Apple (NASDAQ:AAPL) plans to open healthcare clinics for its Cupertino employees and their families that will rely heavily on its technology. The decision reflects Apple's commitment to leveraging its ecosystem to revolutionize this $3.3 trillion dollar market. Could Apple become your primary care provider?
In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Kristine Harjes is joined by contributor Todd Campbell to discuss Apple's plan and what it may mean for shareholders. Also, the two explain how Gilead Sciences' (NASDAQ:GILD) new gene-editing partnership with Sangamo Therapeutics (NASDAQ:SGMO) could turn it into an oncology powerhouse.
A full transcript follows the video.
This video was recorded on Feb. 28, 2018.
Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It's Wednesday, February 28. I'm your host, Kristine Harjes, and I'm joined via Skype by fool.com healthcare specialist, Todd Campbell. Hey, Todd! How are you?
Todd Campbell: Hey, Kristine! I'm well. Glad to be on the show today. It's going to be a fun one.
Harjes: Yes, let's get right into it. Some news out of one of our most beloved biotech stocks, Gilead Sciences. Last Thursday, February 22nd, a collaboration between Gilead and Sangamo Therapeutics was announced. This licensing deal will use Sangamo's zinc finger nucleases, or ZFN, technology, to edit DNA to develop cell therapies for cancer.
Campbell: You know what's really cool, Kristine? We're going to get more into the nitty-gritty as we go forward, but when you think about where we may be heading in treatment from here, the whole concept of being able to go in and actually replace or edit out these parts of our genetic code that are faulty, is truly quite amazing. I was thinking, hey, maybe they could actually make my hair not be grey. [laughs] But I think they're going to focus more on some much more important things early on. There are a few different ways that companies are researching gene editing. You have zinc finger, which is something that Sangamo is doing a lot of work on. You have CRISPR Cas9, which is another more recent development way of doing genetic editing. Then you also have TALEN. Gilead seems to feel, based on this recent deal, that its best option for next-generation therapies is going to be using zinc finger.
Harjes: It's so interesting to me to see Gilead get into this business because it's only fairly recently that they've been very serious about pursuing oncology. This seems to be their next step after purchasing Kite Pharma a while back for Kite's CAR-T drug therapy portfolio. Now, in addition, they're going one step further and looking at how what Sangamo is doing might complement what they're working on with Kite.
Campbell: I think that's an important point. Gilead has always wanted to diversify itself away from its HIV franchise. They went from HIV to hepatitis C. Then, of course, as anyone who's been following Gilead Sciences knows, as they provided a functional cure for that disease, the patient population is shrinking, and thus so are sales, and the company is having to find new ways and new drugs to expand into new indications and replace that revenue. You mentioned the deal last year to buy Kite. That was pretty transformative because it basically elevated them to the forefront of gene therapy, this ability to take out patients' T-cells, reengineer them outside the body and then reinsert them after a 20-day period. That's a pretty remarkable development. We already saw them win approval of their first drug, Yescarta, last fall.
I think what we're seeing now with this deal with Sangamo is them thinking, what's next? If you do a little bit of research and spend a little time thinking about gene therapy in use in cancer, you'll see that it's kind of crowded. You have players like bluebird who are doing work on drugs for multiple myeloma with Celgene. You have Juno, which Celgene just acquired. You have Novartis, which has another competing drug called Kymriah out there. And I think Gilead is looking at Sangamo and saying, maybe we can use this zinc finger technology to go in and create cells that we can use right off the shelf. We'll no longer have to take the patient's cells, ship them somewhere else, have them reengineered and ship them back. We can use it right off the shelf. That would be remarkable.
Harjes: Yeah. Right now, CAR-T therapy is incredibly cumbersome and it's very expensive, because as you mentioned, you're taking the patient's own T-cells, extracting them, editing them, and putting them back into the body. But hopefully, with Sangamo's efforts, you can make a more off-the-shelf type of product pre-made by either healthy donor cells or from renewable stem cells. This could be something that's already on hospital shelves and ready to go, as opposed to having to go through the entire process that CAR-T currently requires.
Campbell: Right. Sangamo has been working on this zinc finger technology for about 20 years. It's pretty much the primary patent holder of this technology. That differentiates itself a little bit from CRISPR Cas9. Our listeners are probably asking themselves, why didn't Gilead go out and buy Editas or CRISPR Therapeutics (NASDAQ:CRSP) or something like that to get involved in CRISPR Cas9? Obviously, there's been a lot of attention spent by media on CRISPR Cas9, what's this zinc finger thing all about? I think Gilead basically looked at it and said, we know there's a risk of off-target when you're doing gene editing, and that can be kind of scary. You don't want to have a situation where you jump in with CRISPR Cas9, which is a relatively new technology, and it turns out that there's a lot of off-target gene editing that goes along in using it. Since zinc finger has been researched for some 20-some odd years by Sangamo, it appears that Gilead Sciences thinks, we know better what we're getting into from a safety standpoint. I think Sangamo's zinc finger nucleases have been used in over 100 patients in clinic. CRISPR Cas9 is only looking to get into clinic this year.
