare, to me, it feels like it's going to be less of an adjustment, since they were already planning for that to wind down. It's avery profitable company. They make a lot of money. Actually, over the course of the next year or so, industry watchers think they could earn$9.50 per share. That's up from $9.14 30 days ago.
Harjes: Going into 2017, the biggest thing to watch for the insurers is going to be Obamacare,what's going to happen with Obamacare when Trump comes into office. I think,looking at all the moving pieces there, you will mostly, on net, see a benefit to insurers if Obamacare is rolled back. One place that I would point out to be a little bitskeptical of is if Medicaid shrinks.Medicaid is not super important for UnitedHealth, but it is a quickly growingsegment for them. So, if that were to go away, it would be a little bit of a hit on them. But, then again, like I said,I think the end of Obamacare would ultimately be a good thing for insurers,depending on what it's replaced with, of course. With that,I actually would push back a little bit on UNH being the less-risky category,just because of that uncertainty. This is a stock that's up 37% in 2016. It'strading at a premium valuation.I like the stock a lot; I'm not sure I would label it as least risky. Does that make sense?
Campbell: Yeah,I totally get that. That's what makes this show great,sometimes we disagree! And who knows? There is risk associated with this stock and the insurers broadly. You make a great point on Medicaid. Ultimately, I think shares could easily be trading at a P/E (price/earnings ratio) of 20X on trailing earnings. If they can deliver the $9, then you're talking about a share price of about $180 at some point next year, which would be a nice gain from where we are today. Theproof will be in the pudding. Will they be able to deliver the kind of earnings growth thateverybody wants them to deliver?
Harjes: Yep, all great points. I also picked my own for the least-risky category. Here, I pickedCVS, thepharmacy retailer that you all know and love. I think they have a demographic tailwindcoming on for them. You have an aging population,that means more chronic diseases, so, moreprescription sales, more people coming into their Minute Clinics. This is the second-largest pharmacy, the second-largestpharmacy benefits manager [PBM] in the United States. They are alsothe largest long-term care and specialty pharmacy. This is just a huge diversifiedbusiness. They have a 2.13% dividend.I don't think they have a ton of regulatory risk. If anything,I actually think that regulatorswill be happy with CVSbecause they are working to drive down the cost of healthcare through their PBM division, which is the majority of their business. What do you think, Todd?
Campbell: There'sno question that pricing remains a big issue. Insurers want lower prices. As long as CVS ishelping them deliver that, it's a very intriguing stock.
Harjes: Right. And they're downpretty substantially. They are down 18% this year,mostly due to competitive pressure. So,I think they are a pretty low risk pick for 2017. Let's move on to our middle category, the slightly riskier category. What do you have for me?
Campbell: I love Celgene. It's a stock we'vetalked a lot about on the show before, and will probably talk a lot about again. It'sone of the biggest biotechs out there. They have a hugepresence in cancer,specifically multiple myeloma, and they have atremendous number of different collaborations andpipeline candidates that are going to be rolling out data over the course of 2017 and 2018 that can move this stock higher. Given the fact that they'retargeting a disease that requires treatment, they'veescaped some of the pushback on pricing that maybe others have endured more of, so they're OK on that front. There are very few biotech companies out there that have offered up guidance from 2017 to 2020. Celgene isforecasting pretty remarkable top- and bottom-line growth. If they can hit their internal forecasts, I think that investors will be rewarded.
Harjes: Right. You hit on great points. Two ofmy favorite parts of Celgene, as you mentioned, theircollaboration. This is just a brilliantstrategy on their part. Paya little bit of money to have, potentially, huge upside and minimize your downside. That's just smart right there -- it's smart business. The other thing is their outlook. Projecting to 2020, as you said, is crazy in the biotech world. They're forecasting an EPS of at least $13 in 2020. That's pretty fantastic. Andmanagement has shown in the past that they are pretty responsible with their estimates. I think that's a good pick.
Campbell: Yeah. Andone thing that people will want to watch,because this could really affect how risky the stock is next year, is they'resupposed to roll out some data on Ozanimod andmultiple sclerosis in the first half of the year. If that data is bad,obviously, it will be bad news for this stock.
