Pacira Pharmaceuticals (NASDAQ:PCRX)Cara Therapeutics (NASDAQ:CARA)Nektar Therapeutics (NASDAQ:NKTR), and Flexion Therapeutics (NASDAQ:FLXN) are studying drugs that could reduce the need to prescribe opioid pain medications. If their research pans out, it could be an important step toward reducing the number of deaths caused annually by opioid overdose. Will these pharmaceuticals stocks reshape how doctors treat pain?

In this episode of the Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by Todd Campbell to explain the opioid crisis and the research that's underway at these companies.

A full transcript follows the video.

This video was recorded on April 12, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is April 12, and this is the Healthcare edition of the show. I'm your host, Kristine Harjes, and I have healthcare specialist Todd Campbell on the line, as usual. Welcome to the show, Todd!

Todd Campbell: Hi, Kristine! How are you today?

Harjes: I'm doing great. The allergies are killing me a little bit, but that's springtime in D.C.

Campbell: I was just going to say, the winter is great for that, but I'll suffer some allergies if I can get some warmer weather.

Harjes: Absolutely, give me sunshine and sniffles any day.

Campbell: Perfect.

Harjes: For today's show, we want to address a very important topic in the world of healthcare that I don't think we've ever really talked about, at least on a macro level, and that is the opioid addiction crisis going on in this country right now. There are so many Americans out there that have procedures every year that require some sort of pain medication afterwards. There are so many people out there that need chronic pain medication. And a lot of the time, this comes in the form of opioids, and there are all sorts of ramifications of that. They work great, but people can end up being very addicted to them. This is an issue that you guys have likely seen in the news, because it is becoming a more highlighted crisis. But I think the issue largely isn't even talked about enough. The magnitude of it is really frighteningly large.

Campbell: Tens of millions of people, Kristine, prescribed these drugs, or going through procedures where these drugs could be prescribed every year. Sadly, because of the way the brain works, the chemistry and biology of it, many of those people will become dependent on those drugs. Sadly, we're in a position, at a point now, where more than 50 people per day are losing their lives because of their dependency on opioid medicines.

Harjes: Yeah. The magnitude of this issue really can't be understated. According to the Department of Health and Human Services, every single day, 650,000 opioid prescriptions are dispensed; 3,900 people initiate non-medical use of prescription opioids. Meanwhile, the number of people that are dying due to opioid overdoses is growing at alarmingly exponential rates. Opioids killed 33,000 people in 2015. That's nearly as many people as car crashes. 

Campbell: Yeah. The rate of deaths due to prescription opioids has quadrupled since 1999. Even in sleepy New Hampshire, where I sit, we're losing hundreds of people every year to this crisis.

Harjes: Exactly. So when we look at this from a perspective of how do we solve this, there are several different companies that are working in this space trying to combat the issue from different angles. We're going to get to them later in the show. But the first thing we want to talk about is to address some basic fundamentals of, what is pain, how do painkillers work, how does addiction happen. So let's start with some basics. What actually is pain?

Campbell: Pain is more than when you stub your toe. You have to think about, what is the process going on there when you stub your toe that makes you think, "Oh my God, that hurt." And I think it's important to recognize that's it's a process that's designed to protect ourselves. What happens when we hurt ourselves is an electrical signal gets sent from the nerves to the brain, and that causes a whole series of different things to happen, including the release of hormone-like chemicals that can cause tissue to swell. And that swelling can amplify the signal; it can also cause additional pain, too. We're talking about a signaling system that's designed to protect us when we experience things that hurt us.

Harjes: Exactly. So the way that painkillers work is, you take them, they're absorbed through the gastrointestinal tract, and they attach to one of four different types of opioid pain receptors that are in the brain. Essentially, what happens here is it reduces the pain without actually removing the cause of that pain, which makes sense, because you can't un-stub a toe. But the point is, these work on the brain to reduce the sensation that you have of feeling that acute sensation.

