The Big Thing to Watch at ASCO 2018

Loxo Oncology, Inc. (LOXO) is awaiting a Food and Drug Administration (FDA) decision on larotrectinib, a precision medicine for cancer in patients with NTRK gene fusions, but it's the company's LOXO-292 treatment for cancer in patients with RET fusions that could make it the MVP of the American Society of Clinical Oncology (ASCO) conference in 2018. After the release of the ASCO presentation abstract in mid-May, Loxo's shares rocketed higher. Is this company's stock a buy?

In this clip of The Motley Fool's Industry Focus Healthcare, host Kristine Harjes is joined by Motley Fool contributor Todd Campbell to discuss LOXO-292's opportunity and how competitor Blueprint Medicines (BPMC 2.66%) is challenging it. Also, the two analysts discuss why shares in Abiomed, Inc. (ABMD) are soaring higher and if this is a high-priced stock that investors should embrace or ignore.

A full transcript follows the video.

This video was recorded on May 30, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is May 30th, and this is the Wednesday 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: Hi, Kristine! Are you dusting off your foam fingers and getting all your pennants ready for the big conference next week?

Harjes: [laughs] Oh, man! I'm looking at Austin, our man behind the glass, who is currently behind the glass, and he's back there fist pumping because he has his Caps jersey on. I'm like, "Oh, you must be talking about hockey playoffs!" [laughs] 

Campbell: [laughs] No! The other most important thing!

Harjes: The even bigger, more widely followed ASCO Conference. [laughs] Yes, you're right, the American Society of Clinical Oncology has their annual meeting slated for June 1st through 5th, so that's coming up and hotly anticipated.

Campbell: Yeah, we're looking forward to it. I've talked to some of the other fellow Fools that focus on healthcare. We've got some great content we'll be providing people throughout the course of the main event.

Harjes: Yeah, it should be pretty exciting. This is one of the biggest investing conferences in the healthcare sphere of the year. There's typically a lot of excitement from investors both during the conference itself, but also leading up to it, when companies release the abstracts of their presentation. 

The first story that we want to tell today is about Loxo Oncology, their ticker is LOXO. This company was a wild success last year at ASCO. This year, it looks like they're going to steal the spotlight again. The stock has already enjoyed a nice 20% pop when investors got a peek at their abstract. Why were they so excited?

Campbell: Not very often do you get to be the MVP two years in a row at the ASCO Conference, but Loxo Oncology has an opportunity to do that. One of the reasons I think people are so excited about what's going on at Loxo Oncology is that they're part of this new class or approach to treating cancer patients that's focused less on the origin of where that cancer is starting -- so, the pancreas, or breast cancer, or lung cancer -- and instead, going right to the root cause of the cancer. So, looking at genetic abnormalities, or mutations, or, in the case of Loxo, looking at these genetic fusions.

Harjes: Yeah. This is a pretty interesting new approach, and it falls right into the broader trend of personalized medicine that we're seeing. The abstract specifically that came out on, I think it was the 17th of May, a couple of weeks ago, was data from a Phase I trial of a drug called LOXO-292. This is for tumors with a mutation in the RET gene. 

A little background on the science here. The RET gene contains the instructions for making the RET protein, which receives signals for turning on other proteins. Basically, why this matters is that a mutation here can cause cells to grow abnormally and lead to cancer. The drug that they're working on is being studied across several different cancers -- non-small cell lung cancer, papillary thyroid cancer, and medullary thyroid cancer -- all specifically looking for mutations in this gene, as opposed to, like you were saying, Todd, just saying, "We're going to treat it based on the location of the cancer." Instead, it's about the genetics behind the cancer itself.

