After the company told investors that it plans to file for Food and Drug Administration approval for a drug that could disrupt the $12 billion market for opioid painkillers, Nektar Therapeutics (NASDAQ:NKTR) shares shot higher. However, that wasn't the only good news it's released so far this month. Management also unveiled impressive early-stage trial data for NKTR-214, a wholly owned immuno-oncology drug that's being studied for use alongside Bristol-Myers Squibb's (NYSE:BMY) multibillion-dollar drug Opdivo. Can Nektar Therapeutics' stock continue to climb?

In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by contributor Todd Campbell to explain what's next for Nektar Therapeutics and its investors. Also, they discuss why Loxo Oncology's (NASDAQ:LOXO) game-changing deal with Bayer AG (NASDAQOTH:BAYRY) disappointed investors and how the FDA approval of a new smart pill could change medicine forever.

A full transcript follows the video.

This video was recorded on Nov. 15, 2017.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is November [14th], 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: Hey, Kristine! How are you?

Harjes: I'm pretty well. I'm recovering a little bit. I ran my first half marathon this past weekend, so I'm still pretty sore, even though it's now Wednesday.

Campbell: Congratulations, that's phenomenal. I have never done anything like that. [laughs] 

Harjes: It was interesting. It was painful. That probably goes without saying. But I get why people do it. It was a very cool experience.

Campbell: Did you end up getting that euphoric runner's high that helped you press forward? Were there any moments during the race where you were like, "Augh, I can't go on?"

Harjes: No, it was a very positive experience. I think the runner's high is a real thing. I feel like I shouldn't say that on a Healthcare show, because I have no idea whether or not there's science backing that up. But, just based on my own observation, it's a real thing.

Campbell: Wow! Well, that's great. Congratulations! I did not do that. [laughs] 

Harjes: Did you do anything interesting?

Campbell: No, but I did drink a lot of coffee in preparation for today's show, because I saw how many things we were going to be discussing.

Harjes: Yeah, we have kind of a list. We were actually going to cover four different topics, but we pared it back to only three, so hopefully we can be within a reasonable time today.

Campbell: I have a high degree of confidence in us, Kristine. We can do it!

Harjes: Yeah, let's get to it! So, when healthcare news hits the major news aggregators that I read, that's a pretty good sign that we should cover it on Industry Focus. And regardless of whether or not there's a direct investing take away, I think it's important to understand the broad healthcare landscape if you want to invest in this space at all. Plus, some of the innovation going on with some of these health companies is just cool. On, Monday night, the FDA approved what is being called a digital pill. It's a medicine that's a form of Abilify, which is a drug that's used to treat schizophrenia, bipolar disorder, and some other mental health conditions. This new version contains a digestible sensor that generates an electrical signal that, when it hits your stomach acids, it then talks to a patch that you're wearing on your chest that will send information to your phone via Bluetooth, and let you know -- and let your doctors know, more importantly -- that the pill has been ingested. This has, of course, generated a ton of chatter as people react to the news. Todd, what did you make of it?

Campbell: It's pretty amazing, and I think kind of awesome, when pharmacology meets technology. Ideally, we would love to have one pill, one shot, whatever, and that cures us of disease. But until we get to that point, it's all going to be about incrementally improving our outcomes. In the case of schizophrenia, there's a massive need to improve outcomes. There are drugs out there that can help people control their disease, but there's a huge adherence problem to these medications. And if people aren't taking them the way they're prescribed, that's going to cause problems for them. Schizophrenia is one of the most common causes of disability, and it's a common disease. 21 million people throughout the world, according to the World Health Organization, suffer from schizophrenia. This is a major problem, because 75% of patients fail to take their medication on schedule. That's not good for these patients. So, the concept of being able to take this little pill and merge it together with a sensor that can say, "Hey, guess what, I can prove to you, or, I can track, or we can share information on whether or not I'm taking this medication as you want me to be taking it," that is potentially big. It's not going to work for everyone, but it will work for some people. And if it works for some people, it will dramatically improve their quality of life.

Harjes: Going, forward, I could see insurers subsidizing versions of this medication that have this built-in method of checking compliance, because compliance drives cost down. It reduces relapses, it reduces drug resistance, hospital readmissions, all sorts of things. It will also be interesting to see how the drug makers themselves price these versions of their medications that include technology like this. If they're priced too high, then the insurers aren't going to cover them at all. Of course, you have that continual balance between where the price should be set so that people actually do adopt it, and then we'll see how the insurers actually react and whether or not they want to incentivize using this high-tech version of different medicines.

