In this week's episode of Industry Focus: Healthcare, Motley Fool analyst Michael Douglass and Fool contributor Todd Campbell go over three of the biggest recent stories in healthcare.
Meanwhile, investors in Pfizer, Inc. (NYSE:PFE) are digesting what a potential approval of the company's PD-L1 checkpoint inhibitor, avelumab, may mean to the company's future financials.
A full transcript follows the video.
This podcast was recorded on Nov. 30, 2016.
Michael Douglass: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's November 30th and we're talking healthcare. I'm Michael Douglass, filling in for Kristine Harjes, and I have Todd Campbell on the line. Todd, good to see you!
Todd Campbell: Hey, Michael, how are you?
Douglass: I'm pretty good; it's been a good week so far. A lot of news in healthcare, so let's hop right in. We figured today would be a quick take on a number of different stories. Let's start with Amicus first.
Campbell: Yeah, unfortunately ... it's always nice when we can be the bearers of good news.
Douglass: It's a mixed bag this time.
Campbell: Yeah, it's a little bit of a mixed bag this week this time, unfortunately. We have two stocks that are reminding us as investors that we need to diversify, especially when we're talking about biotech. One of the stocks we're talking about here is Amicus. Amicus is a rare-disease drug developer that already has one drug that's on the market, Galafold, for use in a very rare condition called Fabry disease. But that drug is only available in Europe right now. Many investors had hoped that it would soon become available in the United States.
Douglass: But instead, the FDA is requiring another trial, and Amicus has guided that that's a good three-year delay for the drug. Chances are good, if all goes well, we still won't see the drug on the market in the U.S. until 2019 or later.
Campbell: Yeah, this is a real bummer for investors. Developing these drugs is not easy, and it's expensive. The fact that the EU [European Union] approved the drug, and it's been on the market there since earlier this year, had a lot of people thinking: If the FDA had been a little friendlier in 2016, maybe they'll allow Amicus to get its drug on the market here, too. While this isn't a huge patient population, you're still talking about a quarter to a third of the global Fabry disease population residing here in America. So, getting approved here, for this drug -- which is an expensive drug, Michael, $200,000 price tag -- every additional patient can help move the needle for this company.
Douglass: Yeah. And with the trial not being completed until 2019, and no FDA decision until 2020, it's a long delay. When you're looking at a company like this, one of my immediate questions is: OK, cool, what does their cash position look like, and what does cash burn look like? Put a different way, are they going to have to dilute or do something to raise more cash between now and when we'll get this news? The answer for Amicus looks like absolutely, yes. Their cash position is about $212 million. Operating cash burn over the trailing twelve-month has been about $150 million. It's not hard to do that math and see potential issues with funding, and the possibility that they'll have to access the equity markets and dilute current shareholders to keep things going until 2020 or later.
Campbell: Yeah, you make a great point there, Michael. The big question is going to be, how quickly can sales ramp overseas? And, what kind of pricing reimbursement are they negotiating in each of these EU member countries? Typically speaking, EU countries are a little bit more reluctant to pay as much for drugs as the U.S., historically speaking. In the third quarter, Amicus had said, "We have approval for reimbursement in five EU member countries, we have about 50 patients right now that are on Galafold." That translated into about $2 million in sales: kind of a rounding error right now. Theoretically, as more countries sign on, and as doctors get more comfortable using Galafold, sales could grow meaningfully.
To put that opportunity into perspective for investors, the two drugs that are on the market that treat this condition: one is made by Shire, the other by Sanofi. Both of those drugs bring in over $100 million a quarter. And one of those drugs, Replagel -- which is made by Shire -- that's only available in Europe, too. There's still a nine-figure opportunity here, but the big question is: How quickly can sales of Galafold in the EU grow, and will they grow quick enough to prevent the need of, like you said, a dilutive offering? This is definitely going to be one of those stories we need to watch over the next couple quarters, especially now that expenses are going to go higher because of this new trial.
Douglass: Right. And, also, there's marketing expense and things like that. Personally, I'm not confident that they will be able to contain things differently to avoid accessing the equity markets. But of course, we don't have crystal balls, we can't predict the future. For me, this is, obviously, very bad news. For me, it's a little bit too risky for my blood. But you actually own Amicus, don't you?
