A $1 Billion Bet on Cancer Cures

The Affordable Care Act, better known as Obamacare, has been around for a while now, but people are still trying to get the hang of the vernacular, as well as what the fine print means for them. A big question on many people's minds is whether health insurance premiums will rise.

Meanwhile, healthcare industry giant Celgene (CELG) just dropped loads of money on the off chance that Juno Therapeutics (JUNO) has the best solution for curing cancer. While Celgene has been a big player in the market, rarely steering shareholders astray, there's never a guarantee they have the solution everyone has been waiting for. Will Juno conquer the competition with their potential clinical champions?

A full transcript follows the video.

Michael Douglass: Celgene Corporation makes a big bet on Juno Therapeutics. And what's happening to health insurance next year? This is Industry Focus.

[INTRO]

Hi, Fools! Healthcare analyst Michael Douglass here for this Wednesday edition of Industry Focus. It is Wednesday July 1^st and I am pleased to be on the phone with Todd Campbell. Todd, let's hop right into it. We've got two very interesting, very different topics. Folks who are listening, please forgive me if the transition is less than stellar. I thought these were two interesting news pieces and I wanted to talk about them both.

We're trying different things out here at Industry Focus. So, as always, if you have feedback, thoughts, comments, questions; shoot us an email. [email protected]. Again, that's [email protected]. So let's hop right in. Celgene; big bet on Juno Therapeutics which is a clinical stage biotech well-known for its CAR-T and TCR drug development platform.

Todd Campbell: I think that one of the reasons people have been thinking that biotech stocks are overvalued has been the surging price of biotech companies like Juno. They're working on brand new, innovative ways to tackling cancer. Celgene actually doesn't agree that this is an overvalued area.

Douglass: Right. Since they just but $1 billion into a 9.1 million shares of Juno, giving it a 10% stake in the company. That's not the sort of the thing that indicates a belief that their shares are overvalued.

Campbell: Yeah. It's a crazy complicated deal. There's a lot of moving pieces to it, but the takeaway is really that this is Celgene saying "We think there's a real potential here in CAR-T. We want to make sure we're lined up with the leaders so we can capitalize on it if this stuff works in larger, later stage clinical trials. Again, those are all caveats that we always remind people of here on Industry Focus.

Douglass: Right.

Campbell: A lot of times we're talking about this really exciting, innovative medicine that is still very early in development. A lot can go wrong over that period of time. That being said, yes; Celgene is making a big commitment. They're giving Juno $150 million in cash up front with no strings attached, and then they've also said "Not only do we want to give you some money to pad your balance sheet to fund all these trials you're doing, but we want to come along for the ride by buying shares in your company. So, what they've done is given another $850 million to buy 9 million shares of Juno Therapeutics' stock.

Douglass: Yeah. It's interesting because you brought up that point that I think a lot of people say. That is, biotech is overvalued. At least that's the perception. If you look by a lot of traditional metrics it could definitely be argued that it is, compared to a lot of other sectors. That's in part because you've got a lot of companies that don't have earnings because they are clinical stage and it's very difficult to value exactly what's going to happen.

Whether those drugs are going to make it through clinical trials, and then even if they make it through trials and get FDA approval, whether they'll actually be successful. Those are always big question marks. For that reason I would argue it's very difficult to value clinical stage biotechs.

Campbell: It's even more difficult now because you look at this deal and think Juno was a bit expensive because it's trading at a market cap of $5 billion, right?

Douglass: Right.

Campbell: Celgene has just slapped a price tag on the shares it's buying of $93 a share. That's 40% higher today. So what is the real value of this? We don't really know because we're years away from having a commercial product on the market.

Douglass: That said, it is also important to point out that we often talk about when a drug gets a big pharma, or biotech partner -- a drug owned by a small company -- that's a good sign. I would say when you have a small company that gets partially bought from a big biotech or big pharma, that's also a very good sign. When you think about Celgene, this is not an abnormal thing for them to do. They've actually done this a number of times, thinking about equity stakes and getting in pretty early stage on companies.

Campbell: Celgene doesn't mess around and they love to take equity stakes in their collaborations. The other thing investors have to recognize too is, Celgene is great at what they do. They're a top tier company. You have to give them some benefit of the doubt that they're making this investment because they see some big time potential. I listened to the conference call. They think that they could have a product on the market with collaboration as early as 2020. For Celgene, the other thing is this is a rounding error deal for them.

It's a big deal for Juno, but it's a rounding error for them. They've got over $7 billion in cash. So this $1 billion isn't a huge deal for them. They're doing $8 billion in sales right now, they're expected to more than double that by 2020 without the help of products from collaborations like this one with Juno. I think Celgene is saying "I think Juno has something really good and it could be big. It could be blockbuster big. Why don't we align ourselves with them and make sure we're the ones who capture the benefit if it's true?"