Campbell: Right. They're attaching to those receptors on the brain cells, so what's happening is that's creating a biological response. It causes the brain to release dopamine, which is what gets released when we do things like eat a great meal or have sex or natural biological processes, things that we find pleasurable. It's stimulating that same brain response, the same biological response. And that's big, because it's what drives people to want to have that same feeling of euphoria in the future. But what happens is, the impact on those receptors degrades over time, so a higher dose of the opiate needs to be taken to be able to get that same release of dopamine.

And the other thing, Kristine, that you have to remember, too, is that it activates another part of the brain, which is our memory part of our brain, which says, "I feel great. What is around me; why do I feel great?" So we have these associations that we make between people and places and things that, when we encounter those again in the future, it triggers something in our memory to say, "Ooh, I felt really good when I was here and I did X." I don't know if you have a favorite restaurant, but I have this one restaurant that I love to go to; it makes a phenomenal steak, and every time I walk by that place, I'm like, "Oh my God," and I start salivating because I want to go in and have that steak. And unfortunately, that's what's happening here. We're targeting these important receptors of the brain that are telling our body, "This felt good when I was here and did XYZ."

Harjes: Exactly, and therein lies the problem. If you are taking a painkiller, you feel really good, and you associate all these good feelings attached to that drug. And that is a very slippery surface. You wind up, as you mentioned, needing more and more of this drug to get yourself to that same pleasurable place, whether that's simply removing the pain you were feeling or feeling that euphoria. Either way or both combined, that's something that people are wired to seek out. And the problem there is, even though you do, over time, develop some sort of a tolerance for the drug, and need more and more to get yourself back to that place, it doesn't necessarily diminish the bad other effects of the drug. For example, opioids have really dangerous respiratory effects. If you take too much of them, you will stop breathing and you will die. That's how overdose happens. But when you develop a tolerance to the drug, it doesn't decrease the danger of the respiratory effects; it just makes it so that you need more and more of the drug to get the other euphoria effects.

Campbell: Right, there are other parts of our brain that are working in concert here. If they see an environment now which is opiate dependent, they are adjusting those processes to make as if that's the new normal. Like you said, just because people have become more tolerant doesn't mean they are becoming more tolerant to the risk of these negative effects. You have cardiac effects, all sorts of nasty things that come along with being opiate dependent. Even as far as things like constipation, cardiac, like you talked about, the risk of the inability to breathe, all of these things. Yet that pull, that push and pull that's caused by the brain, because it's being triggered and saying, "Oh, this feels really good," outweighs the logic behind, "Why would I take more of these medicines and put myself and my body at risk?"

Harjes: Exactly. This is a problem that's being addressed by the pharmaceutical industry, and we want to give our listeners a little taste of how different companies are approaching that.

We are going to dive into a handful of companies that are working on developing alternative types of pain medication. The first one is one that we covered in our March episode of Industry Focus: Healthcare on the show that we did about year-to-date best performers. This one is Pacira Pharmaceuticals, which, at the time, was up 56% just from Jan. 1, and now is up "only" 43%.

Campbell: Yeah. It's been a very good year for this company, and part of that is because it markets a drug that could, theoretically, reduce the likelihood of someone falling into that trap of becoming dependent on opiates. Kristine, how many prescriptions are being written per day for opiates? 

Harjes: Six hundred fifty thousand opioid prescriptions are dispensed every single day, according to the HHS.

Campbell: OK. Let's think about that for a second, let's give our listeners a moment to digest that, and come up with a guess in their minds how much in dollars, what kind of a market size, do they think that be?

Harjes: Hint, hint: It's big. It's really big.

Campbell: Yeah, $12.6 billion are being spent on opiate medication every year. While that's a frightening statistic for many different reasons, I think it can't be lost that, when you have a market that's that big, and you have a potential to disrupt it by developing something that's far less addictive, you're going to have a lot of drugmakers that are going to step up and try to come up with a solution. Pacira is one of those companies. It has a drug, Exparel, that's been on the market for a few years now. It's a local anesthetic that is inserted at the time of a surgical procedure that has been proven to not only reduce pain in patients, but to reduce the likelihood of them needing opiates in their post-operative recovery period.