Campbell: I do. Unfortunately, I have lost some money on it.
Douglass: (laughs) Right.
Campbell: (laughs) That's one of the reasons I think it's always important to Foolishly invest, we spread that risk across a number of names. You're going to have some winners and losers in biotech. This one right now is a loser for me. We'll see how this plays out over time. I have no plans of selling it right now, but I definitely want to watch the next couple of quarters to see what the pace is of the acceleration of sales in Europe. So, I wouldn't recommend anyone buying it right now, until they get better clarity into what that sales trajectory looks like.
Douglass: Yeah, not necessarily a "bad-news buy." All right, that's good stuff, thanks for your take there.
Let's hop on over to the opposite end of the biotech spectrum: big pharma, Pfizer, the massive drug company closing in in what's called the PD-1 race. PD-1, immuno-oncology, the idea here is: Cancer cells are often able to cloak themselves from being identified and targeted by the immune system. The idea of PD-1 inhibitors is that they basically block that cloaking device, and the immune system can be like, "Whoa, wait a minute, this thing is bad. Let's kill it." It's been a really exciting area. You and I were chatting before the show, and you mentioned: Immuno-oncology is expected to be, potentially, a tens-of-billions-of-dollars opportunity across the entire market, just because of how effective some of these drugs have been in treating cancer. Pfizer, a later entrant compared to Bristol-Myers Squibb and Merck. Let's talk about Pfizer's new PD-1 drug.
Campbell: This is a pretty cool area of advancing technology and how we treat cancer. We talked about PD-1s as the ability to be able to help T cells find and destroy cancer more easily -- avoid the cloaking system, if you will. Where we find that, that could be really useful in helping and patient outcomes in cancer, is when these drugs are used in combination with other drugs that are already effective in these different indications. There is a tremendous amount of enthusiasm that PD-1- and PD-L1-targeting drugs could generate a lot of money on their own, but also that they could generate a lot of money when used in concert with these other approved medications.
As you mentioned, you have Bristol-Myers and Merck already on the market with their PD-1-targeting drugs. You also have Roche entering the game in October with a drug called Tecentriq, which got approved for some use in some non-small cell lung cancer patients. Now, sometime next year, it's likely that we'll see Pfizer join the race with this drug, avelumab. (laughs) I always butcher the names, I apologize.
Douglass: Pronunciation is always a fraught ...
Campbell: Pfizer has teamed up with Merck Germany -- which is not to be confused with Merck, the U.S.-based company -- on this drug. The FDA has just accepted their application for approval of its use in metastatic Merkel cell carcinoma, which is a very rare form of skin cancer that has very few treatment options, and a very poor prognosis. So, there's a major unmet need they're targeting with this drug. Because of that, the FDA is reviewing this drug on an accelerated pathway that could get it on the market as soon as next summer. It won't move the needle a lot for Pfizer, because Pfizer is a huge company, generating billions of dollars in revenue, and the patient population is pretty small. But it's important, because it gets them in the race for PD-1 and PD-L1, and would potentially allow them to expand that label into other indications. There are a lot of trials that are still ongoing, evaluating this drug for Pfizer.
Douglass: A couple really good points you made that I want to call out here. The first one is, the initial opportunity with the drug is often the full opportunity with the drug. You have a drug that is good for this one disease, and it's good for that disease and that's all. The real beauty and excitement of PD-1s and PD-L1s is, they are potentially -- and they are certainly being tested extensively -- used in a number of cancers. So, it's not just, "This one was approved for non small-cell lung cancer, OK, cool, it's a non small-cell lung cancer." It's also, "What about renal cell carcinoma? What about these blood cancers? What about whatever else?" There's a lot of potential opportunity with this, and that's why investors are really excited about them. At the end of the day, these combos, given the size of the market -- cancer is an enormous disease, and obviously a very deadly one -- given the diversity of cancers that need to be targeted and fought back against, there's really opportunity here for multiple winners.
Campbell: Yeah. If you look at the way it's shaped up already -- and this is a relatively new class of cancer-fighting compounds -- you have Opdivo sales in the third quarter already clocking in at a $3.6 billion pace.
