Hunting for small-cap healthcare stocks to add to your stock watchlist? We've got you covered. In this episode of the Motley Fool's Industry Focus: Healthcare podcast, analyst Kristine Harjes is joined by Todd Campbell to discuss how Novocure (NASDAQ:NVCR), Flexion Therapeutics (NASDAQ:FLXN), and Zogenix (NASDAQ:ZGNX) could transform patient treatment. Is now a good time to buy these stocks? Watch this episode to learn how:
- Novocure has created an entirely new way to fight cancer.
- Flexion Therapeutics wants to better control knee pain.
- Zogenix is breathing new life into an old drug by targeting rare forms of epilepsy.
A full transcript follows the video.
This video was recorded on July 26, 2017.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. On Wednesdays, we cover healthcare, and Wednesday it is. Today's date is July . I'm your host, Kristine Harjes. I'm joined via Skype by Todd Campbell, Fool.com healthcare specialist. Todd, what's new and exciting?
Todd Campbell: Kristine, not a whole tremendous amount is going on. We're getting some work done at Todd HQ, which is, of course, taking up a little bit of time, effort, and energy. You have to love those roofing projects, right? You have to figure out exactly who to hire and how to get it all done. But, I think we'll come out on the other side a lot drier.
Harjes: Yeah, maybe you'll stop getting rained on one of these days.
Campbell: Maybe. I hope so.
Harjes: Today's topic, we're calling 3 Under 30, as in three stocks trading for $30 or less. We'll be talking about Novocure, Flexion, and Zogenix. But first, we wanted to emphasize that $30 per share, that's a number that's pretty arbitrary. A common misconception about stocks is that their price works like the price of goods, where a $100 pair of shoes is more expensive than a $50 pair. What you have to remember is that the price of a company, what its value actually is, comes down to its market capitalization, or its market cap. That's the price per share multiplied by the total number of shares outstanding. That tells you the actual price of the company. For the companies that we're talking about today, that range will be from about $300 million to a little bit under $2 billion. So, experienced investors, bear with us. That's a point that I don't want any of our newer investors out there to miss. Share price doesn't matter nearly as much as market cap. But, we are still using it as a guiding light for today's episode.
Campbell: Kristine, I think when a lot of people start out trading, they think, "I'll buy this $2 stock, because it's easier for me to get a 10% return." That's simply just not the case. A 10% return on a $1,000 stock is the same as a 10% return on a $10 stock or a $2 stock. I always tell people, it's way better to focus on quality rather than the quantity of shares you can buy because a share price happens to be cheap. So, when you're thinking about quality, you want to find companies that are doing interesting or intriguing things, especially on the healthcare front, maybe something that's disruptive or something that's brand-new and can reshape treatment; with catalysts, maybe, that are coming up in a relatively short order that could actually move that share price up and hopefully not down.
When we were prepping for the show, you and I batted around a whole bunch of stocks. The list we were dealing with had to have been 50 stocks that we were going back and forth on. And we settled on these three because in our view, they're interesting stocks. They're doing some pretty cool things. And there are catalysts that could theoretically make these stocks move over the course of the next year or two.
Harjes: Absolutely. Yeah, it was a pretty long list. The scraper that I built was not just looking for stocks that were less than $30 a share, but I also wanted them to be of pretty substantial market cap. We don't want to talk about any stocks that are too small to be worth consideration. Today's stocks range from about $770 million -- is that our smallest one? -- no, our smallest one is $320 million, and the largest is $1.7 billion. With that, let's dive in, starting with a company called Novocure, ticker NVCR. Todd, I know this is a company that you and fellow Fool.com [investor] Brian Feroldi went to visit recently.
Campbell: This is a really interesting story. The stock is trading around $19 a share; it has a market cap of about $1.65 billion. Kristine, we were lucky enough to both live up in the area and be able to go and sit down and talk to the key executives about how they are reimagining treatment for cancer, specifically glioblastoma, which is the most common form of brain cancer. Listeners, if you pay attention to Washington, which, as healthcare investors, we always pay attention to Washington, you've probably heard the sad news that John McCain has been diagnosed with a type of brain cancer. Sure enough, it was glioblastoma. So, that got us thinking, what kind of treatments are available for patients with glioblastoma? And sure enough, Novocure has a relatively new approach that seems to be very effective in the indication.