Harjes: Right. So, what makes this a novel drug is, it's delivered with this Depofoam applicator that is supposed to extend the release time so that the numbing medicine works for a longer amount of time, so hopefully you don't wind up on an opioid afterward.

Campbell: Right. Bupivacaine, which I'm sure I'm butchering, is the analgesic, and normally that wears off within eight hours. But if you add Depofoam to it, you get significantly longer pain relief. In trials, the trials that justified the FDA approving this drug, you found that this drug significantly extended the period of time for a person to say, "I am in so much pain that I need an opiate."

Harjes: Exactly. This company now has a partnership with Johnson & Johnson. Hopefully that will help boost sales of the drug even further. So far, it's doing very well. It had 11% sales growth between 2015 and 2016. They're forecasting another 9% at least, and that was at the low end for 2017. This company has a host of other things they're doing, but because we want to stay fairly focused, we will leave them for another episode. But keep your eye out for more data. They have phase 3 data coming out in some nerve-block studies; that should be later this year. All in all, lots going on with the company as a whole, and also for this specific drug.

Campbell: Yeah, because, again, Exparel is only being used in certain patients going under certain procedures. The idea is, if we can expand that out to a larger addressable patient population, great, and those studies will read out data over the course of next year or so, and hopefully show similar results to what they saw in their first registration ready trial.

Harjes: Exactly. The next company we want to discuss is called Cara Therapeutics. This one, I don't think we've mentioned it on Industry Focus. You can correct me if I'm wrong there. But I know I mentioned it on Motley Fool Answers, if any of our listeners also listen to one of our other Motley Fool shows, on the April 4 episode, which was all about biotech investing. I mentioned it as a company that I'm keeping my eye on that I'm excited about. This company has run up a ton this year, much like Pacira Pharmaceuticals has. It seems to be really on the right track. Essentially, what it's doing is, it has this opioid compound that targets something called the kappa-opioid receptor. This is different than the way that traditional opioids like morphine work, because those target the mu-opioid receptor. Essentially, the difference here is the drug that Cara Therapeutics is making doesn't cross the blood-brain barrier. So it doesn't come with the side effect of euphoria that gives rise to abuse and addiction.

Campbell: Right. All these painkillers have to go through trials to see how likely they are to be subject to abuse. When they did this trial on this drug, CR845, they basically ended up with placebo-like reports of drug liking and feeling high and wanting to take this drug again. So you have a drug that theoretically can deliver pain relief more closely to the source of the pain -- because, again, it's targeting these κ-opioid receptors located in the periphery of the body, and it's not passing the blood-brain barrier -- so you have placebo-like euphoria. That's a win-win. In March, last month, they reported some data from a mid-stage trial evaluating its use in dialysis patients who suffer from a chronic itch, which is very frustrating and painful, and affects about 70% of the 456,000 people who are on dialysis. And sure enough, it reduced pain significantly versus placebo. They're going to sit down and talk to the FDA, figure out what their process should be for a phase 3 trial, and hopefully we'll get some more insight into how they plan to do that phase 3 trial within the coming months.

Harjes: Yes. So, lots going on with Cara Therapeutics. I would say very worth keeping eye on. We talk about the mu-opioid receptors as compared to the kappa-antagonists. The mu ones are pretty much going to be more effective than targeting kappa every time; it's just the nature of the biology there. So CR845 probably won't ever completely replace mu receptors, but there is a company out there called Nektar Therapeutics that is trying to develop a mu-opioid receptor-targeting drug that crosses the blood-brain barrier, but it does so slowly. The point there is to reduce the euphoria and also lessen the risk of abuse.

Campbell: Right. It's also more selective in how its targeting those mu receptors. It's targeting more selectively; it's passing more slowly through the blood-brain barrier. And as a result, you're getting a similar efficacy of pain relief, but you're also getting less of the likelihood of the euphoria. In tough-to-treat pain cases, chronic pain cases, that could be a major advantage for this company. Now, we've already seen a positive read-out in late-stage studies for this drug. The company itself has a history, a strategy, where it likes to license these drugs out to other larger players, and it has said that it's going to be evaluating its options with this drug now. So perhaps they announce a licensing deal over the course of the coming months. Then, once that's done, maybe this drug gets filed for FDA approval relatively shortly thereafter.

