In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by Todd Campbell to discuss this potential acquisition and Celgene's future. Also, they explain how Teladoc (NYSE:TDOC) is disrupting the $57 billion market for primary and speciality doctor visits. Is this the future of healthcare?
A full transcript follows the video.
This video was recorded on Jan. 17, 2018.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Wednesday, January 17th. I'm your host, Kristine Harjes, and I'm joined via Skype by healthcare expert, Todd Campbell. Hey Todd! How are you?
Todd Campbell: Kristine, how are you? I was so excited when I woke up this morning because I was like, "Oh, great! I get to talk to Kristine and see what happened at JP Morgan (NYSE:JPM)!"
Harjes: Well, I mean, every Wednesday you wake up excited to talk to me, right?
Campbell: [laughs] Absolutely! But even more so today. I listened to last week's show, which was fantastic. You called in from out there at JP Morgan. I wanted to hear more. I thought listeners would probably want to hear more, too. What was the energy there like? What was the scene?
Harjes: It was really incredible! For a little bit of background, in case you missed last week's episode, I was at the JP Morgan Healthcare Conference in San Francisco. This is the biggest healthcare event that happens all year. It's a bunch of biotech investors and executives and media, all converged in San Francisco. It's just, the energy is absolutely phenomenal! I woke up at I don't even know what time each morning to be to business meetings at 07:00 AM, and then you're out until 02:00 AM at all these different events afterwards. I just didn't sleep for about a year. I realized as soon as I started doing the ad read for 23andMe at the top of the episode, like, man, you can kind of hear it in my voice that I'm still pretty wiped.
Campbell: Yeah, it sounds like you were running from place to place. Was it all done at one venue, Kristine? Or was it spread out?
Harjes: It's kind of interesting, because the event itself takes place at the Westin St. Francis, which is right on Union Square. But most people that are "present" at the conference -- I say that with air quotes that I realize what nobody listening to this can see -- but most people that are "there" are not actually there to go to the official JP Morgan event, because it's fairly limited, it's kind of tough to get passes for it. So, people are all over the city doing side conferences that are happening in conjunction with JP Morgan, they're there to do media interviews, they're there for all these other reasons. As somebody put it to me, they were like, "If JP Morgan didn't exist, the industry would need to make some sort of event up just to have a reason to get all these people that are involved in the industry in the same place at the same time."
Campbell: I imagine there were so many takeaways that you had walking away from your time there, with all the different companies you saw, and all the different presentations you listened to, and all the different industry leaders you were able to speak with.
Harjes: Yeah, absolutely. Something I didn't realize going into it was how much is not in the transcripts that you read. I've been covering this event for several years now, and I just read the transcripts, I read other people's round up articles, and stuff like that. But there are things that you miss when you're not actually present for the presentation. For example, in the Westin, there are all these different sized conference rooms. There's everything from the Grand Ballroom, where it's totally decadent and there are tables and it's really nice and it's huge, and that's where you get the big shot companies presenting. Then, it goes all the way down to tiny, closet-sized rooms where they shove the companies that aren't quite as important. So, there's this huge game theory going on about what company is going to be in what room, and it's kind of a status symbol. Then, on top of that, you can add to it how packed the room is. I don't know if that's just a reflection of the planners misjudging how popular the company will be, or I'm only just picking up on these nuances because it was my first time going to the conference, but that's definitely something that I noted in the notes from each of the presentations that I saw. Like, small conference room, but huge crowd.
Campbell: Right. And I suppose you want to under-promise and over-deliver. You have a room packed full of people, that creates an excitement all in its own. Better to have a smaller room with a huge turn-out. You must have struggled to figure out what companies you wanted to go see. But, there's one burning question that I have for you, Kristine.
Harjes: Oh, boy!
Campbell: Did you go to the Celgene presentation?
Harjes: I did! So, Celgene kicks off the entire conference every single year. They're given what is possibly the highest standing, which is to be the very first presentation Monday morning in the Grand Ballroom. This was coming off of some news that they were going to acquire... Impact Biomedicines. [laughs] Those of you who have been following --
Campbell: That brings me to my next big question. At the presentation, did they hint at all about buying Juno Therapeutics?
