If you're looking for new stocks to buy for your portfolio, you might want to consider digging deeper into the story behind Exelixis (NASDAQ:EXEL), Pacira Pharmaceuticals (NASDAQ:PCRX), Kite Pharma (NASDAQ:KITE), Exact Sciences (NASDAQ:EXAS), and Portola Pharmaceuticals (NASDAQ:PTLA). All five of these stocks offer intriguing catalysts that have sent their shares soaring over 50% already this year.
In this episode of The Motley Fool's Industry Focus: Healthcare podcast, Kristine Harjes and Todd Campbell explain why investors are so bullish on these top-performing stocks and what could be next for these companies.
A transcript follows the video.
This podcast was recorded on March 6, 2017.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. I'm your healthcare show host, Kristine Harjes, sitting here in beautiful Alexandria, Virginia, pre-recording this episode on March 6th, which is Monday, for release on the usual Healthcare Wednesday, March 8th. I am happy to welcome to the show Todd Campbell, who's calling in from New Hampshire.
Todd Campbell: Hi, Kristine!
Harjes: Hey, Todd! How are you?
Campbell: I'm doing great. I'm looking forward to talking about a bunch of stocks I wish I bought on December 31st.
Harjes: Yeah, I was actually just about to give you complete credit for today's show episode idea. I'll just completely hand it over to you for an introduction.
Campbell: Sure. I figure we're just now getting into the third month of the year. It's the perfect time to look back and say what's working. And, obviously, don't just buy anything because the stock happens to be up. But what I've oftentimes found is that if you go and every once in a while check what would have been top performers, sometimes you find a good story to research a little bit more and potentially add to a watch list or tuck into your portfolio after you've done that homework.
So, what I want to do today was do a screen, looking for investment-worthy healthcare stocks that have been big returners so far year to date. To do that, I simply said let's look for anything that has market cap greater than $1 billion and we'll rank it that way. So, the stocks that we're going to talk about today, they're not micro caps. We tend to try to avoid those kinds of stocks. But some of them are pretty emerging stocks and companies compared to what you've heard us talk about on the show before. They're not Celgene or Gileads of the world.
Harjes: Yeah, these are stocks that are up 50% or more just in a couple of months, which is not going to happen to a humongous pharmaceutical company.
Campbell: Right, and the fact that we were actually talking about, after just a couple months, five stocks that have returned more than 50%, wow.
Harjes: That's healthcare. [laughs]
Campbell: That just goes to show you -- we always talk about the risk, but this tells you a little bit about the reward side of things, when we talk about biotechnology area.
Harjes: As you alluded to, it's a kind of frequent occurrence that winners keep on winning. That is so not to guarantee that these will continue their winning ways. But even if you don't think they're going to continue winning going forward, it's also kind of just a useful learning experience to look at stocks that did get a bunch of positive catalysts and compare that to any notes you had on them, or if you can remember how you were thinking about some of these companies. Because we have talked about some of these on the show before -- and, say, you were right, it played out like you thought it would, and go back and see how you can reshape your investment process and your research to do even better going forward.
Campbell: I think journaling is so important for investors, to keep track of their ideas -- what's worked and what hasn't worked. It's sometimes more important to keep track of what hasn't worked just so you can bear in mind or learn from your own mistakes. I don't know if you want to jump right in and start talking about the five or if you have a particular way you want to frame it, Kristine?
Harjes: I think we should go in reverse, start with the one that is up the least, which is still up an incredible amount, and then go up to the one that is up the most. But before we do, what you just said reminded me a lot of a really interesting study that I once read. I really enjoyed behavioral psychology, so I read a lot of that kind of stuff. And I was reading a study about how you don't remember the times that you were wrong nearly as much as you remember the times you were right. So, what you said about journaling, I totally agree. That is on point. If you have a written record of all the times that you were wrong, that's kind of useful to counterbalance your own psychological intuition.
Campbell: Right, because we do get biased, especially in periods with a market is really working. We start saying, "Oh, wow, I'm really smart. Look at all these great stock picks I'm making." And that can build up a false feeling of confidence.
Harjes: Yeah. But, that being said, when you look at long-term investing, your winners will be, hopefully, multibaggers, meaning they'll be up more than 100%, as opposed to your losers. The most they can ever go down is 100%.
Campbell: Very true! Just to jump right in, we've kept our listeners in suspense long enough.
Harjes: It's time.
Campbell: No. 5 on the list today is up 55%. That's mind-blowing to me. The company is Exelixis. Exelixis is white-hot because it's playing in the cancer space. We've seen a lot of different merger and acquisition activity -- a lot of different deals gets done over the course of the last year in cancer. And I think that is one reason why investors are getting so excited about this stock. They have a kidney cancer drug on the market that is growing very quickly.
Harjes: Yes, indeed. They actually have a couple of different drugs going on. As you mentioned, their kidney cancer drug is the most exciting of them. Todd, do you want to tell us more about this one?
