This Week's Top Healthcare News Could Cause These Stocks Pop or Drop

As Americans work toward a healthier lifestyle, one company is backing them up with steps that might be shocking to your average audience.

CVS Health (CVS 1.49%) has taken the bold approach to reduce use of tobacco by removing these deadly products from its shelves. In taking the correct approach, the company has even managed to remove itself from a local business group to hold firm on its stance.

While CVS promotes a healthier heart, another company is cutting short its testing on a drug due to some of the most positive results ever experienced and it's beginning to market its wonder product. From the outside, it could appear as though these two market movers have identical end goals.

A full transcript follows the video.

Michael Douglass: Top healthcare headlines for this week. This is Industry Focus.

Hi, Fools! Healthcare analyst Michael Douglass here on this lovely, hot -- perhaps too hot -- Wednesday. This is the Wednesday healthcare edition of Industry Focus, and you're in the right place. Let's hop right down to it. I wanted to talk about some of the major headlines in healthcare this week.

There's some really interesting stuff going on. Todd, let's hop right in. Let's start with Novartis (NVS 1.93%) and their surprise, early drug approval for LCZ696. I think we also call it Entresto.

Todd Campbell: Yes, Entresto. This is a really nice surprise. It's a Christmas in July for Novartis.

Douglass: This is the drug people have been excited about for Novartis.

Campbell: Big time. Novartis previously had a drug that was largely used called Diovan. Diovan has lost patent protection for use in patients who are at risk of heart failure. The ability to replace Diovan with this drug is big. Last year new generic versions of Diovan hit the market and they knocked 76% off Diovan's sales.

Now, with the opportunity to roll out Entresto we've got a drug that Novartis thinks could not only make up for sales lost to some of the generic alternatives to Diovan, but could actually exceed what Diovan was once raking in. In the press release that Novartis issued touting the early approval, it actually indicated it thinks it could upkeep sales of $5 billion.

Douglass: Yeah. Of course, when a company's management says, "We think this could be an $X billion a year drug" I always take that with a small pillar of salt because if a company is excited about something they're going to crow about it. But when you look at analysts, Thomson Reuters polled analysts and they were thinking maybe $3.7 billion by 2017. That's really not that far off.

Campbell: It's not. If you look at the size of the market this drug could address you've got about 5 million patients here in the U.S. who are at risk for heart failure and should be on some form of treatment. According to a New York Times report, the drug has been priced at $4,500 per year. If you assume you've got 1 million of the 5 million that will be eventually taking this drug that would get you to a $4.5 billion run rate. Obviously, we've got to consider the fact that there's going to be discounting and special deals cut with different pharmacy companies.

Douglass: Right, and hard to know whether you're going to get that kind of market penetration.

Campbell: Yeah. It could be 1 million, it could be 2 million, it could be 500 thousand; no one really knows for a while just how successful or not this drug is.

Douglass: This has been a key part of the Novartis investing thesis for a while now. I think this is excellent news for Novartis. It would have been very bad news if this had not been approved. Now the question is going to be: "What does the commercialization ramp-up look like?" That will be something we definitely want to watch pretty closely moving forward.

Campbell: Yeah. I would imagine they're going to hit the ground running as fast as they can. They want to get this out there quickly. We should have some indication, I would imagine, when the third quarter earnest results are released. So, we're talking about the fall before we'll really know whether or not any doctors are stepping up and starting to prescribe the drug.

Investors are going to have to take this with a grain of salt. We don't know how big -- or not -- this drug is going to be, but it's an important win. It's potentially a very important drug. In trials it cut the risk of cardiovascular death by 20%.

Douglass: That's not playing around.

Campbell: No, it's not! That's really a significant benefit. The results actually led to the phase III trial being halted early. This is a drug that could definitely be a needle mover.

Douglass: Yeah. It's often hard to find that with a big pharma. When you look at these massive market caps you see a drug doing $500 million, or $1 billion a year -- which might matter a lot if you're a smaller biotech -- it's hard to find one drug that is really a key part of the investing thesis for a big pharma. So often they're just so diversified, but this could be a really big story for Novartis.

Definitely something we'll be monitoring over the coming months, particularly the next few quarters as they begin their sales ramp-up.