Harjes: No -- this is the thing. There was so much hype going into the conference that Celgene was going to make a big, splashy acquisition. Historically, this conference is filled with huge news. It's a very volatile week for biotechs of all shapes and sizes. And everybody thought that Celgene was probably going to acquire somebody. I think a lot of people thought that it was going to be bluebird (NASDAQ:BLUE), but a lot of them also thought, maybe it's going to be Juno Therapeutics. When this acquisition of Impact Biomedicines was announced, I believe it was on Sunday night, people were kind of disappointed. That's for a number of reasons. It's a privately traded company, so I think a lot of publicly traded company investors were like, "Oh, man! We're not going to profit off of that." But then, also, it's just not that splashy. It was a $1.1 billion deal that, maybe with some milestones, could be up to $7 billion. But it just wasn't the big acquisition that everybody wanted. And we didn't get that gratification until last night, Tuesday night, the Wall Street Journal reports that Celgene is in talks to acquire Juno Therapeutics, which is the news we've all been waiting for.
Campbell: Yeah. And maybe it was one of those things where the conversations were going on, but they had stalled, and they just didn't have everything ready in the timeframe that they wanted to. You and I can talk about some of the theories behind why Celgene might be interested in Juno, and I would love to get at least a second or two of your thoughts walking away from the presentation, what you think people's attitude toward the company was for 2018. But, yeah, I think this is potentially a very big deal. It's very intriguing, especially because it comes only a few months after Kite sold to Gilead Sciences (NASDAQ:GILD) for, what, almost $12 billion?
Harjes: Yeah, that was a $12 billion acquisition. Now, looking at these Juno talks that people are speculating are occurring -- I mean, I trust the Journal to report that accurately, but it hasn't happened yet. Juno's stock is up roughly 50% today. Their valuation now stands at just under $8 billion. So, you have people that think that this could be a $10 billion deal. You also have people that think it could be even larger than Gilead Sciences' acquisitions of Kite. I think one of the reasons for that is that Juno and Celgene already have a partnership that has been around for quite a few years now, and when Celgene initially bought a stake in Juno, it was at $93 per share. Juno currently trades at $67 per share. So, it's quite possible that you could find Juno's shareholders and the decision-makers at that company demanding a higher buyout price.
Campbell: Yeah. Of course, it was a different world back then. You still had JCAR015, you didn't have problems with cerebral edema that sidelined that drug. There's a few different things that are floating around in my head on this entire subject. You have Celgene looking at it and saying, we're in roughly for $93 for 10%, this company back then was worth, in our view, somewhere around $9.3-10 billion. So, they still own 9.75% of Juno. The big story, the big reason that they want Juno, is because they want the North American rights to JCAR017. We've talked about this on the show before, we've talked about CAR-Ts, chimeric antigen receptor T-Cell therapies. They supercharge the patient's immune system so they can bind to and destroy cancer cells better than current existing treatments, theoretically. The deal that Celgene has with Juno is for ex-U.S. rights, not North American rights. And you can argue that U.S. sales are the crown jewel of any drug, because of the way that we handle pricing and demand, and we have the biggest drug market in the world. I think, that's why people are excited about the opportunity, because they're saying, this makes sense, because why wouldn't you want to lock up the U.S. rights to JCAR017 before they file for the NDA? Assuming the pivotal trial reads out OK, theoretically you could get an application for approval filed with the FDA later this year or maybe early '19.
Harjes: Right. And that does hint at the overall story with Juno, which is that they were and are still a pioneer of CAR-T therapy, but they really fell behind their competitors after five patients died back in 2016 during one of their trials, and they had to end that program. This was the 015 program you mentioned earlier. Now, their lead candidate is 017. And that could hit the market in 2019, but they're certainly not first to market with it. Their hope now is that it could be best in class, which, from the looks of their data so far, seems like it certainly could be the case, but a lot rests on the data holding up over time.
Campbell: What I was thinking about too, is it worth the $11.9 billion that Gilead paid, but Kite didn't have the same kind of relationship for co-promoting. So, Gilead was able to secure the entire rights to that drug. Yescarta, which is the Kite drug, now the Gilead drug, Kymriah, which is Novartis' CAR-T, they're both approved already and on the market. Kymriah is approved for a different indication, but they just got priority review for the same indication. So, if JCAR017 does make it to market in 2019, it's going to be competing against two already-embedded CAR-Ts within the same indication. So, the hope has to be that either it's a better mousetrap and JCAR017 can win the sales away, or that there's a big enough market opportunity that the three of them can share.
