The CBO Trips Up Trumpcare, Plus a Biotech "Spiffy-Pop"

If the Better Care Reconciliation Act of 2017 (BCRA) eventually becomes law and replaces Obamacare, the Congressional Budget Office (CBO) estimates 22 million Americans will end up uninsured by 2026.

Following the CBO's report, Senate Majority Leader Mitch McConnell decided to wait until after the July 4 recess to schedule a vote on it. Can this plan cross the Senate finish line? Or will big changes to it be necessary? In this episode of The Motley Fool's Industry Focus: Healthcare podcast, Kristine Harjes and Todd Campbell explain the BCRA, the CBO's forecast, and what's next for "repeal and replace."

Also, what's it called when a stock climbs more in one day than an investor's original cost basis? According to Motley Fool co-founder David Gardner, it's a spiffy-pop! In this episode, Harjes and Campbell explain what caused Portola Pharmaceuticals' (PTLA) spiffy-pop last week, and what investors should be doing with their shares now.

A full transcript follows the video.

This video was recorded on June 28, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is June 28, 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. Welcome to the show, Todd.

Todd Campbell: Happy Wednesday, Kristine!

Harjes: Happy Wednesday to you, too. How's your week going?

Campbell: End of quarter is always really busy for me, and wouldn't you know, we have all this fantastic news that I've been diving into over the course of the last few days, listening to conference calls and tracking the news flow like a boss.

Harjes: You are a boss. Love it. Yeah, there's been a lot of things going on out there in the world at large, and also in the healthcare world. Today, we're going to touch on what we thought was some of the more important points from what happened in the last week or so. The first thing we're going to talk about today is maybe a little bit self-congratulatory, it's maybe a bit of a victory lap, but, if you've been listening to the show for a while, you've heard us talk about Portola Pharmaceuticals. Portola finally had some really good news after a long period of time watching this stock and at times being kind of disappointed by it. They finally got their first drug approved by the FDA on Friday, and the stock experienced a 45% pop.

Campbell: Yeah, I think it's safe to say that Portola is a fan favorite of Kristine and I. We've talked about it in the past, and I know a lot of listeners have had a lot of questions over the last couple days, and those questions have stemmed by the FDA approval of their first commercial drug, a drug named Bevyxxa.

Harjes: Yes. I still want to call it by its old name, so excuse me if I do call it betrixaban, it now has an official market name, which is Bevyxxa. This is a pretty big deal. This is the company's first FDA-approved drug. It looks like it has the potential to be a blockbuster, meaning $1 billion in sales or more. I've seen some estimates that count up to $3 billion annually. Definitely something we'll be watching over the next couple quarters to see how it ramps up. Todd, do you want to talk a little bit about what makes the drug so exciting?

Campbell: I think why we were interested in this company to begin with -- they have two drugs, we'll get to the second drug in a minute -- but one of the reasons that I know I was interested in this company is because the drug they were working on was targeting the same mechanism of action that has already been proven to be effective by Johnson & Johnson, Bristol-Myers Squibb, and Pfizer. Basically, what we're talking about is a new anticoagulant, and it belongs to a class of drugs called factor 10a, or Xa, drugs. What they do is help prevent blood clots in patients who maybe have undergone surgery, like knee surgery or hip surgery, or suffer from atrial fibrillation. Now, with this approval -- Bevyxxa, not the other ones -- can be used in the treatment of acute medically ill patients who have been discharged from the hospital. That's a very large and important market. We'll explain that in a second. But I think the big takeaway to frame the whole conversation is, factor Xa drugs, there's some already on the market, they rack up billions of dollars a year in sales. Now we have a new drug coming out of Portola that's launching into another new indication, and it too could end up being an important blockbuster drug.

Harjes: One point that I really want to emphasize is that this is a new indication. When you look at the Xa inhibitors that are already approved, they're not approved for patients that have already been released from hospitals. So, this is the first time that you have an oral Xa inhibitor that is approved for preventative use in these patients. So, what it's looking to do here is displace a drug called Lovenox, which was at one point a $3-billion-plus annual sales drug. This was something that was taken, and it wasn't the best drug. It's an injection, it comes with the risk of hemorrhage. So, when you look at the clinical trial results, Bevyxxa was tested against Lovenox, and it reduced clotting better, and it also didn't have the added risk of bleeding events. This is an enormous phase 3 trial of 7,500 patients. So, it really does have the opportunity here to displace this long-standing drug that's been on the market for quite a while, and that makes a lot of money.