Campbell: It's so exciting, it's such a major advance, to think that we have enough insight now into how our genes work and how they contribute to cell function that we can start to design some of these precision medicines that are really going to have a much better likelihood, I think, of working, especially within late-stage patients who really don't have a heck of a lot of other treatment options. Much like the first drug that got them the MVP at ASCO last year, which I'll call Laro, Larotrectinib, this is going after fusions, gene fusions, that aren't supposed to occur. And they don't happen very often, right, Kristine, but cancer is so common that even when you're talking about 2% or 10% of a particular cancer indication being tied to these abnormal RET fusions, you're still talking about a relatively substantial patient population, thousands of patients.

Harjes: Absolutely. Just to put some numbers behind what you were just saying, only about 2% of non-small cell lung cancer cases have this RET mutation. But, because there are estimates that 234,000 people will be diagnosed with lung and bronchus cancer every year, even though just 2% of those patients are likely to have a RET mutation that this drug addresses, you still end up with an addressable patient population of about 4,600 people. And that's just in that lung cancer indication alone. These numbers vary when you look at the other cancers as well. Overall, as you were saying, there are a lot of people that could benefit from this drug.

Campbell: RET fusions are most common in thyroid cancers, specifically medullary thyroid cancer, MTC. But, those are a lot smaller addressable markets. I think it's 10-20% of the papillary thyroid cancer market, that works out to like 4,000-9,000 people. It's like 60% of the MTC market, and that works out to about 3,000 people. I mean, if you mash all this together, you're still talking about being able to treat 10,000 patients. Since most of these drugs come to market with six-figure price tags, I think that, from an investing standpoint, you're looking at this and you're saying, not only is this crazy awesome science, but you're also saying, this could be a crazy big opportunity for Loxo Oncology to contribute money to the top line that eventually can reward investors with some upside. We're already seen that, right, Kristine? The shares have absolutely taken off since last year's ASCO. And then, after this abstract dropped, they soared some more. So, this certainly isn't a cheap stock for investors to buy.

Harjes: No, it's not. But there's more going on with this company than just LOXO-292 that we've been talking about. You briefly mentioned Laro. Larotrectinib is the full name, but we're going to go with Laro for simplicity's sake. This drug is actually a lot closer to making it to market. Yesterday, actually, the FDA accepted the new drug application for Laro and granted it priority review. Now, this is on top of previous designations of orphan drug and also breakthrough therapy. So, clearly, the FDA is pretty excited about the potential of this drug, and they should be making a decision on or before the 26th of November.

Campbell: And, you know, it's not just us investors that are excited about the potential of Laro, it's also Bayer. [laughs] Bayer AG went out and actually licensed the rights to Laro last November, before they even filed for FDA approval, because they were so impressed by the data that was presented at ASCO -- again, being able to go out and see relatively high overall response rates within a small patient population, probably around 3,000 people a year, if it gets approved. Certainly, an approval, though, would be a major step forward in this approach toward precision medicine.

Just going back really quick to the RET fusions, Kristine, one of the reasons that I really want to focus on this company next week as I'm looking through and digesting how investors and participants view the data that they put out there on their RET inhibitor, they're not the only ones out there who are working on a RET fusion drug. You also have another company out there called Blueprint Medicines. The symbol there is BPMC. They're also putting up some pretty interesting data for their RET mutation drug. Earlier this year, they made a presentation at another conference a couple of months ago. They won't be doing an oral presentation like Loxo is at this one. 

But, you're going to want to see how that all shakes out with industry participants. Do they look at the Loxo data after the oral presentation and say, "Wow, this data is just so much better than what we've seen from Blueprint," or, do they look at it and say, "You know what? I think that the real conclusion here is that both of these RET drugs are effective." And if you look at the data that we've seen so far, Kristine, the response rates -- you can't compare trials that are separate directly to one another, it's bad science to do that. But, you can look at it and you can say, yeah, they both delivered overall response rates that are pretty high for this kind of patient population, and that's just that they're both effective drugs.

Harjes: Yeah, absolutely. Even though you can't head-to-head them, people are going to be doing that anyway. But they're so early stage in Phase I that the numbers are pretty small. Without a head-to-head trial, you really just can't directly compare the two. It will be important to keep an eye on what Blueprint Medicines is doing, because these are very similar drugs with a similar target.