Harjes: Yeah, absolutely. Looking at Celgene as a broader business and how investors should be viewing this stock as a potential buying opportunity, what else stands out to you besides this potential acquisition of Juno?
Campbell: The big story here is, what's going to reignite investor optimism following their stumbles last fall? People who follow Celgene are probably pretty aware that they had a disappointing Crohn's disease trial readout last fall. They also had some weak results for their psoriasis drug, Otezla. They reported sales growth that was less than people wanted to see in the third quarter. That basically, the bloom was off the rose with Celgene shares, knocked it from its 52-week highs down to where it is today, which, it still trades at a pretty good discount to where it was at the peak in 2017. So, people are looking at it and saying, if we're getting decelerating sales for Otezla, which was arguably responsible for a lot of the excitement and enthusiasm for the company over the last two or three years, what is it that's going to drive sales, reinvigorate sales going beyond 2019? I think we saw at the JP Morgan conference, 2018 sales and earnings estimates, and they reflect slower growth than we saw in 2017. So, investors have to be looking at this and saying, what's going to reinvigorate that sales growth, and push us out to 2020 and beyond?
Harjes: And a lot of it lies in the pipeline, both their wholly owned products and also some of their partnered compounds. For example, in their presentation, they highlighted a bluebird partnership that they have on a drug called bb2121, which is another CAR-T in multiple myeloma.
Campbell: Right. And that drug investors know because -- you have bluebird trading up about 10%, probably on enthusiasm that maybe Celgene will try to roll up all of these big partnerships at some point in time. bluebird's market cap is higher than Juno, I think it's $8-9 billion, but it's still less than Kite. bb2121 for multiple myeloma would be a huge drug, theoretically, because you look at Celgene, and Celgene has the market share leading first-line therapy, Revlimid, and a leading third-line therapy with Pomalyst. And those two drugs combined are generating out almost $10 billion in sales. And if you look at what bb2121 could do, it could expand Celgene into the fourth-line setting. I think that's a multi-billion-dollar marketplace. Investors should probably know that, unlike with the Juno deal, Celgene does have -- well, they have full rights, but bluebird is expected to exercise their co-promote rights for the U.S. So, they'll be sharing any kind of sales with bluebird on bb2121 if it eventually reaches the market.
I think the big story with multiple myeloma, Kristine, you would probably agree with me, is the fact that all the advancements we've seen are improving overall survival in that category, making the addressable market bigger and bigger, and that's helping support multiple myeloma sales growth at Celgene for the foreseeable future.
Harjes: Yeah, absolutely. Summing up on Celgene, the company believes it will launch 10 potential blockbusters over the next five years. If it does successfully, and they all hit their peak sales expectations, that could add over $15 billion in incremental annual revenue, which is pretty impressive. I've always liked what Celgene is doing. I like that they give long-term guidance. Really didn't like when they had to revise that guidance for 2020 late last year. That's also a big part of why they had such a rough 2017. But, I do like what Celgene is doing. I love that they have these partnerships. I will be very interested to see the price tag of a potential Juno acquisition, and also how the other partnerships pan out.
Campbell: With $19-20 billion forecasted for 2020, yeah, that's down from what it was before their disappointment last fall, Kristine, but it's still 14.5% compounded annual growth from 2017 through 2020. And EPS is expected to go to $12.50. That's compounded annual growth of 19%. It's certainly not tough times for Celgene. It's double-digit growth off of such a large base. It was only 2010 where sales for this company were $3 billion, and now we're talking, 10 years later, potentially doing $20 billion in sales.
Harjes: Yeah, absolutely. They've gotten so big, and they still have these very impressive expected growth figures coming forward. By the way, I saw the CEO of 23andMe present at a fireside chat, and she was just fantastic. This is a very interesting company, and this is not a part of the ad read.
Campbell: It's really interesting where we're going to be in 10 years from now in healthcare. We're certainly going to know a lot more about our bodies, our DNA and RNA, than we ever did before. Hopefully that will help lead us to getting better treatment, better primary care -- which of course dovetails nicely into the next topic, right?
