Healthcare Winners and Losers Following the AHCA's Failure

After Republicans in Congress failed to get enough support, they shelved a vote in the House of Representatives on the American Health Care Act (AHCA) last month. If the AHCA had eventually passed Congress, it would have significantly reshaped the healthcare sector, and shaken up healthcare stocks.

In this episode of The Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss which healthcare companies benefit most (and least) from Republicans' decision to hold off on repealing and replacing the Affordable Care Act, also known as Obamacare.

Also, the two update investors on Amgen's (AMGN -0.50%) highly anticipated cardiovascular outcomes study, dig into Ionis Pharmaceuticals' (IONS -0.24%) approaching spin-off of Akcea, and they explain how Tesaro (NASDAQ: TSRO) is changing how doctors treat ovarian cancer. 

A full transcript follows the video.

This video was recorded on March 29, 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, and it's March 29. After two weeks of no Todd Campbell, I'm happy to welcome back my usual podcast partner, calling in to Fool HQ. Hi, Todd.

Todd Campbell: Hi! Yay, I'm back.

Harjes: What's been going on with you these past couple weeks?

Campbell: I haven't known what to do with myself on Wednesdays. I've got all this extra time. Great shows, by the way. If listeners didn't get a chance to tune in to them, go back and check them out, because it's interesting stuff.

Harjes: Yeah, Todd, thank you for the approval. I did really miss doing the show with you, but it was interesting to step outside of the box and film with some different people and get a different take on the healthcare sector.

Campbell: And, also, Kristine, all sorts of news floated by, we have so much stuff we can talk about today, right?

Harjes: Seriously, yeah. Guys listening, when I emailed Todd regarding what we should talk about today, he and I, between the two of us, we came up with so many different news items, because it's been a pretty busy couple of weeks for healthcare. Today's episode is going to be a little bit grab-bag-y. We're going to get you guys up to speed on what you need to know in healthcare, from all sorts of recent news. The first thing that we wanted to cover, and this is probably the most widely covered news item, is the American Health Care Act, which is sort of known as Trumpcare. First, some background, It's relatively well-known that Trump had pledged during his campaign to repeal and replace the Affordable Care Act, which is Obamacare. With the Republican majority in Congress, it seemed like a no-brainer that a replacement bill would pass pretty quickly. It turns out that wasn't the case.

Campbell: I guess you would say somewhat surprisingly. It was something he wanted to tackle early on, but some people were thinking he wouldn't jump right in and make this the first one he tried to push through Congress. I'm not sure now that the AHCA, getting ahead of ourselves, is back on the side burner, whether or not he regrets that choice or not. But from an investor's standpoint, we need to be able to take a look at what the AHCA would have done, and what the implications now are on different industries within healthcare now that it's no longer on the table. 

Harjes: Right. And there are a whole bunch of different parts of healthcare that could be touched by this, as well as some companies that you might think would be impacted, and in discussing it, we kind of decided might not actually be that impacted.

Campbell: Yeah. We'll go through each one of these industries relatively quickly and hit the pros and the cons. Just to back up for one quick second so that our listeners have an understanding of what the AHCA would have done, there were a few different pieces to the puzzle, and I think that's important understand prior to diving right into them. One, it would have changed how consumers can buy their insurance. No longer would they be getting subsidies based on income. They would receive tax credits. Those tax credits range from $2,000 per individual to $4,000 per individual, with a $14,000 cap. By most accounts, independent sources, Kaiser Family, etc., for many people, that would have caused their out-of-pocket insurance costs to climb. As a result, that had many people projecting that up to 24 million people would have lost their own insurance over time, if the AHCA had gone through and passed. Because of that, one of the areas that was under a lot of pressure was hospitals. As you may remember, Obamacare insulated hospitals against bad debt expense, an amount that they have to write off in charity care. Think about it. The more people that are insured, the less people showing up to emergency rooms without the ability to pay.

Harjes: Right, and those people are extremely expensive to the hospitals.

Campbell: Yeah, it's billions and billions of dollars, right Kristine?

Harjes: Right. So, industrywide, if you're looking at those levels remaining still at Obamacare levels, that's a net win for the hospitals.

Campbell: Right. You saw a lot of those stocks jump once the news came out that they weren't going to vote on it on that Friday. Hospital stocks reacted very positively, because there's less of a likelihood of them having to take big write-offs again, like they were doing in the pre-Obamacare days. That being said, on an individual stock basis, I don't have anything to recommend here. I think there's a lot of debt associated with hospital stocks. I think they have a lot of other issues that they're trying to deal with. I don't think I would run out, necessarily, and buy any one particular hospital stock on this news.