Campbell: What I find really interesting about this, too, is that you look at Otsuka, who makes Abilify, they lost patent protection on Abilify back in 2015. They started facing off with some of the generic competitors to that drug. This was a move for them, an opportunity for them, to basically say, let's try and sure up our market share by coming up with something that's completely different, that can differentiate us away from some of these other medications that are used in these indications. This is really unique. And maybe it works. They've come out with a longer-lasting version of Abilify that they market with Lundbeck, and now they have Abilify MyCite. It's going to be interesting to see, if you're a psychiatrist and you're treating these patients, whether or not you're going to feel comfortable prescribing it. I think, if I had patients, I would prescribe it, because it's not like you're getting this information that the patient doesn't want you to have. You're seeking treatment, you're treating them, and they have to opt into sharing this information. To me, it's a lot like the blood glucose monitors, where you can get continuous insight into your blood sugar, and that helps inform your treatment decisions with you and your provider. And I think this is a good thing, because it's going to help doctors and patients with the issue of accountability. No longer will a patient be coming in and saying, "I think I took it when I was supposed to," or, not wanting to disappoint their doctor, saying, "Yeah, I've been taking it." Now you'll be able to look at it and say, "You missed three days here last week. Is there something else going on? Is it the time, is it the dose, is there a side effect that you want to discuss with me?" It opens the conversation. And doing that, maybe you improve outcomes for these patients.

Harjes: Yeah. And I don't want to say that it is 100% undeniably a good thing and there's been no push back at all, because there have been some points raised that dial back the optimism a little bit. For example, some are concerned that Abilify isn't a good choice of a drug for pioneering this technology because the patient population already has tendencies toward paranoia. So, then you introduce this technology which, to some, could feel like big brother is monitoring you, and that's really not going to help with the paranoia. But, for non-compliant patients, the other alternative, if you're not taking your Abilify correctly, is that you end up getting it injected. So, this is hopefully better than that. Or, maybe the threat of having big brother watching you is even scarier than the threat of injection, enough to naturally boost compliance. So, I do think, on the whole, this is a good thing. But, of course, there are concerns. There will also be concerns about the accuracy of the data, that the patch that you wear on your body needs to be replaced, and what if they don't comply with that, how do you keep this data private and ensure that there aren't any manipulations going on, security issues. But, I think, on the whole, it's undeniably a very interesting and good innovation.

Campbell: From an investing standpoint, there's not a lot of take away. It's very intriguing. This is a test case. People are going to watch and see how well it's received. If it's well received, maybe you see this popping up in future medicines and other indications as well. Proteus is a private company, so you can't invest in that. Otsuka and Lundbeck, they're big, multi global companies, so it's not like this could necessarily move the needle one way or another. I think it's just something that we should all keep an eye on and seeing as a potential advance that could merge pharmacology with technology toward better outcomes.

Harjes: Yeah, absolutely. And as I mentioned earlier, whenever I see something hit major news outlets that's healthcare-related, I'm like, OK, we should at least mention this on the show. We've had listeners write in over the years asking where we do source our information and our story ideas, so I want to offer a couple of different healthcare news roundups that I read every day, in case anybody is looking for a way to stay even more in touch with the industry. If you want my personal list of what I read, please shoot me an email at industryfocus@fool.com, and I'll be happy to send you a list of my go-to sources.

In our next segment, we've giving an update on Loxo Oncology, company we discussed on the June 7th show, coming off of the American Society of Clinical Oncology's meeting, ASCO. I was just looking at iTunes and realized that, because this was more than 100 episodes ago -- which is kind of crazy -- it has fallen off the list on the desktop version of iTunes. So, if you're struggling to find it, that's another reason you can email me, industryfocus@fool.com. The short story from what we covered is, Loxo shares got a 50% boost after they reported a fantastic combination of efficacy and safety in their drug that I'm just going to call Laro. It's an abbreviation, but it's not even worth saying the full name. It's a drug that treats solid tumors that have a specific genetic mutation called a TRK fusion. On Tuesday of this week, we got some more news related to the company and Laro, as well as one other drug.

Campbell: Larotrectinib. [laughs] 

Harjes: Oh, you went for it.

Campbell: Yeah, these are so much fun to say, to practice at home, listeners.

Harjes: I copped out.

Campbell: I like to call this one Larry. Larry is friendly. We'll talk about Larry.

Harjes: He seems like a good dude.