Campbell: That's the needle mover, right, Kristine? Cabometyx. That's the needle mover. They launched that drug last year for use in second-line advanced kidney cancer. That's a market that Afinitor, which is a billion-dollar drug, has long dominated. They're winning market share. I think their market share now is up to 27% in that second-line setting. That's translating into a $200 million run rate in sales that could grow even more because they released a study last year that showed they may be able to move this drug up and have it be used in the first line of treatment for these cases. If so, it's going to fight against Sutent, which is another billion-dollar drug. So, you have a couple different reasons why this Cabometyx could become a $500 million or more drug.
Harjes: And another vote of confidence that this company has, other than simply being in a fairly lucrative space, is that other companies seem to agree. They have partnership agreements on almost all of its drugs. Not only is that a vote of confidence, but it also gives them funding. For example, in January, they announced a licensing agreement in Japan with Takeda Pharmaceuticals that gave them $50 million up front, almost another $100 million more in potential milestones, royalties on top of that. This is a fairly well-funded company because of these partnerships.
Campbell: It's still losing money, Kristine. We have to make sure that everybody knows that. This is not a profitable company yet.
Harjes: Although I think technically, this last quarter was the first time they did turn a profit.
Campbell: Yeah, but --
Harjes: But there's an asterisk.
Campbell: There are asterisks there: one-time events and money coming in that you can't expect going forward. I think this year's estimates from industry watchers are about $0.05 in earnings per share -- next year getting more meaningful.
Harjes: Phew, don't spend that all in one place.
Campbell: Yeah, exactly. This is an expensive stock. But, again, there are not a lot of cancer companies out there that are emerging that have fast-growing cancer drugs on the market that are independent. And as a result, you have companies out there like Pfizer and these other guys that want to buy these companies, and that's bidding them up to pretty high valuations. This stock, for example, now has a $6.5 billion market cap, which is pretty big for a company that did, including milestone payments and everything else, less than $300 million in sales last year.
Harjes: Exactly. Let's move right along. We have five companies to cover, so we'll try to be fairly speedy with them. The next one that we want to talk about is up roughly the same amounts. It's 56% year to date. This is Pacira Pharmaceuticals. Is that how you pronounce this one?
Campbell: I pronounce it differently, but we can go with that. I was just thinking like Pacific.
Harjes: Oh, OK, I could see that. Don't get it confused with Pacific Biosciences. This one is Pacira Pharmaceuticals. Ticker is PCRX.
Campbell: Yeah. Again, we have got a situation where we have got a company that has a drug on the market that's growing relatively quickly. It's stable. It's not growing as quickly as Exelixis' drug Cabometyx. But 11% year-over-year growth for their drug Exparel, which is an interesting drug because it's used to prevent pain in patients who undergo procedures. What's interesting about this drug is it's not an opiate. You and I have talked about on the show before some of the problems that the country has right now with opiate abuse. As a result, doctors are prescribing opiates as infrequently as they can.
Exparel works by being inserted at the time of the procedure. It's kind of like when you numb your mouth when you're getting a filling. As a result, it not only helps to control pain, but it reduces the reliance by patients on opiates as they're recovering. We have got a company that has just inked a deal with a unit of J&J that's going to help get Exparel in front of more and more doctors. There's a lot of opportunities, theoretically, to expand the use of this across more and more procedure types. So, you get it used in knee procedures and shoulder procedures and soft-tissue procedures. That has some people thinking sales could grow meaningfully from where they are now. They did about $280 million in sales last year.
Harjes: They're definitely forecasting some pretty strong sales growth for this drug. The one thing that I would throw out there as a word of caution with this stock is valuation. They have pretty astronomical numbers. If you look at their price to sales, their P/E, it's all well above industry average.
Campbell: Yeah, it's a $1.8 billion market cap, which isn't ridiculous if you want to say, what would be a takeout valuation, when you're talking about 10 times sales or something like that. But, yeah, it has a little bit of debt it's going to pay down. It's not a cheap stock. Of course, none of these are cheap stocks. They're fast growing, and that's part of the reason that people are willing to pay a little bit more of a premium to own them.
Harjes: That is true. So, speaking of sleepers, I guess, these stocks are basically the opposite. Our next one on the dock is Kite Pharmaceuticals, which is up 62% year to date.
Campbell: We've talked about Kite Pharmaceuticals in the past, and I'm sure we're going to talk about it again. This company is making science fiction a reality, being able to take the T cells out of a patient's body, reengineer them, put them back into the patient's body to find and better destroy cancer cells in certain types of cancer.
And what has really gotten investors excited about Kite Pharma this year is that Kite has now updated investors on the final data from its pivotal registration-ready study for Axi-Cel, which was formerly KTE-C19. Axi-Cel showed almost a third of patients with a form of non-Hodgkin lymphoma who were complete responders to this drug in trials. That's pretty amazing, because... people who were enrolled in this trial were pretty heavily treated and don't have a lot of treatment options. And that data really has everybody thinking they could file for approval. They're supposed to file for approval at the end of this month. And if they do that, they could get accelerated approval. This thing could get on the market before the end of this year, probably with a fairly high price tag, and start being used in thousands of patients as early as next year.