Campbell: Yeah. Last year, Kristine, we were a little nervous that maybe the FDA wouldn't give a green light to this drug following the trial results only because the trial results were really mixed. You had these multiple cohorts, and it had a statistical significance across the entire group of patients, but in one subset of patients it didn't, and people were worried that because it didn't in that one subset maybe the FDA would frown on the entirety of the data. Obviously that wasn't the case. It's been approved. And that's great news for doctors and patients, because as you said, Lovenox is not a fantastic drug. It is a standard of care still, and that's why in the trial, Portola went head-to-head up against it. I think, now, what we're going to see -- time will tell. This drug will get launched somewhere between August and November, according to management. I think what we'll see is that doctors will relatively quickly start transitioning patients over to this. Because if you think about it, Kristine, these are very sick patients. They've had strokes or heart attacks, something pretty drastic has landed them in the hospital. And they're older patients, so they're a little bit frail. And when they're being released from the hospital, a lot of times, you have mobility concerns, they're going to be in the bed for a while, which of course increases the risk of blood clots. Portola said when they announced to fanfare that they won the approval that there are 24 million people in the G7 countries who get admitted to hospitals with conditions, and 1 million of those people, when they are released from the hospitals, end up returning because they have a blood-clotting event that theoretically could be prevented by the use of this newly approved drug. So, this is a massive indication. The U.S. is just the start. I imagine we'll see the potential to roll this out in other countries like in Europe and Japan. On the conference call last week, a question was, "Are you still going to go in alone in marketing this drug?" Management says, in the U.S., absolutely. Their plan is to commercialize it themselves. They're hiring their own sales team to do that. They'll be rolling those out. Overseas, the doors seem to be left a little bit open, maybe talking to one of the other players out there about licensing.

Harjes: Right. And when you talk about adoption, and whether doctors will immediately flock toward this new drug as opposed to Lovenox, that brings us to the other side of the Portola story. One potential hurdle that these Xa inhibitors have to overcome is the fact that there is no currently approved antidote. When you think about a blood thinner, you also have to keep in mind that sometimes patients who are on blood thinners have unexpected major bleeding events, or they'll need an emergency surgery, and in those situations, you need to have an antidote on hand to stop the effects of the blood thinner.

Campbell: Right. Warfarin was, for 50 years, the leading anticoagulant. It still has 40% market share in the indication. And that's easily reversed by given vitamin K. That's one of the reasons that warfarin is actually losing market share, because it interacts with vitamin K and causes people to have severe dietary restrictions. So, warfarin has this antidote, and it's one of the reasons it's been so widely used, and it's still widely used in a lot of elderly patients who could be subject to, say, a fall, or something that would cause a bleeding event. So the thinking here is, if you can get an antidote approved by the FDA that would reverse these factor Xas, the top-selling of which are Xarelto, which is a J&J drug teamed up with Bayer, and Eliquis, which is a Pfizer drug teamed up with Bristol-Myers, then that antidote could also become an important top-selling drug.

Harjes: Right. And Portola is developing exactly that. They are very close to the finish line at this point. They have already filed for approval once. The approval unfortunately did not come. They received a complete response letter, a CRL, which is not a good sign. But, when you look into the details of their CRL, it was due to manufacturing issues and a request for another piece of data specifically about how this drug works to reverse the effects of some of the lesser-known, less commonly used factor Xa inhibitors. So, this wasn't the FDA saying, "Your drug doesn't work." This was the FDA saying, "We need you to tweak a couple of things in the manufacturing process and provide us with a little bit more data, and then we'll reconsider."

Campbell: As a refresher, this is a drug that, its competitors theoretically really want to see get approved. Pfizer, Bristol-Myers, Johnson & Johnson, they all helped provide financing for AndexXa's trials. They really want to see this drug get across the finish line. 

Harjes: I wrote an article a long time ago, something about the little biotech that's getting a free lunch from big pharma, and that's because Portola is getting so much money handed to them from these big pharmas that aren't even demanding that much back from Portola, because these companies just want to see an antidote on the market to then boost their own drugs.

Campbell: Absolutely. The more of that warfarin market share you can chip away at, the better -- that's the way they're looking at it. AndexXa, as it stands right now, is going to be refiled, according to management, for approval in August. Previously they were targeting July, now they're looking at August. [Editor's note: Portola management plans to resubmit AndexXa for approval in July, previously June.] Who knows how many months it will be before the FDA makes a ruling on it. Let's assume it gets approved late this year, early next year. That's big news, because Portola estimates about over 90,000 people could benefit from the use of this antidote per year. And depending on pricing, that could add a few hundred million dollars in revenue to the top line. So, now you have a potentially billion-dollar drug in Bevyxxa, and you have another few hundred million potentially coming in from AndexXa.