Douglass: $3.6 billion annualized.
Campbell: Yeah, annualized. And, Keytruda clocking in at around a $1.2 billion annualized pace. So, you're already generating out, just from those two drugs, sales at like a $5 billion annualized pace. I think some of the peak sales estimates for PD-1s and PD-L1s put this market in the tens of billions of dollars. Now, as you and I have talked about in the past, Michael, peak sales estimates: Don't rely on them. (laughs) They're often wrong. But what we are seeing so far, proof in the pudding, is very strong uptake of these drugs, and very good revenue generation for investors for the ones that have already reached the market.
Douglass: Yeah. So, this is definitely good news for Pfizer shareholders. I would not argue, and I don't think you would either, Todd, that this is thesis-changing for Pfizer, because no one drug can really easily move the needle for a company as big as Pfizer. What the opportunity with this drug is is yet still unclear. We only have these data points so far. Of course, obviously, actual approval is not guaranteed. The FDA certainly surprises people in both directions sometimes. I think there's still a lot of question marks as to how, long-term, this fits into the Pfizer strategy. But it is undoubtedly good news. It's nice to see Pfizer getting into this market and playing with the first movers, Bristol and Merck and Roche.
Campbell: Absolutely. You mentioned, we only have the information so far on Merkel cell. There are 11 ongoing phase 3 trials that are either recruiting or not yet recruiting for this drug. I imagine that if investors stay tuned over the course of the next year, year and a half, they're going to see some more data coming out that will give them a little bit more clarity into what the peak potential could be for this drug.
Douglass: Absolutely. All right. Before we head to our final segment, I wanted to call out a couple of things, really quick. First off, folks, if you use the Amazon Echo, now you can get the brand new skill from The Motley Fool. You can get stock quotes, create a watch list, ask Alexa how your portfolio is doing -- and best of all, it's free. For more details, including a demo of how it works, go to www.fool.com/alexa.
Also, as has been announced on several Industry Focus episodes, we are working on compiling a list of great investing books for the end of the year and the start of next year. We'd love to hear your opinion. If you have an investing book that you love, that has changed your life, that has challenged you -- that really, in any way, has been a good use of your time to read -- shoot us an email at email@example.com. Let us know what you thought. Title -- and we'd also love to know why you would include it on our list.
With that, let's head on over to Juno. Juno is another relatively small, relatively early stage biotech that has had a lot of excitement about it because of its chimeric antigen receptor T-cell therapy, or CAR-T, as we're going to call it from here. Unfortunately, it had some pretty bad news in a trial, which caused them to halt it recently.
Campbell: This is probably the most disappointing news for -- I'm not just going to say investors, but potentially patients, too. The reason I say that is, Juno was working on a drug called JCAR015. JCAR015 was being studied in very tough-to-treat acute lymphoblastic leukemia (ALL). These patients don't have a lot of treatment options. CAR-Ts had been amped up to be revolutionary in their ability to help battle back against this cancer. Unfortunately, sadly, earlier this year, there were a couple patient deaths that resulted in a very short trial halt of JCAR015 back in June or July. At the time, Juno had determined that they felt the deaths had been caused by the preconditioning regimen they were giving. Basically, what they were doing was, before giving patients their CAR-T therapy, they were giving them chemotherapy ahead of time to help kill off some of those cells and make the CAR-T more effective.
Douglass: And, of course, the problem with chemotherapy is that it comes laden with side effects and, unfortunately, in this case, two of the patients passed away -- according to Juno's belief, because of the side effects of chemotherapy.
Campbell: Right, and one chemotherapy in particular, fludarabine, that had been added to the preconditioning regimen very recently. They told the FDA, "Let's remove that fludarabine; let's stick with the one drug we used in preconditioning. We think that's going to solve the problem." The FDA signed off on it. Sadly, two more people have passed away in the JCAR015 ALL trial.
Douglass: Yeah, which is undoubtedly bad news. Management got out ahead of it immediately, very quickly, and issued a voluntary hold on their trial, and immediately hosted a call with analysts; and what they said on that was basically, it was pretty clear that they didn't have all the data to know exactly what was the issue. So, it's unclear whether or not they're going to move forward with JCAR015, whether they're going to modify things, or end the trial and the drug's development. That's still unclear.