Harjes: It's really interesting, because it's completely different than traditional forms of treatment. It's not a chemotherapy, it's not radiation. Instead -- and to me, this sounds like science fiction, but it's on the market, so it actually does have some clinically demonstrated effect -- what it does is use these tumor-treating fields, they're called TTFields, and they have shown that surrounding a tumor with these fields helps to stop cancerous cell division. As a result, the tumor itself is not able to grow as quickly inside the patient. The great advantage to that is, there's no systemic toxicity, which is in complete contrast to something like radiation or chemotherapy. Chemotherapy has a whole host of side effects -- nausea, constipation, fatigue, anemia, there's a ton of really terrible side effects that patients have to experience. Radiation often kills healthy cells alongside cancerous ones. But the theory here is that you can avoid that.
Campbell: Right. It's really interesting. This is going to date [me]. You probably like to go to the beach, I go to the beach. Back in the olden days, when you went to the beach and you wanted to listen to your favorite radio station, you really had to get careful with that transistor radio to get that frequency just right to get your favorite station. Somehow -- lots of research, obviously -- Novocure was able to figure out the exact, precise frequency that they could use to disrupt cell division. So, their approach is extremely different than anything doctors, including oncologists, are used to prescribing for their patients. To be able to disrupt the ability for these cancer cells to replicate, without having these off-target risks of safety and toxicity, and even the ability, so far, for there to be any kind of a buildup of resistance to this approach -- it's very different.
The machine itself, you have this TTField generating machine, it's not that big. It's maybe the size of a small laptop computer, or something like that. Then, you have these arrays that you wear on your head, kind of like a knit hat. The arrays are custom designed for every patient. A scan is done, they figure out exactly where to put these on your head. They're made just for this one patient. They send them to generator, they send them the arrays. The arrays get swapped out every two to three days. And sure enough, in trials, this has more than doubled the five-year survival rate when used alongside chemotherapy in glioblastoma patients.
Harjes: This is a cancer that has extremely poor prognosis. So, to see such a great, dramatic improvement in this gives a lot of patients a lot of hope. Especially now that this disease has become part of the national attention because of Senator John McCain, there will be a lot of eyes looking at this company to see, will it continue to perform as well? Right now, there are about 1,200 patients that are actively using Optune. That figure has been steadily rising over time. The company is exploring it in other forms of cancer as well, including lung, ovarian and pancreatic cancer, which could really, really expand to the addressable market for this company.
Campbell: Glioblastoma, I think, is only 12,500 cases per year in the U.S., maybe another 5,000 if you add together Japan and Germany, where Optune is also available. So, it's a relatively small market compared to, say, pancreatic cancer, which is 50,000-plus, or non-small lung cancer, which is, of course, even more. The trials they're conducting now, the data won't be available for a while on that. But what's interesting to me about this is, in speaking to management and talking to them, they think they can achieve breakeven and potentially profitability just on the glioblastoma approvals alone. You mentioned they're treating about 1,200 patients now. That's up substantially from 225 patients in 2014. Revenue was $83 million last year, that's up 150% year over year. And costs are growing much slower than that, because they've built up all this infrastructure to commercialize, and now they're able to leverage more sales against those fixed costs to get themselves closer and closer to profitability. There's no timeline for profitability, but if you look at the first-quarter results, it seems like they continue to make solid headway. 2017 looks like it's shaping up to be a year that's even better than last year.
Harjes: Our second stock to talk about today that is under $30 per share is called Flexion Therapeutics. They are a $780 million market cap company, and their ticker is FLXN. Listeners might recall that we talked about them on our April 12 show, which was about drugmakers looking to create non-opioid pain medications. In this episode, we discussed how opioids are an extremely common prescription. There are over 650,000 opioid prescriptions dispensed every day. Meanwhile, there's been a quadrupling of deaths due to opioid abuse since 1999. So, there's a huge market for new ways to control pain, and Flexion is right up in the middle of that market.