Harjes: Yeah, absolutely. The back half of today's show, we're going to cover another company that I saw present at JP Morgan. We received an email toward the end of last year from Deborah from San Diego -- thanks for writing in -- about Teladoc, the ticker there is TDOC, which had just been recommended by The Motley Fool's Rule Breakers service. This isn't a company that gets much love from Industry Focus, so we wanted to spend some time to digging into the stock, because they're working in a really important area of healthcare that could truly revolutionize the patient experience.
Campbell: Kristine, it's interesting. When you mentioned talking about on today's show, I started doing more and more research on this stock, and the more research I did, the more and more transformative I came to believe this company could potentially be, and the whole concept of telehealth or healthcare on demand, however you want to look at this. I started thinking of it being almost like you see with Illumina, in how it's transforming our understanding of our DNA or RNA. Or CVS and how's it's transforming how healthcare is given in person by opening up so many of those MinuteClinics in people's local neighborhoods. And then I started thinking about Teladoc and saying, if I envision what healthcare and primary care is going to look like in 20 years, it could very well be that I'm staring at my smartphone and I have a hologram image of a doctor above it, and they're able to see me and evaluate me and talk to me as if I'm actually in a doctor's office. That's a pretty transformative technology, theoretically.
Harjes: Yeah. You're right, this sort of trend is something we see in other places, too. Think about how much more prominent teleworking is. There are so many people that... I don't know what the phrase is for that, telecommuting, teleworking, working remotely. And there are more and more technologies that are enabling people to connect in ways that they were previously unable to do. What telehealth is trying to accomplish, specifically Teladoc, is to provide on-demand appointments and a whole health platform using your phone, using your computer, basically going over the internet and using your webcams and the phone's calling parts to quickly and easily have a doctor visit. It's not for every single condition. There are still going to be critical care moments where you're going to need to go either to the ER or to your doctor or specialist. But, they've been expanding their platform, particularly with a fairly recent acquisition of a company called Best Doctors, which allowed them to secure access to more and more specialists. So, the variety of things that can be treated via their platform is growing.
Campbell: It's interesting, Kristine. There's two different parts of that. You're right, you're not going to be able to take care of urgent care, but you can certainly take care of episodic care. "I have this rash on my body, what the heck?" Or, if I have the flu and I need to get a prescription and I don't want to travel to a MinuteClinic and I don't want to go to my primary care doctor and I certainly don't want to wait, I want to be able to deal with someone relatively quickly, get my prescription filled and feel better. Then, you have the second advice market for really complex cases. You have Best Doctors, which is able to, if you say, "I have a cancer diagnosis, this is the treatment, this is the diagnosis," then Best Doctors is able to say, "OK. My second opinion on that is this, and maybe I have a slightly different idea or slightly different view of what the treatment should be for that."
And what I found really interesting about Teladoc is that they recognize that trying to market this service directly to individuals like you and me would be very hard and very costly. It would be very tough, I think, without doing the model they did. The model they did was to say, "We're going to go out and find healthcare plans, and we're going to find employers, and we're going to get them to offer this as an extra benefit alongside of what they're already doing as far as healthcare." Now you have workers at these different companies who, alongside of having regular healthcare insurance, they have the option to be able to call in and speak with a professional and get some advice without having to go anywhere for that. I think that's really advancing or pulling forward the market penetration. And maybe, maybe, we're going to get to a point where Teladoc can go from building momentum to getting flight altitude to being able to actually deliver profits to investors, which is something that they're not doing right now.
Harjes: Right, they're still fairly early stage. I love this business model, though. As you mentioned, it's a win-win for them to go directly to the insurers and to the companies that are offering insurance to their employees, because it's a differentiating factor. If you're an insurer and you can offer that, that's something that could potentially attract customers to you. And, as the insurer, you're saving money. There have been studies that show that clients save an average of $472 per patient visit. That's also combined with an average employee productivity saving -- meaning, not missing a day of work -- of $46 per visit. So, of course, if you're an insurer, you want this to be an option for the people that you insure, because it lowers your costs.
Campbell: And it's more efficient, too, it's a more efficient use of the doctor's time. They don't have to have all of those administrative expenses. Theoretically, you could have a doctor doing this from home on the side whenever they want to. They could fit way more visits in in the span of an hour then you could in a traditional office environment.
Harjes: Yeah, absolutely. One more thing I love about the business model is, it's 90% subscriptions, meaning 90% of revenue comes from subscriptions from those employers and health plans, as opposed to coming from the individuals using the service. There is a little bit of a per-visit charge, and that's where you get the other 10% of revenue. But subscription models in general, it's just more consistent, it's more reliable.