Campbell: Right. And, Kristine, sorry to interrupt for one quick second, because I didn't want to lose that train of what you've just triggered there -- something to remember there, too, is, although these are Phase I data, just like with Laro, there's an opportunity, potentially, to get to the FDA sooner based on Phase II data, because this is such a big unmet need in late-stage patients.

Harjes: Yeah, for sure. One thing that I do want to touch on again is this licensing deal with Bayer that Loxo has with Laro, their lead drug. This is really important for their funding. Loxo has not had to dilute their investors in a while. I think it was mid-2017, the last time they issued new shares. And hopefully, they won't have to do that again. Which, if you follow along with early stage biotechs, that's very common, where in order to raise money and continue progressing the pipeline, companies will need to issue new shares to raise money. 

Now, with this gigantic German company, Bayer, backing them, they have a lot of cash coming in from this partnership, which will not just be beneficial for Laro itself as they build up the sales team and build that expertise, but also in progressing the earlier stage pipeline.

Campbell: That's an awesome point, Kristine, and something that we have to remember. They got $400 million upfront in that deal. They can get another $450 million in regulatory and first-sale milestones. Then, on ex-U.S. sales, they can get double-digit royalties plus another $75 million in sales-based milestones. So, you're right. If we get the approval in November on this drug, you can immediately finish the year with a few hundred extra million dollars in your pocket, depending how things go. And that would go a long way toward conducting or paying for those trials for the RET drug.

Harjes: Absolutely. As we head into ASCO, keep an eye out for presentations from Loxo. Their abstract utilized January 2018 cutoff date data, but the presentation itself will utilize an April 2018 cutoff date. So, you'll get slightly updated numbers, which hopefully will trend in a positive direction. Make sure to keep an eye out for more coverage on Loxo, on Blueprint, and all the other companies that are presenting at ASCO. That'll all be on fool.com.

Moving on to the back half of today's show, we're going to continue last week's theme of medical device makers, because apparently, our listeners were very excited about the medical device makers. We got a lot of good feedback about that. 

Today, we're going to talk about Abiomed, which is a $17 billion market cap company whose stock has doubled since just January of this year. Both of these companies, Loxo Oncology in the front half of the show, and now Abiomed, have been very, very high performers, but they're both kind of under the radar.

Abiomed's flagship product line is the Impella heart pump, which is the world's smallest heart pump. Revenue has been growing very swiftly with seemingly no end in sight. Todd, what's your take on Abiomed?

Campbell: I'm so excited to be talking about this stock. It's kind of funny, right, when you think about it. We oftentimes tend to expect the biggest returns coming from the biopharma area, not from the medical device area. When you see that return year-to-date, it's like, what?! [laughs] Double my money in a few months in this company? Especially for a company as big as this, right? $17 billion market cap! So, you have to ask yourself, what's the excitement here? What's the reason for excitement at Abiomed? And, what's the potential for this company to continue to grow and deliver for investors? 

I think that you did a great job setting the stage here to understand that what they're doing is, through medical devices, they're attacking a very, very big need for devices that can help relieve the stress that gets put on the heart following a heart attack. If you're able to relieve the heart from that stress of pumping on its own, either prior to or during surgery, or in the hours and potentially the days following that surgery, then you can get better outcomes. You can have less of a risk of complications, less of a risk of a readmittance back to the hospital after they've been sent home, and less time overall spent within the hospital, which theoretically can save payers some money there, too. 

So, really, what we're talking about is the Impella heart pumps. Those are used temporarily from hours to a few days. They're used in patients who are at a critical risk -- they've had a heart attack and they're also in shock.

Harjes: Yeah, absolutely. This is a very, very large market. Heart disease, as many of our listeners will know, is the leading cause of death in the United States. It kills 875,000 people per year. It costs our healthcare system $555 billion, which is estimated to grow to $1.1 trillion annually by 2035. In that same year, 2035, it's estimated that 45% of the United States population will have heart disease, which is just a frightening and insane statistic. 

