Does Healthcare’s Past Predict its Future?

It's time travel week at Industry Focus! In this healthcare episode, Kristine Harjes brings on former host Michael Douglass to talk about how the healthcare industry has changed (and some areas it hasn't) since he left the show.

Listen in to hear how his predictions about the Affordable Care Act, MannKind's (MNKD 1.22%) much-hyped Afrezza, Gilead Sciences' (GILD 0.12%) advancements in hepatitis C treatment, and more, have panned out in the last few years -- plus, learn about three exciting areas he thinks we'll still be talking about on the show for the considerable future. Also, the hosts take a closer look at how a few different companies have reacted to Obamacare since its implementation, and why it's so hard to guess how the law will change the space going forward.

A full transcript follows the video.

This podcast was recorded on April 27, 2016. 

Kristine Harjes: The more things change, the more they stay the same, on this healthcare edition of Industry Focus.

Welcome to Healthcare Industry Focus! It is April 27th, 2016. I'm your host, Kristine Harjes, and if you've been listening to the Industry Focus shows that came on Tuesday and Monday of this week, then you'll know it is throwback week. So, we've reached out to some of the folks who were involved with the show before all of your current hosts were. In that light, I have special guest Michael Douglass on the show, who has been doing this kind of thing since before it was even podcast.

Michael Douglass: Right, yeah. I started at The Motley Fool in early 2014. And at the time, the healthcare show was called Market Checkup, and it was only videos. We didn't do a podcast at all with it. I was there when Industry Focus first became a bi-industry podcast and show, and then was eventually handed off to our much more talented current host, Kristine Harjes.

Harjes: Well, thanks. I don't know if I can truly accept that compliment. I think you did a great job too. And I'm really excited to have you back on the show today. Just thinking about what has happened in healthcare since I started following the industry, about two years, as I alluded to in this episode's teaser, things have changed a little bit, but a lot of the themes are roughly the same. Let's take a look at one of the biggest topics for you guys that you were covering, which was Obamacare. What was the state of that two or three years ago?

Douglass: Right. It's kind of funny. As you mentioned, these overall big trends, a lot of them are demographic. Those things don't really change that much. It's an iceberg, a glacier, it moves slowly and it makes big changes over time. The Affordable Care Act had been passed some years before I came, but the open enrollment for the first public exchanges was ongoing when I began in healthcare at The Motley Fool. 

We were definitely covering, "Hey, they extended the deadline for the exchanges." Because of all the technical difficulties they were having at the time, they ended up extending the deadline through the end of March 2014. And there was a lot of, "Hey, how many people will they actually get in the exchanges?" And, "Is the law going to be a success?" "Are they going to get enough young people?" "Are the insurers going to play ball?" There were all of these big, grand, open questions.

Harjes: There were a ton of questions, and very few answers. I think we're still answering a lot of these questions. One that I want to have you expand on a little bit is why young people were so important.

Douglass: Young people were considered a proxy for healthy people, as a general rule. That was the shorthand we were using, because young people are less likely to have a lot of chronic illnesses, because many of those tend to be age-related. The hope, then, was that these young people would help mitigate the cost of a lot of very sick people coming on to the exchanges -- sick people who had been previously excluded from personal health insurance. The hope was, then, that could de-risk the pool a little bit, so insurers would be able to make a buck. Then the insurers would play ball and get involved, and the health plans wouldn't become totally unaffordable. 

There was a lot of discussion of the "death spiral" that would happen if not enough young people signed up -- that because of that, insurers had to jack up prices; at which point people who had previously signed up would say, "Eh, never mind, I'm done," and they'd back out; then, the pool would get smaller and smaller and riskier and riskier and more and more expensive -- and it would just cause the law's overall collapse.

Harjes: What were you personally expecting, and has it played out like that?

Douglass: The death spiral, obviously, didn't happen.

Harjes: Whoever came up with that term, that's just brilliant. That really inspires fear right there. The "death spiral."

Douglass: It was good -- or, depending on your point of view, bad -- marketing. I expected the law to enroll a lot of people, and it certainly did that. I think we actually, at one point, made guesses, and I'm pretty sure I was pretty wildly wrong. But I did guess they'd beat the 7 million they were predicting, and I think they ended up doing 8 million in the exchanges that year, and another 4.8 million or so in Medicaid and Children's Health Insurance Program, or CHIP.

Harjes: To your credit, nobody has really been able to estimate these things too well. The CBO expected to have 10 million enrollees by the end of 2016, and it far surpassed it, it was 12.7 million for 2016. Of course, there'll be a little bit of attrition there, because the guess was for the end of 2016. Still -- these numbers are really hard to pin down.