Harjes: This is a surprisingly advanced company. They have a roughly $2 billion market cap. They're working in 10 different indications on a whole range of different diseases. One that stands out to me is that they're working in both hemophilia A and hemophilia B. They have a partnership with Pfizer, actually, in hemophilia A. We know that these are enormous markets. Both their A and B products are in Phase I/II development. So, they have a lot going on, and yet this is still a pretty big deal to the stock, that is has this partnership now with Gilead. I believe on the day of the announcement, shares gained about 14%.
Campbell: And if you look at it from, I'm an investor in Sangamo, or I'm considering Sangamo, what do I want to do with this, what does this mean for it? Gilead has given them $150 million up front. Then, depending on regulatory milestones, sales milestones, developmental milestones, Sangamo can earn up to another $3 billion. That's spread over a minimum of 10 different products. So, do a little math there, best case scenario is a maximum of $3 billion, or $300 million per product developed by them. That's not insignificant at all. Plus, they'll get royalties on any eventual sales.
That being said, we always have to tamp down some of that enthusiasm. Nothing is in clinical trials right now from Sangamo in cancer. It's going to be a while before we have any idea whether or not zinc finger can be used in this way to develop these next generation drugs. We will, however, get a little bit of insight into the technology later this year, when data comes out in Hunter disease, or MPS II. At some point this year, they're hoping by the first half of this year, they'll be able to provide us a little bit more insight into how that trial is going. Maybe that would help validate Gilead's decision.
It's definitely fascinating, it's fascinating times. I think it's a smart investment. Who knows, in 10 years from now, this could be the big thing, or the standard of care that's used to cure cancer.
Harjes: Investors and industry watchers have been pleading with Gilead for a while now to make acquisitions and beef up their portfolio and their products using all this cash that they have. But, that being said, because Sangamo is so early stage, I'm actually really glad they structured the collaboration in this way as opposed to an outright buyout. Now, you have an initial investment and then milestones contingent on different events that might happen along the way as this develops further. There's huge upside that I think they've captured with this. Best-case scenario, you get adoptive cell therapies breaking into solid tumors. This would most likely be in combination with drugs like PD-1 inhibitors. You could even see, one day, this type of therapy getting into the treatment of other diseases. These are also diseases that Sangamo is working on. So, I do see a tremendous amount of upside at a pretty minimal risk to Gilead.
Campbell: 100% agree. They keep their optionality. I know that Kite had a relationship with bluebird bio on some research into gene editing, so they already have that kind of relationship. I wouldn't be surprised to see Gilead sign others of this kind of collaboration deal and spread itself around. Because, again, we don't know which one of these gene editing approaches is going to end up becoming the safest, more favored of all of them. It's going to take a few more years for that to all shake out. There's no question, though, that Sangamo's approach is the furthest along in clinic, and that does give it an advantage.
Harjes: Absolutely. Since we've been doing this show, Todd, it seems like there's more and more overlap between the various sectors that Industry Focus covers, particularly with Tech and Healthcare, which is becoming more and more integrated every single day. In yet another example of the two sectors overlapping, CNBC reported yesterday, Tuesday, that Apple is opening a group of medical clinics for its employees and their families called AC Wellness.
Campbell: The lines are blurring, Kristine. The lines are blurring. Technology and Healthcare, I think we're definitely going to be talking more and more about how we're going to be using technology to try to improve the healthcare system. You and I did the show recently talking about how Amazon, Berkshire Hathaway, and JPMorgan formed a consortium to try to figure out how to drive down healthcare costs. I think Apple's latest move to create healthcare clinics for their own employees shows that private companies are very interested in figuring out whether or not they can do healthcare better. And obviously, there's a major need, Kristine, because we spend so much money on healthcare every year.
Harjes: Yeah, a lot of these major tech companies have so many employees that it ends up being a fairly large expense item just to take care of them. Studies report that health problems result in 69 million workers reporting missed days each year, and that reduces economic output by $260 billion. So, this is just one more indication, this Apple initiative, that the large tech players have skin in this game and they want to throw some of their brains and some of their financial muscle around to try to cut down on those expenses, and give people a better experience, too.
When you look at what Apple is trying to do with these wellness centers, it's not just dispensing drugs, it's not just going in for a regular checkup. It really does seem, from early indications, which would be the website that they've propped up and some of the job postings that they've announced that they're looking for people to fill, it's more comprehensive than that. They're looking for people who can do population health management, and people who can design lifestyle plans for these Apple employees and their dependents, in order to have a more holistic view of wellness.
Campbell: And that dovetails very nicely into what we've seen out of Apple in the course of the last couple of years, talking about their plans for healthcare. Obviously, they have the Healthcare app, and they're trying to get more and more people to figure out new ways to use their ecosystem to create healthy lifestyle type solutions. They're also internally spearheading all sorts of things. We've talked in the past about what they're trying to do with wearables, the Apple Watch, being able to use that, use the heart study in December that they announced, use that to try to ferret out whether or not you might be at risk of an atrial fibrillation. Last year, we also heard Tim Cook say that he was experimenting with an Apple Watch to track his blood glucose levels. Clearly, Apple believes that technology can contribute to improving preventive medicine. Given the fact that we spend $3.3 trillion a year on healthcare, anything that can reduce healthcare costs, such as preventative medicine, would be a welcome advance.