Campbell: Yeah. There are 650,000 prescriptions that are written for opioids every day, according to the Department of Health and Human Services. A lot of those prescriptions are for the use of opioids as rescue medication for people who are suffering from chronic pain, including chronic pain associated with osteoarthritis of the knee. That's really the sweet spot that Flexion Therapeutics is targeting, developing a new way to control pain that isn't an opioid, that can control pain more consistently, and potentially, as a result, reduce the need to rely on these rescue medications which, as we talked about previously in that prior show, it can increase the likelihood of getting addicted and contributing to the opioid epidemic.
Harjes: Right. The way that knee pain treatment generally works is, you start off on an ibuprofen or aspirin, and over time it doesn't work as well. Then you move on to corticosteroid injections. Again, over time, it starts to not work as well. That's when you end up being moved to an opioid, because with all of these things, eventually your body built up a little bit of a tolerance, and the pain is not effectively being managed by the milder drugs. Zilretta is a sustained-release steroid injection, and it's supposed to supplement the natural fluids in the knee. It's been very effective so far. They are looking to get this drug approved by the FDA. Currently, they have an application submitted. The PDUFA date, which is the day that is, in theory, the deadline that the FDA is supposed to say yes or no by, that date is October 6.
Campbell: Yeah. If you suffer from knee pain, and you're one of the five million people who get corticosteroid shots every quarter, you probably know why it is that Flexion is intriguing. Frankly, the effects, the benefits of the corticosteroid shots, can start wearing off after the course of a few weeks. And by the time you get to the three-month mark, you don't have any relief from it. One of the things you were talking about, the progression of treatment, the next step after you've exhausted corticosteroid shots and some of these other medical interventions, is actual knee replacement. And obviously, it's invasive, it's expensive, it's not something that people want to subject themselves to. And oftentimes, knee replacement doesn't necessarily give you the relief that you were hoping for. 20% of the patients aren't satisfied after they've had that done. So, if you can find a way, like Zilretta, where you can extend the life of the corticosteroid, and have that pain relief last that entire three-month period, not only do you improve the quality of life of the patient, but you may actually delay them advancing to that eventual total knee replacement.
There's no guarantee, obviously, that the FDA will approve this drug when they make their decision in October. But I think it's intriguing. I think they might have a good shot at it when you consider the fact that this is just a reformulation of a drug that's already available. They've redone this corticosteroid so that it will last longer. So, I think they have a good shot at it. Anything can happen. If they do get approved, you're talking about a drug that could bring in hundreds of millions of dollars in sales based upon what you've seen out there for competing drugs in this indication. And, there are studies that are on going for Zilretta that could expand its use to other disease indications and other areas of chronic pain.
Harjes: The numbers that I've seen peg this drug at $500-$600 million in peak sales just for this one indication, so I could easily see it being a blockbuster, meaning a billion or more annually if it gets that expansion to other joints. One other thing that I thought would be interesting to talk about with this company is that they've also examined the cost effectiveness of this drug. They assumed a hypothetical cost of $500 per treatment, and they used the actual cost of some comparable treatments, some of the more traditional ones and also the hyaluronic acid injections. So, they had three different things they were comparing it to. In each of them, they found that Zilretta improved quality of life at a lower cost per QALY. QALY is a way of adjusting a life-year for the quality of that life. The acronym is QALY, quality-adjusted life year. So, it improves QALY, quality of your life, and it also does it at a lower cost for that improvement. And since this is a chronic treatment, that's pretty huge, because not only would you find insurers more willing to accept this, but they're going to accept it year in and year out, and that's that constantly generating revenue flow, which, especially as the population ages, that's only going to grow.
Campbell: Right. And the diagnosis and the treatment and intervention is starting younger now, younger and younger. So maybe, when before you weren't doing this until you were in your 50s or 60s, now because of injuries people have suffered to their knee when they were in their teens or 20s, they're being diagnosed and beginning treatments in their 40s. Well, people are living longer and the population is bigger. So, you have some pretty attractive demographic tailwinds that could support demand for this drug.