Harjes: I think the big question here, and this is the root of most of the listener questions that we've gotten, between the Twitter and the Facebook group and writing in to [email protected] -- you guys want to know what we're doing now. Are we taking some profits off the table? Todd and I are both shareholders. Personally, I'm not. I want to wait it out. This is a very exciting time to be a shareholder in this company. Of course, it still comes with risks, even though they've now crossed the line to becoming a commercial-stage company. You could still see the stock suffer pretty dramatically if, say, AndexXa doesn't get approved. What do you think, Todd?

Campbell: Right. This thing had, what, a 45% pop on the day of the approval? Some gap and fill is to be expected.

Harjes: And it's still a $3 billion company. That's pretty small.

Campbell: Yeah. It's not like Kristine and I are expecting another 40% pop next month. I'm going to stick with this stock. I'm riding it out. Assuming you've got $1 billion, $3 billion in revenue a couple years out, I wouldn't be shocked by a $5 [billion]-$6 billion market cap on this company. And in a takeout situation, which, again, who knows, never buy a stock because it could become a target of another company, but maybe that increases the valuation to $7 [billion]-$8 billion. Time will tell.

Harjes: All right, Todd, let's pivot to another very important news item that probably hit slightly bigger headlines than just the quirky biotech news outlets that you and I tend to read most of. This has to do with the healthcare bill, and what the Republican senators have proposed as their potential replacement of Obamacare.

Campbell: Right. Republicans rode into Washington in November on a platform that includes the repeal and replacement of the Affordable Care Act, which is more commonly known as Obamacare. The House passed a bill that would do that last month and advanced that bill to the Senate. The Senate, in hopes of winning over some of the moderates and the centrists of their party, took that bill, did some work to it, lifted up the hood, fixed a couple things, and then rolled it back out, hopefully, in their view, to get a vote on that bill this week. However, that bill vote has now been pushed back until after the July 4th recess, because the CBO has come out and issued some scoring that raises some questions that they want to go back and take a look at.

Harjes: Right. The CBO is the Congressional Budget Office. This is a nonpartisan group that is supposed to crunch the numbers on proposed legislation. They weighed in on Monday on this new bill. What did they find?

Campbell: They found that less people will have insurance in 2018 and through 2026 than will have it under current law. That there will be 22 million fewer people insured in 2026 than under current law, and that 15 million people could drop off of insurance as soon as next year. 

Harjes: Right. A large part of that is because of a shift in Medicaid funding, which will become a block grant type of funding. What they're predicting is that an estimated 15 million fewer people will be covered by Medicaid in 2026. So, if you think of the number that Todd threw out there, the 22 million fewer Americans having coverage in 2026, 15 million of those will be directly impacted by this change in how Medicaid is granted.

Campbell: Right. Initially, the people who are going to become uninsured, there are going to be some who do it voluntarily, and some people who do with involuntarily, right? As you probably know, listeners, there are mandates that require you to have health insurance or pay a penalty when you file your tax return. This bill, the BCRA, will rollback those penalties, remove them.

Harjes: Right. And this is one of the most hated parts of Obamacare, according to Republicans.

Campbell: Yes. So, what's going to happen then is you're going to have a lot of people who will say, "OK, I'm 20 years old, I'm completely healthy, I don't need insurance," and they'll stop paying, so they'll cancel. Those will be the people who voluntarily walk away from their insurance. Then you'll have other people who will be forced to walk away because the subsidies that are going to be given to them under the new BCRA are less than what they are currently receiving now, and that could result in higher premiums and out-of-pockets for them that they just can't afford. So, you have a few different things work in there. Initially, you have the voluntary people walking away, and to have the people who are getting priced out of the individual market. And over time, as the BCRA shifts Medicaid funding to block grant funding, they expect that eligibility requirements for Medicaid will tighten, more people will get rolled off of Medicaid, and that's what's going to get us to that number.

Harjes: Right. What's important to understand here is that the impact won't be exactly the same for everybody. If you start to look at different demographics, the impact varies considerably -- it even goes in opposite directions. For example, the biggest negative impact will happen for older, lower-income Americans. The percentage of people that are without insurance will more than double for people who are between ages 50-64 and whose income is below 200% of --

Campbell: Yeah, that's a huge point. You look at it, and the CBO included all sorts of data and fancy charts that show how this breaks out. You definitely see uninsurance rates increasing across all age groups. The biggest hit, however, like you just said, 50-64 with incomes 200% or below the federal poverty level. To put that into perspective, a family of four, 200%, that's about $49,000 a year in income.

Harjes: Exactly. One the other hand, you also could see, for healthy singles, you can have premiums that are reduced by 30% in 2020. 