Harjes: Right. It seems like they're all done testing it. They have proven it's very effective, and at this point, they're just looking for a partner. And at that point, it will file with the FDA. When and if it gets there, we can probably expect around a mid-teens royalty. That seems to be fairly typical for this company. It's kind of an interesting strategy in general. I would say it probably makes the upside a little bit more contained, but it's also less risky.

Campbell: It's less risky, and it keeps the dollars flowing in for them to work on other projects they have going on. I think it's an interesting company. The stock has moved a lot since it announced the results from its chronic-back-pain study last month. Investors have to recognize that it's maybe not as cheap as it was four or six weeks ago. But certainly something to keep an eye on, especially given the fact that you could get some news in a not very long period of time of somebody is signing on to commercialize it.

Harjes: Yep. Last company we want to talk about today is one that called Flexion. In December of last year, they filed for approval of their drug, which is called Zilretta.

Campbell: Yeah. Zilretta is an intriguing drug, because it could reduce the need for both opioids and corticosteroid shots. If you suffer from osteoarthritis of the knee, you know how much pain you're under regularly because of it. Typically speaking, you start off with things like NSAIDs, so you're taking things like aspirin and ibuprofen and those types of things. Then you may advance to other types of solutions, including corticosteroid injections that are given once every three months. The problem with that is once those corticosteroid injections oftentimes wear off relatively quickly, in a matter of weeks -- if you're still suffering from chronic pain, you might need other pain-relief medications, including opioids. Zilretta, in its trials, showed it could control pain for the entire three-month period. Since it's not an opioid, that is theoretically a major advantage. If you can control pain for that entire period, and remove the need to have to rely on opioids as a back-up medication, it wouldn't take a lot of patients who are suffering from pain that requires corticosteroids to make this drug into a top seller. And, full disclosure, I happen to be long the stock myself, and a lot can go wrong from here. The FDA could come back and say they want more studies, the FDA could reject it. We're not on the market yet, but this is an intriguing drug.

Harjes: And if it does end up on the market, peak sales estimates are upwards of $500 million, and perhaps could even be a blockbuster drug if the label ended up being expanded to reach some other joints. Approval should come in October. One other thing you need to mention when you're talking about this drug is the potential buyout rumors. At The Motley Fool, we don't believe in buying a stock just because of the buyout rumors. But I think when you're looking at the share price of this company and trying to understand how much the market cap has moved lately. This is the center of that story. So, pretty much on March 23, FiercePharma reported that Flexion's board had voted to accept a buyout offer from Sanofi that would be worth more than $1 billion in cash, which has inflated this company's market cap quite a bit. Today, it's standing around $845 million. You have a whole handful of Sanofi executive going from Sanofi over to Flexion. Just last week, one of the top officials at Sanofi joined Flexion as the chief medical officer. So it certainly does seem like this buyout would make sense, although, to my knowledge, neither company has commented to confirm that it actually is even being discussed.

Campbell: Right, it's all rumor and innuendo right now. You're drawing lines between some dots. Who knows what ends up happening? Obviously, there's a lot of activity in this space; that means there's a lot of options that Sanofi could be considering. Don't buy a stock, any stock, this stock, based upon the potential for a suitor to come and pony up some money to buy. Instead, look at all of these companies on the basis of, can they displace the use of opioids and help reduce the risk of dependency and potential deaths?

Harjes: Exactly. You pretty much did my disclosure for me. Thanks, Todd. That does wrap up our show for today. Hopefully we were able to give you a better understanding of this market and some of the ways that companies are approaching in novel ways to try to reduce dependence on opioids and combat what is a truly devastating crisis.

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. For Todd Campbell, I'm Kristine Harjes. Thanks for listening, and Fool on!

Kristine Harjes owns shares of Johnson & Johnson. Todd Campbell has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Johnson & Johnson. The Motley Fool has a disclosure policy.