They also have management that has some experience. Sanofi makes one of those hyaluronan injections, Synvisc-One, that drug has $400 million annual in sales. And some ex-Sanofi executives have joined Flexion in the C-suite. So, they seem to have a team that's pretty good, they have an intriguing drug, and they have that catalyst coming in October, i.e., the decision date. Obviously, if it gets rejected, the stock will tank. But if it gets approved, then theoretically, you could argue the stock will go higher.
Harjes: Yeah, and that's the case with a lot of these smaller companies that we talk about. The drugs are not on the market yet, so an FDA decision is really make or break. Let's move on to our final company of the day. This one is called Zogenix, their ticker is ZGNX, and they have a market cap of $320 million.
Campbell: Yeah, this is the smallest stock that we're talking about. It has a $13 price tag and a $322 million market cap. They're working on a drug that has had a mixed past, and we'll talk about that in just a second, that may be able to significantly reduce the number of seizures that patients suffer if they're diagnosed with rare forms of epilepsy.
Harjes: Exactly. They're working on a drug that's called Fenfluramine. They're calling it ZX008, which might be a little bit easier to pronounce and remember. This drug is trying to treat some very rare forms of epilepsy, specifically something called Dravet syndrome and also another one called Lennox-Gastaut. If they are successful, they will be going head to head against a company that we've talked about on the show before called GW Pharmaceuticals. GW has a drug called Epidiolex, which is pending FDA application for approval in Dravet syndrome, which currently has nothing approved to treat it.
Campbell: Yeah. This is a very small patient population. That's something that people should know. They should also know that ZX008 is a low dose of Fenfluramine, and anyone who's been around as long as I have, the grey hair, may remember the drug fen-phen from the 1990s, which was an obesity drug. It was unfortunately found that that drug resulted in some cardiac events, and it was pulled from the market back in 1997. So, this is one of the two drugs that was in that two drug combo of fen-phen, but this is a very low dose of it. So far, there's been no evidence that it is increasing cardiac risk. That's important, obviously, to eventually winning approval.
What has been seen in trials is pretty darn good efficacy. You mentioned that, if, eventually, this drug makes its way to market, it could be competing against Epidiolex, Epidiolex being marijuana-based drug that GW Pharmaceutical has been working on for years that could also offer new hope in this indication. As you mentioned, there's no approved treatment specifically for it. And typically, patients with this indication do not respond very well to the current existing treatment options that are out there. Lennox-Gastaut syndrome is a much bigger indication. There [are] 15,000 or so patients in the U.S. that theoretically could benefit from the drug, if it's approved, eventually, in that indication. Initially, we're just talking about Dravet syndrome, a relatively small indication. What all eyes are focused on this quarter is data from its Phase III trial, the first of two. You're going to get data in this quarter, and then you'll get data again in early 2018 in Dravet syndrome. And if the data is good, then theoretically, you could get an application filed with the FDA for approval. And if the Lennox-Gastaut, or LGS, data is eventually good some time down the road, then they will file for a supplemental approval of the drug at that point.
Harjes: This is definitely something that investors in GW want to be watching as well, because it could be a pretty big threat. Something to keep an eye on as well when the data comes out is that there aren't any serious side effects, because this drug, as we went through, has a pretty serious side effect history. In fact, it kind of reminds me a little bit of the episode that Gaby and I did on Thalidomide, similar stories there where you have a drug that is not even worth using, and then you find a way that it can actually be effective in a certain population at a certain dose. So, lots of interesting stuff to watch out for, here. Something that I like to do at the end of these shows, Todd, where we cover a handful of different biotechs, is put you on the spot and ask you which one your favorite is. Hopefully you were ready for that question. I'll ask you to close this out by telling us, which one of these is your favorite buy and why?
Campbell: For risk-tolerant investors, Zogenix is third, no matter what. I think it's kind of a toss-up for me between Novocure and Flexion. In the past, I've liked Flexion a lot. I think they have a good shot, and their market cap may undervalue them if they win the approval. But, if you're looking for a safer route, Novocure already has the FDA approval. They are already winning market share and prescription growth. So you know what, I'm going to say Novocure, even though it's not cheap, followed by Flexion, and Zogenix coming up in third place.
Harjes: Sounds good. Thank you so much. As always, people on the program 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. Today's show was produced by Dan Boyd. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!