Douglass: Yes. And that's one of those broader healthcare problems. Across the board, we're doing a lot of guesswork, and that's a drawback. I will say, I very much believed that Anthem (ELV 0.13%) would do very well -- they were called WellPoint at the time, and they've since changed their name to Anthem -- because they decided to play ball. They said, "You know what? These exchanges are full of people that we can make a relationship with. We operate a lot of Blue Cross Blue Shield policies. We have a great brand, and we think that we can play here, we can play aggressively, we can get a lot of people, and we can build an overall structure that will help us really drive shareholder value." And so far, that has very much panned out for Anthem.

Harjes: They're a little bit unique in this regard. Something we talked about on the show just a few weeks ago was UnitedHealth Group's decision to drop out of almost all of the Obamacare exchanges.

Douglass: Yeah. UnitedHealth Group was always one of the more skeptical ones. I remember, initially, they only did a handful of exchanges. I want to say it was five, or something like that. And then they scaled up, and then they promptly scaled right back down.

Harjes: I don't know why, but the image that I get of them watching Obamacare is like, a nervous kid at a pool, who might be a little too cold, so he dips his toes in, and he's not really sure about it, and he says, "You know what? I'm going to dive in and do this! Rip the Band-Aid off!" And then he just scampers right back out of the water, because it was way too cold.

Douglass: I think that's apt. I will say, cost continues to be a problem outside of your Medicaid expansion states. And by the way, no surprise, I think, that the Medicaid expansion has steadily increased. There have been a number of states that were holdouts in 2013 and 2014 that have since expanded Medicaid, because it's just an easy win for them, free money from the government.

That has been a boon to your Medicaid insurers. It was pretty clear they were going to benefit from that. Anyone who said that insurance companies would collapse because of the Affordable Care Act, I think, has been proven very much wrong. It's certainly not been a huge net benefit for some of them, but for some, it has been a nice win.

Harjes: So, one of the other huge things that I'm sure you were talking about a ton a couple of years ago had to do with a more specific niche of the market, and that is in hepatitis C. I remember, when I first started following this industry, it was right before Harvoni, which is a Gilead Sciences hepatitis C drug, was approved. That was a huge, huge story! I can only imagine when its predecessor, Sovaldi, was first approved.

Douglass: Oh, yeah. I was covering Gilead Sciences when it announced its first quarter 2014 earnings, which was the first full quarter of Sovaldi on the market. Sovaldi had been approved in, I want to say, December of 2013. When the reported in December of 2013, they had like three weeks of data, so it wasn't really helpful. 

But, their first full quarter on the market, Sovaldi did $2.1 billion, which is just unheard of. It was easily the fastest drug ramp ever. It put this drug on track to be this massive winner in 2014. Previously, you'd had Incivek, by Vertex, which had been a hepatitis C drug. It had managed, I think, $1-point-something billion. It was huge in its time, before Sovaldi completely knocked it off and basically wiped out those revenues almost immediately. Really big story.

Harjes: One of the worries that came with this, because, people saw what happened to Vertex with Incivek, and they also saw, after that, Johnson & Johnson's Olysio, which also became obsolete, due to the Gilead Science's drugs -- people thought, "Is this another flash in the pan that's going to be easily replaced by competitive threats?"

Douglass: Yeah. Or, even, are they going to treat everybody who's going to be immediately treatable, and then just be done? And that didn't happen. It was pretty darn clear. Even today, Gilead Sciences has treated, I want to say, less than or around 10% of the United States hepatitis C population. And this has been the market that Gilead's been playing in the most. Very much, hepatitis C is a longer-term fix than a lot of people were thinking in those initial heady days, because it just takes time.

Harjes: Right. And of course, another thing to watch is a potential for a Gilead Sciences pan-genotypic hepatitis C drug. We won't get into the nitty-gritty of exactly what that means, but let's just say, it could be a game-changer in this market. It's looking at a PDUFA date of June 2016.

Douglass: And that's one of the really cool things about Gilead. When you look at Vertex with Incivek, and Johnson & Johnson with Olysio, they got wiped out by a competitor. What Gilead is doing, in a lot of ways, is wiping out their own drugs. They had Sovaldi, and it was revolutionary. Then they created Harvoni. And Sovaldi sales fell off pretty quickly, but Harvoni became the new standard of care. And now, they're working on this pan-genotypic combination which could potentially become the next standard of care. Consistently, their opponents have just not been able to catch up.

This is why they're maintaining about 90% market share in hepatitis C, which is just nuts. You don't see that, really, anywhere. Those of you who have been listening for a while have heard me gush about Gilead in the past, so I'm going to restrain myself from here. But, just for the record, it's really interesting to see how they've been able to do that.