Harjes: So, another part of this bill that was talked about a good bit is Medicaid, the Medicaid expansion was something that Republicans really strongly pushed against. The latest on that news, I saw just this morning that Kansas voted today to expand Medicaid, which is incredibly surprising, because that is such a red state. But, the governor is probably still going to veto it. Still, interesting stuff going on here. How would you view that through the lens of an investor?

Campbell: I think for the most part, the big winners there were the Medicaid insurers, who make their money by running state Medicaid programs. What the AHCA would have done is it would have capped enrollment in 2020, and then block-granted money to the states, and the states would have been responsible for finding the savings and figuring out who they wanted to insure. As a result, that could have caused fewer people to be on Medicaid rolls. Now, Molina, Centene, these insurers make their money based on how many people are enrolled in these programs. So, obviously, had the AHCA passed, that would have been a net loss for them. Now that it's off the table, that's good for them, especially now, like you said, some of these other states continue to warm up to the idea of allowing more people to get into the Medicaid Program.

Harjes: Really quickly, before we move on from this news segment, what are some companies that are surprisingly neutral?

Campbell: Neutral? Drugmakers. If the AHCA had passed, and uninsurance rate would have climbed, they would have seen a drop off in demand. But they also have to pay billions of dollars in fees to participate because of Obamacare. So, that's a little bit of a wash. It's probably a net positive. But we'll call it a wash. Then, also, the big diversified insurers, the guys like UnitedHealthcare and Anthem, kind of a wash for them. They do business in the Medicaid side, they do business in the Obamacare side. They have been losing money on Obamacare, so that would have been a win, if they were able to redo their plans so they would become much more profitable. But again, the hit to Medicaid might have offset some of those gains.

Harjes: All right, great. News item No. 2 relates to something we had teased in our Valentine's Day show, which is that Amgen had some data about their cholesterol-lowering medication, it's a PSK9 inhibitor. We said there was going to be a data readout in March. Indeed there was, so we figured we owed you guys some follow-up.

Campbell: Yeah. Most people, if you look at just the raw number, they say, "Wow, that's a pretty good finding." Essentially, what they found is, using Repatha, which is a drug that helps lower bad cholesterol levels, reduced the risk of things like heart attack and stroke by about 20% versus a placebo. That's pretty significant when you think about how many millions of people are affected by heart disease.

Harjes: Right. At first glance, that's positive data, right? This is exactly what they were looking for. They did this very long-term cardiovascular risk study. There were 27,500 people in it. They waited years, until 1,630 of them had a heart attack or another cardiovascular disease-related event. And they get this number that says, definitively, statistically significantly, our drug does lower the risk. And yet.

Campbell: It was a snoozefest for investors, right? [laughs] 

Harjes: Yeah! It was super interesting. So, why did that happen?

Campbell: I think really, what it came down to was, there's a couple different things. If you include hospitalization in the metric, the net benefit falls to about 15%. OK, maybe that's not as big of a needle-moving number as people would have liked to have seen. Again, huge study, and obviously, we're talking about saving people's lives, so we don't want to diminish that. That being said, if you look at news that has come out of other companies on other drugs that have also shown that they reduce the risk of cardiovascular events, it really hasn't translated into a tremendous uptick in the sales of those drugs.

Harjes: Yeah, it's kind of crazy when you look at some examples. Eli Lilly's diabetes medication Jardiance also showed a cardiovascular benefit. The drug sold just over $200 million last year, which sounds like a lot of money, but in the world of drugs, it's really not. 

Campbell: Yeah, for a huge patient population, too, right?

Harjes: Yeah, exactly. The diabetic population is enormous. I think something that could be really driving the shortfall in -- for this optimism about Repatha is that it's still so expensive. It's $14,000 a year. Even with Amgen potentially thinking about doing a money-back guarantee if the drug doesn't lower your overall healthcare costs, something to keep in mind is, there's not really a reason for insurers, as far as financial incentives go, to pay upfront to try and reduce long-term risks. That's messed up, but when you look at the financials, if I have to pay $14,000 a year now, and maybe down the road you won't have a very expensive heart attack, statistically, you're probably not going to still be on that same insurer at that time. You go through a bunch of different insurers in your life. So why would one want to pay to save another one money? It's so cynical, but it's problematic.