Harjes: And for now, much like the JPHathAzon project, this is going to be limited just to Apple employees and their dependents. But, who's to say what could come out of it?
Campbell: Yeah. You know, what's really interesting is, if you go back last year, CNBC was actually reporting that Apple was chatting with a venture-backed company called Crossover Health. They are a start-up that's developing clinics for various private companies, and actually, Facebook and Apple were customers of theirs. That deal fell through. But, if they were talking to Crossover, it certainly makes me feel like, while it may start out for Apple employees, they're thinking much bigger than this. They're thinking, how can we use healthcare to drive more people into our ecosystem?
Harjes: Yeah, it's so Apple of Apple. They want to provide this start to finish type of experience where, once you're a part of this ecosystem there's no reason that you would leave it, because it only gets more and more beneficial as they add more services. So, say you have an Apple Watch, and you're monitoring your glucose through it. If you then also have the ability to go see somebody in a medical center that will look at that data with you and help you develop a comprehensive plan for how to approach your diet and your exercise to better manage those glucose levels, that's huge, and that's super sticky. This is exactly what you see when you look at both their hardware suite of products and also the services that they're adding on top of that. This is a really nice parallel with that typical approach that Apple has taken to their revenue.
Campbell: Let's take that one step further, too, Kristine, and think about how many resources they have and their ability to analyze data, and the steps that they're taking in artificial intelligence. In January, they announced a deal now where you can have your electronic health record in the Apple ecosystem. They cut deals with athenahealth, with Epic, with Cerner, to tie it all together. Now, holding your smartphone, tying it in with your Watch, having your entire electronic health record in one place, and then being able, theoretically, someday, to walk into an Apple clinic with all of that insight? Wow. That could definitely shake things up.
Harjes: Yeah, it's super interesting to watch this all develop. I'm particularly excited looking at the upcoming South by Southwest Conference, which we'll be sending some Motley Fool analysts to. Every year, it seems like there's more and more health news coming out of this typically tech-centric conference, so I'm sure we'll only be getting more news items to cover, both on this show, the Healthcare show, as well as the Friday Tech show.
Campbell: Yeah. You know what does scare me a little bit, though, Kristine?
Campbell: [laughs] We know that Apple likes to have a contained silo ecosystem. It's not like you can access iTunes with your Android phone. And we know that Apple is a "premier" product. In Q4, Gartner said that Apple's iPhones accounted for about 20% of total smartphone sales, and their iPhone X is basically a break-the-bank premier product.
Apple is investing a lot of money in their healthcare initiatives. And Tim Cook has said in the past that he feels that these are business models, which is a contrast to what we're seeing with Amazon, JPMorgan and Berkshire's consortium, which, they've said they're going to make a non-profit. One worry, one thing we'll have to watch, is make sure it's not a case of Apple being able to go out and hire the best and the brightest minds in the industry and then put them into a siloed ecosystem that really only people who have access to Apple phones are going to be able to gain access to. And I will admit, Kristine, I'm a Samsung user, and when they announced the heart study, I was so intrigued that I may indeed switch over myself. But, maybe that's not the case for everybody.
Harjes: Yeah. That's a sample size of one, but I still think that's fairly indicative. And that's kind of the point, too, of this business model. If you can lock up the best of the best in hardware or software or whatever it is, you're going to attract customers. And then you build this sticky web and you catch them and keep them within your chamber, which is both brilliant, and also, as you point out, kind of frightening.
Campbell: Yeah, and it kind of makes you wonder what's going to end up happening with players like Samsung and some of these other large providers. Are they also now going to start trying to figure out ways that they can partner up in healthcare, to try to make sure they don't get left behind? Apple is brilliant, and what they're doing here is brilliant, and it could significantly disrupt healthcare in fantastic ways. But, like anything else, we'll have to wait a few years and see how this all plays out.
Harjes: Yep, absolutely. We'll keep reporting back in the meantime. In wrapping up this week's episode, I'll encourage everyone listening to find us on Twitter. We're @MFIndustryFocus. Or, you can join our Facebook group, it's called Motley Fool Podcasts. There, you can connect with a whole community of listeners as well as all your favorite TMF analysts. 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. This show is produced by Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Kristine Harjes owns shares of Apple and Gilead Sciences. Todd Campbell owns shares of AMZN, Apple, CELG, FB, Gilead Sciences, and PFE. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends AMZN, Apple, ATHN, BRK-B, BLUE, CELG, FB, and Gilead Sciences. The Motley Fool has the following options: long January 2020 $150 calls on Apple, short January 2020 $155 calls on Apple, short March 2018 $200 calls on FB, long March 2018 $170 puts on FB, and long May 2018 $85 calls on Gilead Sciences. The Motley Fool recommends CERN, EDIT, and IT. The Motley Fool has a disclosure policy.