Campbell: It gives you a lot more visibility. With this company, the things that investors are going to want to keep an eye on are members, which is going to have to do with how many companies sign on with Teladoc. So, number of members growing is going to be good, because like you said, they get paid a fee per member that they cover, and that fee has grown from $0.40 in 2014 to $0.76 per member. That's growing nicely. More importantly, the membership has grown nicely, from eight million members to about 23 million members since 2014. So, that's very good. And of course, visits, the number of visits, how often are people utilizing the service. I think, for me, it makes a lot of sense that visitation is going to climb and climb as people start recognizing that this is a lot more convenient for them.
Harjes: Absolutely. It's not even just about that per-visit charge. It's really about securing the relationships with the insurers and the employers, because if the people they cover aren't using it, maybe you're not going to have as sticky of a relationship. But if it's something that people really grow to love and require in their health plan, then all of the sudden, you're not going to drop Teladoc, even if they do increase that subscription fee a little bit.
Something that I want to point out a little bit as well is, the utilization numbers are growing even faster than the patient base, which is really good. That means there's a wider adoption. And these numbers are still fairly low. There's only a utilization percentage of 7%, meaning that most people who have this available to them aren't using it. I think most people who have it available to them probably don't even know that it's part of their plan. Listeners, if this sounds great to you -- it's been a bad flu season, if you were sick in bed with the flu and you dragged yourself into an urgent care clinic and you would rather call up a doctor and do a FaceTime -- probably check this out and see if your plan provides it, because it's fairly likely that you might be covered.
Campbell: The other thing, we didn't even mention this -- there's so much to unpack here, and I know we're running a little tight on time -- is the fact that there's a lot of places in America where access to care really isn't good. You have these medical deserts where there aren't a lot of opportunities to see specialists or primary care doctors easily, you have to travel pretty far to do so. I think this is really going to fill a very important need in those areas that we should keep in mind.
As investors, I hinted previously, this company is still losing money, but sales are growing quickly. I think in 2018, they're expecting to see $350-360 million in sales. That would be up a lot from $232 million in 2017. But, they're expected to lose $1.47 per share. Now, that's better than the $1.83 they lost in 2017, but still, we have no real pathway yet to be able to say, "Here's the year, here's when they're going to get profitable."
Harjes: But this company very much is in the Rule Breakers style. If you're not familiar with our service, there's a whole bunch of items that make a stock something that fits the Rule Breakers model. A couple of them are definitely evidenced here. It's still small and growing and it might be losing money, and the valuation therefore is kind of off the charts. You can't do much of a P/E if you don't have earnings. But they're still early stage, and they're looking at such a humongous market. I like what you said earlier, Todd, about Illumina, because this is a company that's disrupting its market. It's the top dog, they really don't have any competition. Any smaller companies that are competing with them, I would say, are probably going to end up getting acquired by Teladoc. But it's the type of business where, the bigger your network gets, the stronger your competitive advantage is. And there is no close No. 2.
Campbell: I absolutely 100% agree with that. I think the only thing that I want to watch here is the cost side of the equation. Obviously, most of the healthcare spending for the sector goes through providers. So, the question becomes, how expensive will it be, providing these services? And does the market support a price that could cover those costs? And that's something we're going to have to watch over time. 100% agree with you. Again, like we started off the show, I look at where I think that healthcare and primary care will be in 20 or 30 years, and it's not me sitting in a doctor's office for a half hour waiting for him to finally call my name.
Harjes: Yeah, exactly. It's one of many ways in which the healthcare system needs to get more efficient, so I'm thankful that there is a company out there that's doing this. From a personal perspective, I wish them luck. I would love to have this wide network available to me. Alright, that will wrap us up for this show. Thank you so much, Todd, for being here with me today. 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. Thank so much, Austin, for your work, as always. He's our wonderful producer. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!
Kristine Harjes owns shares of Gilead Sciences and Juno Therapeutics. Todd Campbell owns shares of Celgene and Gilead Sciences. The Motley Fool owns shares of and recommends Bluebird Bio, Celgene, Gilead Sciences, and Illumina. The Motley Fool recommends CVS Health, Juno Therapeutics, and Teladoc. The Motley Fool has a disclosure policy.