Abiomed is estimating that about 221,000 U.S. patients per year would benefit from procedures using their Impella product. Despite seeing double-digit growth for revenue for quite a while, they still have a pretty long runway. They're just getting started. They don't seem to have any substantial competitors. They have that first-mover advantage. It looks like it could be early days for this company.

Campbell: Fiscal year 2017, their sales grew 35% to $445 million. In fiscal year 2018, their sales grew, again, by 33%, to $594 million. I think what got people really excited was the fact that that was better than the guidance. The guidance was for 31% growth, $582 million. 

The other thing that investors should know is that this has been a profitable company since 2012. They're making money. They had $90 million in operating income in fiscal 2017, and then, that jumped in fiscal 2018, just finished up, to $157 million. So, up 74%. Your operating income grew at a much faster rate than your revenue growth, which suggests to me that as these devices are getting used more frequently, they're able to leverage their fixed costs and really accelerate their profitability for investors. Maybe that's one of the reasons that the company is debt free and its cash stockpile has been growing for three consecutive years.

Harjes: Yeah. The stats that I mentioned were U.S. stats, but they're not even just based in the United States. They're also in Europe, they have approvals there. They launched in Japan in September. They have a presence in Germany. And even though expansion is kind of slow -- and management routinely reminds investors that it has to be slow in order to ensure good outcomes, because you need to be trained to use these pumps, it's not something that you can just drop off and go away -- they have the entire world out there that they're just starting to reach. And when you think about the demographic trends in general across the entire globe of an aging population, I've said it so many times already just in this one segment, but they really do seem like they have a huge runway ahead of them.

Campbell: Well, just to put that into context, in the fiscal fourth quarter, the one that just wrapped up, their overseas sales, their ex-U.S. sales, were only $22 million. So, a very small proportion of their total sales is coming from the international markets right now. And, by the way, that was up 107% year over year, and it was really tied to one country: Germany. So, as Japan starts to accelerate, as other countries start to get more interested in the opportunity to use Impella, I think that, yeah, you could see sales grow substantially. The company, Kristine, estimates this is a $5 billion market opportunity, and they say that they're only about 9% penetrated into it.

Harjes: Yep. And the other thing that's important to realize about the business model is that there's recurring revenue. Their hospital reorder rate stands at over 90%. So, it's sticky. Once you're trained on using these, you're probably not going to move to a competitor. I saw on the fool.com Premium side of things in our Supernova service, an analyst compared this company to Intuitive Surgical, which is the robotic surgery giant. She pointed out that there were similarities in the business model, where you have that recurring revenue, there's a product that will become the standard of care, there's a long growth runway, and really solid financials. I like that comparison a lot.

I think one more thing to add to the list of why these two companies are fairly similar is a nosebleed valuation. This company is definitely not cheap, they're trading at about 30X the last 12 months of sales. Their P/E is several hundred, and that's TTM. It's not even that much better when you look on a forward basis. But, like you said, they have a very strong balance sheet. They've been profitable since fiscal 2012. So, I see a lot of similarity with Intuitive.

Campbell: Yeah. Value investors are not going to be tucking this in a portfolio, similar to what we were talking about last week on the diabetes show. These things are richly valued. But, that's not necessarily a reason to not have a stock like this in your portfolio. You need to take that valuation in the context of where the company's sales could be in five or ten years. You have to take that longer-term look and say, if they're only 9% penetrated into this massive market now, can they grow into that valuation? I'll let someone smarter than me make the answer to that. But, I'm very, very excited by the opportunity to really improve a lot of people's lives. This is a medical device that can save lives. That makes the potential for it to be a must-use device in hospitals, not a nice-to-have device.

Harjes: Yeah. I really like what this company is doing. That will be a wrap for today's show. Any comments or questions, you can always drop us a line at [email protected]. We love to hear from you. Let's go, Caps!

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!