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 analyzing Acadia 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 like Celgene Corporation (NASDAQ:CELG), UnitedHealth Group (NYSE:UNH), and Regeneron Pharmaceuticals, Inc. (NASDAQ:REGN), but they also like some surprising picks, such as GW Pharmaceuticals plc (NASDAQ:GWPH).
Tune in to find out if these stocks are right for your portfolio.
A full transcript follows the video.
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 is Dec. 21, and I'm your Healthcare show host, Kristine Harjes. Next week, we're going to be replaying our favorite episodes from last year, so for the last time in 2016, I am welcoming 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 you very much, and happy holidays to you and your family as 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 research results from a company called Acadia Pharmaceuticals came out yesterday.
Campbell: Really interesting data. I think it's very helpful to walk investors through the pluses and potentially the minuses associated with the information that was released by Acadia Pharmaceuticals. I don't think this is a stock that 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 for Parkinson's disease psychosis. Now, they're testing it in Alzheimer's disease psychosis.
Campbell: Right. This year, they just launched this drug, Nuplazid, for the treatment of hallucinations and delusions within Parkinson's patients. It's estimated that about 40% of all Parkinson's patients suffer from psychosis that this drug can address. The company is researching this drug across a number of different similar indications where they think they may also be able to help. One of those indications, obviously, is Alzheimer's disease, where they've been evaluating the drug in treating Alzheimer's disease psychosis, which is estimated to affect between 25% to 50% of the Alzheimer'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 million Alzheimer's disease patients, that's an extra million. So, you're talking 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 trial there 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. But I 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 been desperate for new advances in Alzheimer's disease treatment. There's not a lot of good treatments out there. The only things we have out there treat the symptoms, they don't curb or crimp the disease.
Harjes: Yeah. Every stock working in this space has been extremely volatile, trading emotionally up, down, every which way on Alzheimer'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's Alzheimer's disease. So you have to take this with a big grain of salt. But there's another reason that I want investors 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 a statistical 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's kind 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. But compared to how big this indication is, and how 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 the Parkinson'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's what you would want to have.
Harjes: Absolutely. The other 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 was receiving this drug, their numbers held steady. But the placebo group experienced a placebo 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 that loses its statistical significance between the six week and 12 week mark. What does that mean? The approval in Parkinson's disease was based on six week data. So you could make an argument that six week is fine. The other thing I'm curious about is the choice of the study or the scale or the score that they used for evaluating these patients. It was a nursing home score, because all of these were nursing home patients. That isn't necessarily one that you see typically used in psychology trials or Alzheimer'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 some enthusiasm 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 that The Motley Fool is now accepting applications for their summer internships. If you or somebody that you know is looking to spend the summer at a company that is consistently rated one of the best places to work in the whole country, careers.fool.com is the URL that you need to know. I personally started my career here as an intern, so I can attest, it's an amazing program. Again, if you're interested or you know somebody that might be, the posting is at careers.fool.com.
Without further ado, the next segment of our show is inspired by a listener question that came in through Twitter. If you 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 background necessary 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 was passed by Congress and signed by the president. What it's designed to do is to reduce the regulatory 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 of additional spending that they're going to be sending to both the National Institute of Health and the FDA.
Harjes: And if you're curious about more, we did an entire half of an episode on 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's essentially a basket of stocks that trade for a single price. It's kind 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 not super familiar with ETFs is, it's a handful of stocks that we're looking at here.
Campbell: Right. We have plenty of coverage on The Motley Fool's website if anybody is interested in looking more into different ETFs. It was a fascinating question to me, and it really got me thinking about who'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 that I would throw out there is BioMarin. 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 is allowed to consider real-world evidence about a drug's efficacy. So, outside of trials, do we see this drug working? And that could lead to expedited approval, especially for patients with an unmet need. So, your patients that are looking at receiving rare-disease drugs. So, I could definitely see them benefiting from this act.
Campbell: I totally agree with you. I'm actually going to cheat with one name that I would like to include in there. It's going to be an ETF of ETFs. I think people should look at the medical device ETF, the iShares Medical Device ETF -- symbol is IHI -- and that's because one 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 increase everything from breakthrough designation to the ability to use new devices in more rare diseases. There's a lot of goodies in this act that could help prop up medical device stocks. If you wanted one in particular, I guess Medtronic is 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 Labs at 7.7%, and Thermo Fisher at 7.7%.
Harjes: Yeah, that sounds right. So at Medtronic, they make cardiac devices, diabetes devices, and more. They're a huge company. They're very diversified. They're a Dividend Aristocrat. If you're only looking for one medical device company, that would be my pick.