Douglass: That makes perfect sense. You mentioned a bit of 'giving Celgene the benefit of the doubt'; what do you think? You're a Celgene shareholder. I am as well. What do you think about the deal from Celgene's point of view? Obviously, it's a great deal for Juno. What about as a Celgene shareholder?

Campbell: I'm totally OK with it. I love Celgene. I think this is another bit of evidence showing they're not afraid of getting involved in what could be transformational medicine. If you can reengineer a patient's immune system to better identify and kill cancer cells and reduce the reliance on chemotherapy that's a game changing, new approach. I applaud them wanting it. Full disclosure, I don't own Juno. I think ultimately, long term, this is short money to get the potential for big money down the road.

Douglass: Yeah. For me this is continuance of what we've seen for a long time as a key Celgene strategy where they get in early, they get in big and they find ways to monetize. It makes good sense to me as a potential long term. Again, any one particular deal might flame out, but with a number of them with a lot of opportunity that could be a good thing for shareholders in Celgene. It certainly has been. With that commentary out of the way, let's go ahead and hop to the Kaiser Family Foundation.

Reading stuff that Kaiser Family Foundation comes out with is always such a pleasure because I find their data fascinating and usually very well analyzed. They released an analysis -- and I'm quoting here from the title -- "2016 Premium Changes and Insurer Participation in the Affordable Care Act's Health Insurance Marketplaces". It looks like next year, health insurance for folks who have plans purchased in the marketplaces; their costs may increase a bit.

Campbell: Yeah. They're going higher. Right now the Kaiser Family Foundation is saying they were able to get the information from the major markets, and the average is going to increase by about 4.4% for next year. That's not a huge amount of money, right?

Douglass: Right. We've seen plenty of apartments who raise their rents at 10% or 15% a year. So 4.5% doesn't sound so bad, does it?

Campbell: No. I think it's probably going to grab a lot of people's attention because certain markets are going to grow a lot more than other markets based on this first look at the data. Portland, Oregon's rates could up more than 16% based on what people have filed so far. At the other end of that is Seattle, Washington. Their plan prices could fall as much as 10%. Those are the big outliers you need to decide, and people are going to have to watch and see what market they live in.

I think the biggest takeaway here though is not just going to be that it's a 4% increase. Based on the plans that Kaiser took a look at, in order to stay in the lowest priced plans -- the lowest priced one or two silver plans -- consumers are going to have to switch insurers again because the greatest increases are occurring in plans that are preexisting. The prices are being kept down with the new entrants into the state.

This is shaping up a lot like -- for lack of a better comparison -- auto insurance. It seems like in any given year you can swap out to another carrier and reduce your monthly premiums.

Douglass: Sure. That's an interesting dynamic. Of course, it makes sense for new entrants. They need to seize market share. The best way to do that is probably -- let's face it. The formulary is long and complicated, what's covered and what isn't is usually complicated. The easiest thing to do is probably have that headline price come a bit lower than what the others are showing. Of course, for discerning buyers it can be a different calculus, but that topline number is probably a big part of that. Certainly an interesting development and something we'll want to watch.

I should caveat; my understanding was that these are primarily the lowest priced silver plans. Remember, with the Affordable Care Act you've got bronze, silver, gold, and platinum. These are based on what percentage of costs are generally going to be picked up by the plan in a lot of circumstances. This was an actuary analysis of the plans. Keep in mind, the silver may not represent the rest of the market, but it's probably a good leading indicator. Especially given that silver plans are a large percentage of the overall individual insurance market in the exchanges. It's definitely a big trend.

Campbell: Yeah. I think the takeaway for people listening is "Never doubt the insurer's ability to price products correctly." They will make money. Insurance companies will come in with a lower rate, that gets the market share, then they can look back at their experience for medical claims for prior year and say "Did we price this to maximize the profit potential?" None of these companies are getting rich off their ACA plans. The profit margin estimates for these plans are somewhere between 3% and 5%.

This isn't huge, but it is a numbers game. If you're talking about millions of people signing up through the exchanges then a 4.4% increase is pretty substantial for a top and bottom line growth.

Douglass: Definitely. Like I said, here at the healthcare team at Motley Fool we have been keeping a close eye on the Affordable Care Act for a very long time. Even with the recent court decision there will still be a lot to talk about with this law. Where it's succeeding, where it has opportunities, and what issues it might have. In fact, I would encourage folks listening to shoot us an email with your thoughts on what's going on with the law. [email protected].

If I haven't plugged it enough. Todd, thanks much for your take. Folks, as always, come back to The Motley Fool and the daily Industry Focus podcasts, as well at Market Foolery, and Motley Fool Money which are also frequent fliers in our podcast collection. For all of your investing needs come back. Thanks much. As always, people on this program may have interests in the stocks that they talk about, and the Motley Fool may have formal recommendations for or against those stocks. So, don't buy or sell anything based solely on what you hear.