Campbell: Yeah. A lot of these events are probably happening to people once they get into their mid to late 60s and beyond, and when they'd be on Medicare. So, that's absolutely a great point, and it's sad. I think what we need to recognize is that Amgen is going to work with payers to try and figure out some sort of a payment system that makes sense. Right now, more than 80% of prescriptions for this drug are being rejected. So, they have to figure out some way to get this drug into the hands of consumers and turn a profit on it. And I don't know if that means even more significant cuts in pricing, or like you said, these other payment schemes or whatnot. But, there's a question mark. I guess, from an investor standpoint, you're going to have to watch the next couple quarters and see whether or not there is a big pop in sales. As it stands today, I think the drug is selling around $240 million annual run rate. So, you want to watch and see whether or not that annualized run rate picks up in the next couple quarters.

Harjes: Agreed. So, onto Ionis. They recently announced earlier this week that they are spinning off their lipid disorder subsidiary.

Campbell: Yeah, Akcea is going to be the name of the new company. It's going to IPO. So, individual investors will be able to go out and buy stocks specifically in this company that's going to be working on drugs that can, again, improve cardiovascular outcomes. They're focusing on rare lipid disorders, so they have a couple of interesting compounds. This is a weird decision, in my view. If you think about it, it's not like Ionis needs the money by IPO-ing this company to be able to facilitate commercialization of their drugs or research on these drugs. They're spinning it out, and lumping all of these lipid disorder drugs together. I'm not entirely sure why they're doing this, to tell you the honest truth.

Harjes: Especially because they will keep some stake in Akcea. This is so frustrating to me. In the S-1, which is the IPO documentation, there are literal blank spots in it when it comes to some of the specifics and the numbers involved in this IPO. Such as: What sort of stake Ionis is going to keep in the new spin-off.

Campbell: [laughs] Right. It says somewhere in there that -- I think, the language, if you read it, it looks like they're going to split whatever they collect in money, both in milestones from Novartis, because there's a deal that goes alongside that Akcea is going to end up having a collaboration deal with Novartis on a couple of these drugs, and I think they're going to end up splitting a lot of the money with Ionis. Ionis is giving up 50%, let's say, of its exposure to these drugs to launch this separate entity, and they're collecting $100 million in IPO raise? It's a weird situation to me, on why they're doing it this way, rather than just owning the drugs 100% outright and doing the collaboration themselves with Novartis.

Harjes: Yeah. Something that Ionis is very good at is pursuing collaborations. Novartis is, already, fully partnered here. Now that they're doing the spin off, Novartis has agreed to a $50 million funding commitment of that $100 million IPO.

Campbell: Actually, it's going to be concurrent, so it's going to need additional, you can get up to $150 [million] gross of fees and stuff that they'll have to pay out to the brokers to get this done. But, that's not going to be enough money. By their own account, in the S-1, it says, "Even taking into consideration the IPO and the money from Novartis, we're still going to need to raise money to commercialize our lead drug," which is volanesorsen -- I can't say this. This is alphabet soup. Volanesorsen is their lead candidate. It just put up good -- we'll call it good -- phase 3 numbers for a rare condition that affects up to 5,000 people globally called FCS -- again, alphabet soup, I'll just break out the abbreviation. I think investors just need to know that it's a relatively small indication without a lot of different treatment options, and of course, that could obviously begin generating out revenue for this company as soon as next year. But it's not a slam dunk that's it's going to pass through the FDA, because there were some safety concerns related to platelet counts. Maybe that's why they're spinning this out, they want to insulate themselves against this drug running into a stumble.

Harjes: Yeah, I totally agree. Lots of unanswered questions here. I know personally, I will definitely be looking in Ionis' next conference call to see some of the details behind this. It drives me nuts to see those literal blank spaces in the S-1. So, it will be interesting to watch both that and more data coming out of the four different trials that this IPO money will fund.

Campbell: Yeah, and the other thing that investors should know is, let's assume, best-case scenario, that volanesorsen gets the FDA nod and hits the market for this small patient population of 3,000 to 5,000 people globally. Good news. They go out and start marketing this drug. A, there's no guarantee that this drug, depending on how they priced it, is going to get prescribed and become a commercial hit of any magnitude. Also, B, you have to recognize that one of the drugs that's partnered up with Novartis actually has the same mechanism action, same target and everything, it's just a little bit more advanced. If that drug is successful, why would doctors still end up prescribing volanersorsen instead of this other drug down the road?