Harjes: Right. One more pick in the middle category, yourriskier category, is Regeneron. The reason that I pick this one is they have got 2017 catalysts galore. They have their newcholesterol-lowering drug, Praluent, is set to releasecardiovascular data which could potentially justify its kind of high price tag of $14,600, and couldpotentially turbocharge pretty lackluster -- thus far -- sales. They also have aPDUFA date coming up in March for a drug called Dupixent. This is for asevere form of eczema. They have a resubmission of another drug that hadpreviously been turned down by the FDA inOctober due to manufacturing issues. They think they've figured out themanufacturing issues and should be able to get the green light now. They're also another stock that's entering 2017 with a depressed price, they're down 33% since a year ago.
Campbell: You're going with these value-oriented growth stocks, I see.
Harjes: Yeah, I am. Actually, all three of my picks are down quite a bit this year. I'll use that to kick right into my pick for themost risky stock. This is a company calledCara. They are down 45% year to date. That is a tough pill to swallow. This is a company that IPO'd inFebruary of 2014, and they're down 11% since their IPO,despite a lot of pipeline progress. This is,essentially, a one-trick pony. Again, they have the 2017 catalysts coming up. The drug that they're making is called CR845. Essentially what makes this intriguing is,it's an opioid pain medication, but itdoesn't have the side effects of typical opioids,meaning it's not addictive. If you've been reading health news lately,you know this is a humongous problem in the United States,opioid addiction. They are looking to find a drug that can cure the pain without having those potentially negative side effects. So far, the drug has cleared a ton of trials. They're looking at it in post-operative pain. They're also looking at it in a chronic skin itchingcondition, as well as chronic pain. The latter thing there is an enormous indication, 100 millionprescriptions written in the United States every single year for chronic pain. They should be getting data out in that indication in the first half of next year. They'll also be getting data in the skin itching condition trial, and also in post-op pain by the end of 2017. Definitely a high-risk, high-reward stock to watch.
Campbell: Yeah, Kristine, there'sdefinitely a major need for new drugsthat can work the way that opioids do, or,deliver the efficacy that opioids do, without that addiction. That's, I'd say, themain connection between my most risky pick and your most risky pick there is that we both targeted clinical-stagecompanies that have the potential to meaningfully change a big blockbuster indication.
Harjes: Right. That's why they're the riskiest picks, but they're also still picks.
Campbell: Absolutely. In my view,the most risky stock to consider in 2017 is going to beGW Pharmaceuticals. We've talked about this stock on the show before. They're working on amarijuana-based medicine to treat epilepsy. They'vealready succeeded in three phase 3 trials. They have one more phase 3 trial reading out data early next year. They want to file with the FDA as quickly as possible. It wouldn't shock me if the FDA gives an accelerated review to this drug because there's a massive need,especially in childhood forms of epilepsy that areresistance to current anti-epileptics. There's a huge need here for new treatment options. It seems like, so far, Epidiolex could fill that need. We'll have to see. Theepilepsy indication is big. It's billions of dollars. There's a history of various epilepsy drugs at least reaching nine-figure sales, and there are some that have eclipsed that number. Thedevil will be in the details withwhat the label says and when this druggets to market and what the pricing will be. But, if they can win approval next year, then this stock could trade higher.
Harjes:This is, for sure, a high-interest story to watch. They could completely reshape epilepsy. We should belooking at a potential approval by the end of 2017. That is a wrap for this episode, and also a wrap for new healthcareepisodes of Industry Focus in 2016. We will of course be back next year for more industry deep dives. For now, aheartfelt thank you to all of our listeners for tuning in all year, and also to Todd for being mypartner in crime here, making this show happen.
Campbell: Thank you, too Kristine!
Harjes:Thank you! As always,people on the program may have interestsin the stocks they talk about and The Motley Fool may haveformal recommendations for or against,so don't buy or sell stocks basedsolely on what you hear. ForTodd Campbell, I'm Kristine Harjes, have happy holidays everyone, and Fool on!
Kristine Harjes owns shares of Johnson and Johnson. Todd Campbell owns shares of Celgene. The Motley Fool owns shares of and recommends Biogen, Celgene, and Illumina. The Motley Fool owns shares of Medtronic. The Motley Fool recommends BioMarin Pharmaceutical, CVS Health, Johnson and Johnson, and UnitedHealth Group. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.