Turning now to what I thought was a very interesting healthcare headline: CVS Health, which used to be CVS Caremark, who rebranded themselves as CVS Health and had the whole issue with banning tobacco products from their stores.

They've now taken a step further and they've left the U.S. Chamber of Commerce over the fact that the Chamber is fighting anti-tobacco laws. CVS is saying, "When we said we were anti-tobacco we meant it. That's not only going to apply within our stores, but also with our membership, and groups."

Campbell: The tobacco industry will not be sending any holiday gifts to CVS's management.

Douglass: They will not be buying their Christmas cards at CVS? Yeah.

Campbell: That is definitely the case. This continues a shift in CVS's business model away from using the front end of the store as a neighborhood store where you can go in and get anything. Your pack of cigarettes, your pack of gum, or whatever.

For CVS to truly become an integrated healthcare company, CVS made this bet last year and said, "We're not going to sell tobacco products anymore because the reality is the link between tobacco and tobacco-related illnesses is there. It's real. How can we go out and have all these different pieces of our healthcare puzzle and business model saying one thing and this other part -- the fact that we sell cigarettes at the front end -- be rationalized?"

So, they made the decision last year to not sell tobacco products, which impacts $2 billion a year in sales. This was not something they entered into lightly.

The jury is still out from an economic standpoint whether or not the press they received in discontinuing the sale of tobacco products, or even from leaving the Chamber in this instance, will result in growing sales, or greater sales in these other businesses that evaporate. The jury's still out on that. It's definitely holding true to, "We really do mean it, we don't like tobacco."

Douglass: Yeah. It's interesting because they have duty to shareholders to maximize shareholder value, but the argument here seems to be by branding themselves in this way, by leveraging this anti-smoking stance to help in formulary discussions on the PBM side -- which they haven't pointed to "this happened because of that" -- but they said it's made the conversations easier.

They said it's been a plus. In my head, when you look at the size of some of those PBM contracts that they're fighting for, something that has some benefit on a lot of these contracts could end up valuing out very nicely for them. When you think about what they're doing in specialty in terms of growing that healthcare footprint and tightening that model so they're a good feeder into hospitals where people need that kind of care, and the Minute Clinics when not, it has made sense.

Given that they've already crossed the Rubicon here and come out against it in their stores, it makes sense for them to go ahead and take the additional healthy step that doesn't impact the bottom line.

Campbell: I think one thing investors also have to recognize is the pharmacy-benefit-management business is bigger than the retail-store-operations business.

Douglass: Not on the profitability side, but on the revenue side.

Campbell: Exactly. They did over $20 billion in revenue on the PBM business in the first quarter alone. It's an $80 billion business for them. There's a lot of reasons you would want to become friendly with healthcare payers who are teaming up, or hiring CVS to do their PBM, or administrate their drug management for their customers. I think you're right.

There are reasons that are qualitative, but later on might be quantitative, benefiting investors. The other part of that is they continue to invest in Minute Clinics, they continue to roll out various product care programs; they are transitioning themselves into being the one-stop shop for you if you are not feeling well.

Douglass: Absolutely. Clearly, an exciting story going on at CVS and the multiyear transformation that we're going to want to keep watching. Big news this week in healthcare, we just thought we'd cover things that were maybe a bit more broad interest. We want to let our listeners know that we've got a number of good questions and we'll be addressing them next week with a doubleheader episode that we're pretty excited about. Of course, assuming nothing really timely happens in the news that we have an itch to discuss.

Keep those questions coming in. Tell us what you think about CVS and what your experience has been, or ask us a question about a biotech that's on your mind, or a big pharma that's on your mind, or insurer that's on your mind. That's what we're here for. We love getting listener questions and we read every one of them as we're deciding what we're going to do for each week's episode. Todd, thanks as always for your contributions. Folks, as always please, never buy or sell, or short anything with a stock based on what you hear.

Always do your own due diligence, and please remember that Todd, myself, and The Motley Fool may have ownership interest in the stock. The Motley Fool may have a buy or sell recommendation on a stock, so always do your own due diligence. We want folks investing better. That means always going to a number of different sources to make the best-informed decision. With that said, for The Motley Fool, I'm Michael Douglass. Thanks much for listening. Check back to Fool.com for all your healthcare and other investing needs, and Fool on!