Campbell: What was really fascinating about this -- absolutely reach out to Kristine so you can get a copy of that June episode, because we talked about three different companies that are exciting companies that presented some really, really interesting data at the American Society of Clinical Oncology meeting in June. Larry is really interesting because it approaches treating cancer in a way that's kind of unique. Historically, we've gone and looked at cancer treatments based on the origin of the cancer. So, we've developed breast cancer drugs or lung cancer drugs or whatever. And this drug doesn't really work that way. Instead, it targets a specific abnormality, a mutation, where you see these TRK, basically it's a signaling pathway, incorrectly fused together. And that fusion creates activity that leads to the development of tumors and their proliferation. Now, TRK activity is not very common in adults, so it's pretty easy to go in there and see, "OK, we have a problem, this person has TRK fusions." And sure enough, those tumors exist in melanoma, they exist in breast cancer, they exist in lung cancer. So, there's a potential to approve Larry at some point, and then be able to use that across multiple indications regardless of the origin of the cancer. That's kind of exciting, this cool concept of using biomarkers, it gets us a little bit closer to the concept of personalized or precision medicine. And that's great.

I think what's really interesting about this story from this past week is, a lot of people bought shares in Loxo because they had pie in the sky expectations for what this could mean if they launch it as soon as next year, if all things go well, maybe later next year. And they were thinking, either they're going to benefit 100% because it's a wholly owned drug, or they're going to get bought outright, lock stock and barrel, or gobbled up hook line and sinker by some other larger player. That didn't end up happening. I think that's one of the reasons that shares actually sold off on this deal, Kristine. It's a huge deal, but because it's just a licensing deal for Larry, I think some people were disappointed, because now they're going to have to split profit on this drug, and they didn't get bought out. But, still, it's a good deal in my view, because they get Bayer, which has a global sales force that can hit the ground running right out of the gate, they still get to share in the U.S. profit on this drug. Bayer is going to pay them royalties on ex-U.S. sales. And, they solidify their balance sheet with this really big, $400 million upfront payment that now gives them plenty of money to work on other things that are in their pipeline.

Harjes: Yeah, exactly. To me, it was a little bit surprising that the stock fell on the news. But I think you hit the nail on the head with these pie in the sky expectations, and this wasn't really what people were expecting. But, I think it's good news for anybody who wants to see this drug hit the market and it be successful.

Moving on, you might remember this next stock from our April 12th episode on non-opioid pain medications that different companies are developing. Again, same offer, I'll send you the link if you want. I'm sure this one is well more than 100 episodes old since its from April. This company is called Nektar Therapeutics. They announced in their earnings report that they plan to file for NKTR-181 in April of next year. That, again, was the drug we were talking about on that non-opioid pain medication episode. It's a μ-opioid receptor drug that crosses the blood-brain barrier more slowly than traditional opioids do so that you reduce the feeling of euphoria. Hopefully, that could decrease the abuse of opioids -- which, by the way, Americans spend $12 billion annually on for pain relief. As exciting as that is, it turns out that there's a whole lot more going on at this company than just NKTR-181. The stock has climbed 70% so far just this month, just in November, including a 14% jump on Tuesday of this week. The company now has a market cap of $6.3 billion. Todd, what has investors so excited?

Campbell: Crazy, right? $24 a share the $40 a share in a heartbeat. This could be the $6 billion company that no one is really talking about.

Harjes: It's pretty under the radar.

Campbell: Yeah, it doesn't catch a lot of news flow. They have so many different irons in the fire, maybe it's hard for people to figure out exactly what this company does and is all about. It seems like, over the course of the last couple of years, investors have gotten most excited about companies that are specifically working in one area of research. But that's not the case at Nektar. Nektar is working on pain treatments, it's working on immuno-oncology, it even has a relationship with Eli Lilly on an autoimmune disease drug or immunology drug. So, it has a lot of different things going on, and that doesn't even include the fact that it's already collecting royalties from AstraZeneca and some others for the work that it's done on drugs that have already won approval. So, it has so many different pieces to this story that investors are going to want to know about. What got everybody so excited this past week and a half, though, was that news on NKTR-181, the ability to go out to the market as soon as, depending, if they get an accelerated review, they could theoretically have this on the market by the end of next year. It's a wholly owned drug, they're not sharing it, they're not partnered with anybody on it. That's a $12.6 billion market for opioids that they'll be targeting with this drug. And the FDA has shown and said time and time again over the last year-and-a-half because of the opioid epidemic they're willing to consider these unique approaches. So, I think that's a really big reason for excitement. But more recently, the excitement stems from NKTR-214, which is another wholly owned drug, but it's in immuno-oncology drug, so it's used for cancer.