Campbell: Yep. And if 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 is Johnson & 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 Goliath within both of those areas. I guess I would toss in the ring Biogen, because Biogen is doing a tremendous amount of research and development on neurodegenerative diseases like Alzheimer's and Parkinson's disease. Specifically in the Act, there's a lot of money that's being set aside for the Brain Initiative, and also for the Precision Medicine Initiative, both of which could increase the number of drugs that end up in the clinic targeting cognitive decline.
Harjes: Right. There's a lot of money in here going toward those initiatives, which are trying to harness the power of data to create personalized treatments. Basically, what precision medicine is doing is taking 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 an Illumina that does gene sequencing.
Campbell: Absolutely. And they're saying one of the biggest advances, potentially, in Alzheimer's research could come from deep sequencing, 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 connect different patients who are suffering from this devastating disease.
Harjes: Right. So, thanks again to Harris Arshad for writing in to Twitter and asking 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 great heading 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 on UnitedHealth, which is the largest U.S. health insurer. The reason that I picked UnitedHealth is because of a few different reasons. One, they backed away significantly 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 of Obamacare, 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 a very 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 bit skeptical of is if Medicaid shrinks. Medicaid is not super important for UnitedHealth, but it is a quickly growing segment 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's trading 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. The proof will be in the pudding. Will they be able to deliver the kind of earnings growth that everybody wants them to deliver?
Harjes: Yep, all great points. I also picked my own for the least-risky category. Here, I picked CVS, the pharmacy retailer that you all know and love. I think they have a demographic tailwind coming on for them. You have an aging population, that means more chronic diseases, so, more prescription sales, more people coming into their Minute Clinics. This is the second-largest pharmacy, the second-largest pharmacy benefits manager [PBM] in the United States. They are also the largest long-term care and specialty pharmacy. This is just a huge diversified business. They have a 2.13% dividend. I don't think they have a ton of regulatory risk. If anything, I actually think that regulators will be happy with CVS because 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's no question that pricing remains a big issue. Insurers want lower prices. As long as CVS is helping them deliver that, it's a very intriguing stock.
Harjes: Right. And they're down pretty 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've talked a lot about on the show before, and will probably talk a lot about again. It's one of the biggest biotechs out there. They have a huge presence in cancer, specifically multiple myeloma, and they have a tremendous number of different collaborations and pipeline 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're targeting a disease that requires treatment, they've escaped 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 is forecasting 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 of my favorite parts of Celgene, as you mentioned, their collaboration. This is just a brilliant strategy on their part. Pay a 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. And management has shown in the past that they are pretty responsible with their estimates. I think that's a good pick.
Campbell: Yeah. And one thing that people will want to watch, because this could really affect how risky the stock is next year, is they're supposed to roll out some data on Ozanimod and multiple 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, your riskier category, is Regeneron. The reason that I pick this one is they have got 2017 catalysts galore. They have their new cholesterol-lowering drug, Praluent, is set to release cardiovascular data which could potentially justify its kind of high price tag of $14,600, and could potentially turbocharge pretty lackluster -- thus far -- sales. They also have a PDUFA date coming up in March for a drug called Dupixent. This is for a severe form of eczema. They have a resubmission of another drug that had previously been turned down by the FDA in October due to manufacturing issues. They think they've figured out the manufacturing 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 the most risky stock. This is a company called Cara. They are down 45% year to date. That is a tough pill to swallow. This is a company that IPO'd in February 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 it doesn'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 itching condition, as well as chronic pain. The latter thing there is an enormous indication, 100 million prescriptions 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's definitely a major need for new drugs that can work the way that opioids do, or, deliver the efficacy that opioids do, without that addiction. That's, I'd say, the main connection between my most risky pick and your most risky pick there is that we both targeted clinical-stage companies 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 be GW Pharmaceuticals. We've talked about this stock on the show before. They're working on a marijuana-based medicine to treat epilepsy. They've already 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 are resistance 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. The epilepsy 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. The devil will be in the details with what the label says and when this drug gets 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 be looking at a potential approval by the end of 2017. That is a wrap for this episode, and also a wrap for new healthcare episodes of Industry Focus in 2016. We will of course be back next year for more industry deep dives. For now, a heartfelt thank you to all of our listeners for tuning in all year, and also to Todd for being my partner in crime here, making this show happen.
Campbell: Thank you, too Kristine!
Harjes: Thank you! As always, people on the program may have interests in the stocks they talk about and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. For Todd 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.