Harjes: For our listeners, earlier, before this episode, I was on the Gilead Sciences investor relations website, and Michael comes walking over to my desk, and from probably 15 feet away, he goes, "Oh! You're on Gilead's website, I recognize the coloring!"

Douglass: (laughs) 

Harjes: This has to be his favorite stock.

Douglass: Yes, definitely.

Harjes: Last major topic that I know you guys were covering a good bit before I picked up the show was the quite epically named MannKind Corporation. If we hop back in that time machine, what was going on with MannKind?

Douglass: Gosh ... So, MannKind Corporation, ever since I've watched the stock, has been a battleground stock. The key bull thesis around it was, they had this drug called Afrezza, and it's an inhalable insulin, and it's a mealtime insulin. The idea is, for people who don't like the needle pricks, this could be a big thing. It had been rejected by the FDA twice, so, they were coming in for their third potential approval. I think the actual approval date was in June of 2014, so it was right when I started hopping in. It was a really interesting stock. A lot of people were really for it, a lot of people were really against it. I think there was high short interest at the time.

Harjes: Even then? Wow.

Douglass: Yeah, kind of your classic battleground stock.

Harjes: Yeah. There really were sky-high expectations for Afrezza, which, we've seen, as it played out, really didn't take off at all.

Douglass: And we took a lot of flak, David Williamson and I. We were the precursors to Kristine and Todd on this. We both very much felt that Afrezza was not going to work out very well. And that viewpoint has been largely vindicated.

Harjes: Indeed. I know you're not afraid of a little bit of speculation--

Douglass: Uh-oh! (laughs) 

Harjes: Just to put you on the spot, just a little bit -- can you make a prediction for, say, two years from now? What do you think Industry Focus: Healthcare is going to be talking about?

Douglass: Gosh. Sure. In fact, I'll give you three.

Harjes: Wow!

Douglass: Game on.

Harjes: (laughs) I knew you'd be up for this.

Douglass: The first one -- you, we, whoever is on the show will absolutely still be talking about the Affordable Care Act.

Harjes: In whatever way it exists.

Douglass: In some way, shape, or form. I believe that this health reform seems likely to stay in some way, shape, or form. The adjustments and changes it's making to the industry are tremendous. As a corollary to that, the second thing: I think you're absolutely be talking about mergers and acquisitions. What we've seen was, a lot of hospitals have been buying each other up for a while. This has always been the case in biotech, too. But it's really spread in the last few years to your PBMs and your insurers. We've been seeing a lot of M&A activity. I expect -- maybe we won't be setting records in two years, I don't know. But I think there will still be a lot going on, because consolidation in healthcare gives you economies of scale.

And when you're on the bargaining table, trying to talk about a drug price, if you have more members, that gives you a harder lever to pull, and a better way to say, "Hey, let's cut a deal." You don't want to be not on this formulary. On the flip side, I think you'll see drug companies bulking up for the same reason, because that will give them more drugs, more things in their arsenal, more things to go after. I think that is absolutely going to be a long-term trend in healthcare.

Harjes: Yeah, it has somewhat of a domino effect.

Douglass: Exactly. I think the third thing we'll still be talking about -- and we didn't really touch on it here -- is immuno-oncology, because these cancer drugs that, in theory, teach the body how to recognize and kill cancer cells, or at least de-cloak those cancer cells, so the body's natural immune response is triggered. It's something we were talking about two years ago. We didn't have time to talk about it today. I think it's something that will absolutely still be on the agenda two years from now, because it is a broad sector. There's a lot of digging still being done.

You've had your early winners. Bristol and Merck have both done pretty well based on their immuno-oncology drugs, Keytruda and Opdivo. But, I think, you have a ton of small-cap biotechs that are now looking into this really hard. You've got Celgene with a lot of their collaborations working on it as well. So, I think there's just enormous opportunity there, and I think that, while one signaling pathway or another, or one set of proteins or another may or may not work out, I expect that will be something that we're still very much looking at it healthcare in two years.

Harjes: It does feel like it's a field that's still very much in the early stages. Those are some really interesting answers. I'm inclined to agree with them, for the record.

Douglass: Thank you.

Harjes: I'm absolutely going to be writing them down in my Outlook calendar for two years from now. We'll check back in. Listeners, we hope that you've enjoyed stepping in the time machine with us for a little bit today. Michael, it's always great when we get to do a show together. Thanks for playing ball.

Douglass: Thanks for having me.

Harjes: As always, people on the show may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against these stocks, so don't buy or sell stocks based solely on what you hear. If you have questions or comments, you can always shoot us an email us at [email protected], or reach out on Twitter @MFIndustryFocus.