One thing they did point out was: They do not believe it's a classwide or portfolio-wide effect. The reason that matters is, think about it this way: If all CAR-T drugs had this problem, that would be a big issue with all of CAR-T, and would have serious implications for everybody working on that, and all the work that Juno is doing. So far, their sense is that that's not the case.
Campbell: Yeah. JCAR015 was an aggressive program. When you think about ALL, you have other competitors that are researching their own CAR-T drugs. Essentially what they're doing is taking T-cells out of a patient's body, reengineering them so they can better identify and kill cancer, and then reinserting them inside the patient. So, you have lots of different cancers that theoretically could benefit from this. ALL, however, has a historically high level of neurotoxicity anyways. The deaths were caused by brain swelling, which has not been evidenced, so far, in competitors' CAR-T programs.
Kite Pharma, for example, is working on a drug, KTE-C19, that is being studied in non-Hodgkin's lymphoma -- typically lower neurotoxicity than you would see in ALL. They also, in the Kite program, are using a much lower dose of the chemotherapies in the preconditioning regimen. That could have something to do with it as well. It could be that the JCAR program was a little too aggressive on the preconditioning regimen versus competitors.
I think it's also important for investors to recognize, even if JCAR015 is permanently sidelined, that's not the end of the road for Juno. Juno has a very robust clinical pipeline of CAR-Ts being studied across a lot of different B-cell cancers. Some of these CAR-Ts that are still in trial, that are unaffected by this trial halt, are next-generation drugs that are designed to work better and be more targeted than JCAR015.
Douglass: Right. If this were a classwide problem -- and it's not that that's necessarily been ruled out, but so far the data indicates that they haven't seen the same issues with these other drugs -- that would be thesis-changing for Juno. For me, this doesn't necessarily change the thesis on Juno. What we really need is more detail.
Campbell: It pushes it back, though. We look at it, and if they do shelve JCAR015 permanently -- they had hoped that maybe this drug could hit the market in 2018 -- they shelve it now, who knows when the first CAR-T from Juno gets to the market? Meanwhile, Kite is still advancing their programs and theoretically could have their drug on the market by the end of next year. So, investors do need to realize that it pushes back the timeline for commercialization and driving generalization for Juno, but that's not necessarily a deal-breaker.
Douglass: Right. Just like we discussed with Amicus, when you have a biotech that has bad news, that potentially pushes their timeline back. One of my first questions is: What about cash and cash burn? Juno has $1 billion on the balance sheet in cash. Looking at their cash burn, they have a runway. They have plenty of time to report -- potentially, hopefully -- good data in some of these other indications and trials, before potentially needing to figure out how else they're going to get money.
Campbell: Right. Michael, they're burning through about $60 million a quarter right now, so they figured they would shut down JCAR015, who knows if they'll start up another trial somewhere else. Let's just say they're going to burn through about $250 million a year. At the current cash on hand, that gives them four years' worth of cash.
Douglass: Right. And they may not even shut down JCAR015. There are definitely a lot of possibilities here. It's really just too soon to tell. As for me, at least right now, I'm not buying Juno. But I wouldn't have it on a sell list, personally, either. Does that sound about right?
Campbell: I hate to hedge and say I think it's watchful waiting, but I think you need to stick it out and see: Where's this going to go from here? How's this going to shape out? Are there going to be any other surprises from competitors? I think what I might do if I was an investor and wanted exposure: I might say I want to hold off on Juno right now, but maybe I'm going to spend some time getting to know Kite a little better.
Douglass: Yeah. I think that makes sense. Todd, thank you as always.
Folks, as always, people on the show may have interests in the stocks they're discussing. Todd owns Amicus, I've looked at Juno before. And The Motley Fool may have recommendations for or against the stocks we discuss on the show. So, as always -- and this isn't just true on our show, but this is for everything -- do not buy or sell or do anything with a stock based on just what you hear. Always do your own due diligence.
As always, it's a pleasure to be on the show. For Todd Campbell, I'm Michael Douglass, this is Industry Focus. Thanks much and Fool on!
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