Campbell: And that's the other part of the story, right, Kristine? In the media, you see the headlines, 22 million, you're not really seeing the potentially 30% less expensive plan.

Harjes: Exactly. So, the impact will vary greatly depending on who you are. I also will point out that this bill is projected to save the government quite a bit of money.

Campbell: Yeah. Again, this is mostly due to the change in the way that they're going to fund Medicaid. They're going to shift to a block grant per-person funding program, and then they're going to increase that over time beginning in 2025 by regular inflation rate, not medical inflation rate. If you mix all that altogether and stir it all up and crunch all the numbers, you come out with them spending roughly about $150 billion less in 2026 on Medicaid than they would under current law and Obamacare. You add that plus subsidies and some other savings, and you get around $320?!

Harjes: $321 billion cumulative decrease over 10 years in the federal budget deficit.

Campbell: Correct. So, the BCRA, there's multiple goals here. If the goal is, let's get rid of the taxes that were created under Obamacare, the penalties, the fees, let's try to reduce the budget impact that Obamacare will have over the course of the next 10 years, it's certainly doing that. It remains to be seen whether or not from the perspective of an American who consumes insurance products and healthcare services whether or not this plan will be better, worse, or the same. You have people like the Kaiser Family Foundation coming out and saying premiums are going to go up pretty substantially for most people. Then, you have the CBO saying that premiums could drop up to 30%, but that's because people will be forced to buy high-deductible plans to cover far less healthcare. So, you have a lot of different competing variables. As the joke is, healthcare's complex, who knew?

Harjes: Yeah, this bill alone is hundreds and hundreds of pages. Another thing that remains to be seen is whether or not this will even pass. The way that the numbers are running right now with the Republicans and the Democrats and the different people who need to vote on this, if there are more than two Republican who vote no, the bill is not going to pass. And I've heard more than two Republican senators saying that they're not going to vote for it, that they don't support this bill. 

Campbell: Yeah. The real question will be, over the recess period -- that's why they wanted to have this vote this week, they didn't want to have to send all these senators back to their home states over the July 4th weekend, have them at cookouts and getting barraged by people who are potentially going to be impacted negatively by the change to the BCRA. You have organizations out there like the nonpartisan AARP, who are lobbying very fiercely against this bill because of some of the components that they believe are going to increase the cost for the 50-64 year olds. So, you have to take that into consideration. Then you have governors in some states who have accepted Medicaid expansion under Obamacare, and obviously don't want to lose federal funding to pay for those voters in their states that would lose care under a block grant program. So, you have senators who are going to have to go back and talk to their governors, and come back and reconvene after the recess and try to hammer out something that's maybe less onerous to older, lower-income Americans, and maybe does more to keep people on Medicaid than what we're seeing right now.

Harjes: One more asterisk that I want to add to this is that you have to keep in mind how wrong Obamacare projections were in the first place. When you look back to 2012, the CBO projected that Obamacare would result in 23 [million]-25 million more American gaining insurance through the state exchanges. The actual totals were more like 12.7 million. There are so many different things that go into those numbers. But I think the important thing for listeners to think about is, these projections about the new healthcare bill are stated as comparisons to the current state of things, which would be the ACA. So, they rely on future projections of the ACA's impact being right in the first place. Then, also, the new layer of predicting the future again being accurate. So, I would definitely say to take any sort of hard-number projections with a grain of salt. The important thing to think about is, directionally, do these causes and effects make sense, and what might some of the externalities end up being?

Campbell: And you nailed it. These are estimates. They're best estimates, they're educated estimates, but they're still estimates. I think what they are useful for is figuring out, as you said, the directionality. You can look at it and say, "If I draw some general conclusions to the direction of what could happen, where does that leave me, and what would I like to see done differently?" This will have impact on individual stocks throughout healthcare. That's one of the reasons why it's important for all of our listeners to be paying close attention to what goes on in Washington.

Harjes: As we wrap up here, Todd, are there any portfolio moves that our listeners need to be making based on this news?

Campbell: No, it's too soon. I'm a little concerned about the number of people who would drop off, obviously, because that shrinks the addressable market for a lot of these companies. Elective, things that are tied to elective surgery, or toward drugs that aren't required for a life-threatening condition, maybe those things take a little bit of a hit if more people fall off of insurance. But before we get the final details of what this bill is going to be, if it's going to be signed into law, I think you basically just stand pat, and make sure the stories, the reasons that you own your stocks, you understand them and you still like them.

Harjes: Awesome, sounds good. We are headed into a long weekend. Do you have any fun plans for the holiday?

Campbell: Barbecue as much as I can. How about you?

Harjes: Pretty much the same. I hope you enjoy it. Listeners, thanks for tuning in today. 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!