Harjes: And just to add one more detail to the trial data, that 31% of patients that had a complete response, that was after six months. Up until this point, the durability of the response had been a huge unknown. So, that particular note is, I think, what really had people excited for the first couple of months of this year after the data was released. I think that alone is accounting for the majority of this lift.
Campbell: You always hate to say curative when it comes to cancer, but you're finally getting to a point now where you're using language that's incredibly encouraging, especially in such a tough group of patients to treat. They did a retroactive analysis on people who were suffering from this disease and found that overall survival, historically, has been about 6.6 months for this patient group. At 8.7 months, they have yet to determine what the overall survival is on Axi-Cel.
Harjes: Which is great news.
Campbell: Yeah, it's very good news. Importantly, the safety profile looks pretty decent. We've talked in the past about how competitor Juno Therapeutics stumbled because of some safety concerns with their competing drug. Kite seems to have avoided that. So, for whatever reason, their drug has proven to be a little bit safer in trials. So, you have good safety, high complete response rate. Little wonder that investors are cheering that this year.
Harjes: Yes, exactly. Interestingly, our next stock is also another cancer-related oncology company. This one is Exact Sciences, ticker EXAS. They are up 65% year to date.
Campbell: This is a really interesting company because they're doing something that a lot of people were very skeptical they'd be able to commercialize and do, and do it successfully. They have developed a screening tool that can be used to find colon cancer much earlier. If you start thinking about colon cancer, it's the second deadliest cancer. If it's caught early, it's very easy to care. Nine out of 10 people will be cured. If it's caught late, however, it has a very high mortality rate. So, it's reshaping how patients get evaluated for their colon cancer risk.
I think we have probably talked about this on the show before, but as a refresher to everybody, the gold standard is the colonoscopy. Colonoscopies are expensive, and they're invasive. As a result, very few of the tens of millions of people who should be getting screened every year follow through and do it. This test is just used as a stool sample that you send off to a lab. That makes it, obviously, less expensive than having to do all the prep and going to hospital for a procedure, and it also makes it easier for people to follow through on and get done. It's less invasive. It's easier for them to be willing to do.
Harjes: This was a great story. It sounds like a fantastic idea. But, at first, there was a lot of doubt. But it seems like the company is starting to turn the corner. They had 244,000 completed Cologuard tests in 2016, which was up 135% year over year. They had sales of these from $99 million, which was up 152% year over year. This is, however, a company that is still losing money. They posted a pretty hefty net loss in 2016. But a lot of that is because they're still spending so much money on their marketing and boosting awareness. Their test completion rates are also problematic. They definitely still have some work to do, but they seem to be heading in the right direction.
Campbell: The compliance right with the test is better than it is with other screening methods. And as more insurance companies start recognizing that it makes more sense to catch this disease early and they start reimbursing for it, I think you're going to see that this company's sales will continue to climb, and eventually, this company becomes profitable. Like you said, right now it's not, because it's investing so much in marketing. But it's a very interesting the story, and it's definitely one that investors are going to want to keep an eye on.
Harjes: Indeed. We have arrived at our last company of the day, which is also this year's biggest winner so far, up 72%. This is a name that Todd and I talk about a lot. We both really like this company. That is Portola Pharmaceuticals.
Campbell: Full disclosure, I happen to be long this one.
Harjes: As am I.
Campbell: It's been up 72% so far this year. Took it on the chin last year, and now we're getting it back.
Harjes: Yeah, they were down 56% in 2016, which did not feel good, especially having to come on the show and be like, "Hey, we were really wrong." But maybe we weren't so wrong. Long-term investing, we're doing OK.
Campbell: The whole concept here -- here's the takeaway for this company: They have got two drugs that could both be blockbuster drugs. And last year, they both stumbled in trying to get these drugs to the FDA. One of the drugs, Betrixaban, we talked about, put up very weird mixed results in trials early last year, and that cast a lot of doubt on whether or not the FDA would be willing to look favorably upon it once they filed their application for approval.
The other one is AndexXa. AndexXa is used to reverse a class of drugs called factor Xa anticoagulants that are used to prevent blood clots. There is no antidote on the market right now. However, last August the FDA sent them a rejection letter because they wanted to get some more information from them. So, that was a one-two punch last year. Then, fast-forward to 2017, Kristine, and guess what? Betrixaban has been filed, and the FDA has said they don't think they're going to need to do an ad-com meeting to discuss Betrixaban, which doesn't guarantee an approval, but certainly increases, in my view, the odds of a go-ahead. And AndexXa, supposedly, they're going to get that refiled soon, too. If they make good on their timeline, they think they could have an approval in hand by the end of this year. So, theoretically, one blockbuster already on the market by late this year, and potentially two on the market next year.
Harjes: Which is pretty incredible, and gives us a lot to look forward to, and I'm sure we'll be discussing them on the show again come June 24th, which is the PDUFA date for Betrixaban or whenever we get the next news about AndexXa. Todd, thank you so much for running through these five companies with me and for coming up with today's idea and running the screen. It's been great, as always.
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, thanks for listening and Fool on!