Harjes: Yes. They reported on Monday some data for this drug for solid tumors in combination with a drug called Opdivo, which we've talked about on the show plenty, this is from Bristol-Myers Squibb. The Nektar drug activates cancer-fighting cells, while Opdivo, which is being studied in combination with, unmasks the cancer cells by hijacking the PD-1 protein, it's a PD-1 drug. This protein is what usually helps cancer cells hide from the immune system. Opdivo uncovers them while NKTR-214 activates these cancer-fighting cells. Together, they've shown pretty stunning efficacy across a bunch of different cancers. There was 91% disease control rate in melanoma, 85% in kidney cancer. In lung cancer, three out of four of the patients studied responded, with one complete response. And the safety looks good so far, which is pretty awesome. You look at the way this trial is being done, they're splitting the costs of the combo therapy with Bristol-Myers Squibb, but it retains the full rights to its own drug.

Campbell: Yes. And what's really intriguing about this is, not only does NKTR-214 boost the T-cells and the natural killer cells in the tumor microenvironment to help destroy it, it also increases PD-1 expression, which helps make Opdivo work better. So, this is a drug now that, theoretically, if used in combination with Opdivo, would allow for its use in patients that don't have very high expressions of PD-1. And, interestingly enough, that was born out in the data. You had very high response rates across both PD-1 positive and PD-1 negative patients. That's pretty cool and pretty game-changing, if you will, when you think about how to treat these. The other thing that's interesting were, these were Stage IV cancers. They weren't easy to treat. They're treatment naive, they hadn't gone through other treatments yet, but they're Stage IV cancers. So, there's a big need there for therapies that work better and can help these patients. So, I think people are looking at this and saying, wow, if NKTR-214, if their Phase II study goes as well as what we seen so far, and we won't know that for a while, so we have to temper down some of this enthusiasm, because we really don't know how that's going to pan out over time -- but that could be a really important and intriguing drug for this company. Then, they have two other immuno-oncology drugs that they're developing, NKTR-255 and NKTR-262, which are really interesting. Then, of course, they have this other relationship with Eli Lilly, where in July, Eli Lilly gave them $150 million up front to get the rights to NKTR-358, which is an immunology drug. And if that drug ends up panning out, they could collect double-digit royalties in the low 20s, plus another $0.25 billion worth of milestones. So, there's a lot going on for Nektar that makes it intriguing. I think 100%, what was it, 70%, a big move like that, you probably want to let that digest a little bit before you consider going out and buying it. But I think this is an intriguing stock, and it's worth having on people's radar.

Harjes: And it's still fairly tiny even after that 70%. I kind of wish it had been on my radar before just this month. But it hasn't been one that I've personally given a lot of attention to, except for the small bit that we did about the 181 drug earlier this year. But, I'll definitely be following along a little bit more closely now. I'm sure you will too, Todd. They have 12 different clinical programs, and eight of them have partners, and they're big-name partners. We talked about, they have a partnership with Lily, they're working with Bristol. That always gets me intrigued, when a smaller player has relationships with some of the pharma giants. This is a company that is not yet profitable, but even as their research and development spend is ramping up, it seems like they're fairly well-financed because of these partnerships, and they are bringing in some money through these royalty programs and some of the upfront and milestone payments that they're receiving.

Campbell: Right. The royalties are kind of a rounding error. We don't expect that to be a tremendous amount of money. But over the course of the next five years or so, maybe that starts to turn into tens of millions of dollars. It's obviously not going to pay the R&D budget. The company will finish the year with about $350 million in cash. Like you said, it's pretty well financed. At some point, you could probably expect it'll go out and tap investors by issuing more shares. After this big move up today, that wouldn't shock me.

Harjes: It'd be great timing.

Campbell: Yeah, it would probably be a pretty good time to do that. So, maybe that gives you an opportunity to start thinking about being able to buy, if shares sell off on that. So, yeah, this is an intriguing company. It's definitely one that's worth watching.

Harjes: Sounds good. Before we sign off, I wanted to give some promotion to a race happening here in Alexandria this weekend, the Carpenter Shelter 5K, 10K and Fun Run. The Motley Fool works closely with the Carpenter Shelter, which is a local charity whose mission is to help the homeless to achieve sustainable independence through shelter, guidance, education and advocacy. If you're in the area and you want to join me, Chris Hill, and many other Fools in supporting this great cause, head to carpentershelter.org. Since competition is a core value to The Motley Fool, anybody who beats me in the 5K -- and that will not be difficult -- I will send you something fun. So, I hope to see some familiar faces out there. 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!

Kristine Harjes has no position in any of the stocks mentioned. Todd Campbell has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.