Harjes: Exactly. And you do see, frequently, companies cannibalize their own drugs by making even better versions. But when the new version is a partnered drug versus the older version which was wholly owned, that's not good financially.

Campbell: Correct.

Harjes: Last news item of the day involves Tesaro, which I believe we've talked about on the podcast before as well. They announced that their drug Zejula was approved early.

Campbell: Yeah, this was, I guess if you look at it, it's not a complete and utter surprise. Regulators had already approved two different drugs that have the same target that Zejula does. So, maybe they're very confident in their understanding of what these drugs do. But, yes, early approval. The decision was supposed to come on June 30. Instead, we got it more than three months ahead of time. That's great news for patients, because this is the first one of the drugs of its class that can be used right after patients first respond to a platinum-based chemotherapy. This is for ovarian cancer patients.

Harjes: Right, it's a maintenance drug for these patients. I think, besides the early approval, another thing that caused the very positive reaction to this news is, it was a wider-than-expected label. It was approved for ovarian, fallopian tube, and primary peritoneal cancer patients with their disease in complete or partial response to a platinum-based chemotherapy.

Campbell: And even more importantly, it was approved for use in either BRCA-positive or non-BRCA-positive patients, which is a first for drugs of this class. We're talking about something called PARP inhibitors, which, Kristine, you and I have talked about before on the show. PARP inhibitors, basically what happens is, the cancer cells, once they get damaged by chemotherapy, they can use those -- those nasty little beasts -- they can use the human body's repair system to repair the damage that's been caused to their cells. This helps stop that. So, these drugs have been shown in trials to be very effective at crimping cancer. In trials, this drug specifically did a great job of increasing the amount of time that it takes for the disease to recur. So, prolonging progression-free survival versus standard of care today. That's so huge for ovarian cancer patients. 85% of ovarian cancer patients end up relapsing. As they go through additional platinum-based chemotherapy treatments, the duration of the benefit continually shrinks. So, being able to insert a drug early on in the use -- in this case, in the second-line setting -- is a big win for patients, and potentially, a big win for the company. PARP inhibitors right now are racking up sales north of $200 million a year. Obviously, that's for a much more limited patient population, because they're only approved right now for BRCA-positive patients. So, this could be a nine-figure drug, at least within the first year or two.

Harjes: Right. And when you consider that it's also being studied in the first-line setting, then those numbers could get even bigger, potentially.

Campbell: Mm-hmm, they could get bigger because of the expansion into the first-line setting, and they could also get bigger because PARP inhibitors are being studied in other types of cancer -- breast cancer, pancreatic cancer. Now, Tesaro just reported they're going to study it in non small-cell lung cancer. So, PARP inhibitors may end up having a lot of value in being used as part of combination therapy across a lot of different cancer types. But that doesn't mean, Kristine, that Tesaro is the de facto winner in its class.

Harjes: Right. They're not the only player in this space. You also have other players, such as AstraZeneca. They have a PARP inhibitor called Lynparza, which was also very successful in showing the same sorts of effects that Zejula was able to. So, as an investor, how are you looking at the competition there?

Campbell: It's really a wait-and-see game here. Tesaro has run up remarkably on excitement surrounding the launch of its drug. An argument could be made that you have to now see sales come in to back up that valuation. AstraZeneca just announced this week that the FDA has accepted for review, priority review, its application to expand Lynparza's use to include maintenance therapy. Probably would just end up in BRCA patients. But, a lot will depend on the label. And obviously, that takes away a little bit of the advantage that Tesaro has, and that approval could come as soon as September. There's all sorts of movement that's going to be going on in the next year or two in this class of drugs, and that could very well shift the landscape as far as market share. So, investors should keep a cautious approach to all of these companies, because I don't know if it's necessarily clear who the winner will ultimately end up being. If Tesaro can prove that its drug has enough unique properties that it's not a classwide effect, then, obviously, it would be the best-selling drug, because it can be used in both BRCA and non-BRCA patients. Again, being able to treat 100% of the patients is way better than being able to treat the 15% to 20% that happen to be BRCA positive.

Harjes: For sure. So, the waters are still a little bit muddy on this one as far as investing takeaway goes. But for patients, this is indisputably great news, that PARP inhibitors are gaining approval and picking up steam. Again, they block tumors' ability to repair DNA. That is fantastic from a patient perspective. We will definitely be rooting for all of these companies to succeed from that standpoint. As always, people on the program may have interests in the stocks that 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. Thanks a bunch to our producer, Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!