Drugmakers' dustbins are filled with failed attempts to slow the progression of Alzheimer's disease, yet drug developers, including Biogen (NASDAQ:BIIB), remain undaunted in their pursuit of new treatments. Recently, Biogen reported data from a midstage trial that suggests it could be rewarded for its perseverance. In hundreds of patients, the company's BAN2401 successfully slowed disease progression as measured by the Alzheimer's Disease Composite Score (ADCOMS). Is this the breakthrough patients have been waiting for?

In this episode of Industry Focus: Healthcare, host Kristine Harjes is joined by Fool.com contributor Todd Campbell to discuss the data, the challenges associated with developing Alzheimer's disease drugs, and the impact on Biogen investors.

Also, the two weigh in on Amazon.com's (NASDAQ:AMZN) decision to enter the mail-order pharmacy market with its acquisition of PillPack.

A full transcript follows the video.

This video was recorded on July 11, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is July 11th, and this is the Wednesday Healthcare edition of the show. I'm your host, Kristine Harjes, and I'm joined by healthcare specialist Todd Campbell via Skype, as usual. Todd, what's going on?

Todd Campbell: Hi, Kristine! How are you?

Harjes: Pretty good. We had a fire drill at HQ this morning. That was very exciting.

Campbell: That's always very exciting, not necessarily in a good way. Hopefully it was limited to just a trash can, right?

Harjes: There was actually no fire at all, it was just a drill. That's great news.

Campbell: That's excellent news, except that you had to go back to work.

Harjes: Well, I had to finish up my notes to the podcast! Fortunately, I was able to get them done, and here we are! [laughs] 

Campbell: Of course! 

Harjes: A couple of weeks ago, Amazon announced an acquisition of PillPack, which is a private company that ships prescription drugs to customers. It's pretty cool. They're already pre-sorted into daily packages, they have very clear labels on them. They come out of a container, kind of like how you would pull a ticket at a deli. But instead of getting a number, you actually get your day's pills. It's pretty neat. 

The deal was for an undisclosed sum, but it's reportedly around $1 billion. Pharmacy stocks were instantly crushed. They lost about $10 billion in combined market cap. What's going on here?

Campbell: They got walloped. They lost all that market cap for what's reported to have been a $1 billion deal for a company that, last year, the estimate is that they did about $100 million in sales. Obviously, people are extrapolating this out to be a much bigger potential deal than what those numbers might suggest. 

I think what might be helpful for listeners, as we're chatting about this deal, is to keep two things in mind as part of a way of framing our conversation. First, every year in the U.S., there are about 450,000 preventable medication-related adverse events that occur. Two, about 50% of Americans fail to take their medicine as their doctor prescribes. Keep those things, listeners, in the back of your mind as we're having this conversation. You might understand why Amazon is so interested in PillPack and the potential opportunity here.

Harjes: We know that Amazon has been trying to get into the healthcare space for a while. This is something that Jeff Bezos has been thinking about for years. When you think all the way back to 1999, Amazon purchased a stake in drugstore.com. That ultimately failed. Walgreens ended up buying this company, which was not a money-making company, in 2011. It was ultimately shut down. There has been a history of interest from Amazon in this space. 

We recently have been getting more news about the conglomerate that they're forming with JPMorgan and Berkshire Hathaway combined with Amazon to try to reinvent the health insurance space. That's something that a lot of people have their eyes on. Amazon has this history of disruption. I saw this amazing quote from an analyst with Telsey Advisory, his name is Joseph Feldman. He said, "When Amazon sneezes, everybody else catches a cold." 

This is something that's going to be true in healthcare, just like it was true for, say, the grocery stores, which all got wrecked when Amazon bought Whole Foods. We saw that here, as well. It's an established phenomenon that when Amazon wants to play in a certain game, they're going to be highly disruptive.

Campbell: Reports have been swirling for about a year that they might be interested in somehow getting more involved in the pharmacy marketplace. Last year, we talked a little bit about the potential for them to create their own pharmacy benefit manager for their employees. There were rumors that perhaps they might go out and try to do an acquisition or somehow get into the retail pharmacy marketplace, and that they had acquired licenses to sell medications in a few different states. Of course, you had that announcement earlier this year that they're forming the nonprofit with JPMorgan and Berkshire Hathaway. You've had some discussions about them kicking the tires to supply medical devices, equipment, and other things to hospitals and labs.

They're absolutely interested in this market. You can't blame them, especially in the pharmaceuticals, because it's a huge market. I think in 2016, about $329 billion was spent on prescription drugs in the United States. Last year, that increased to about $338 billion. This year, that's supposed to increase to about $360 billion. We can all imagine that as we get a much larger, older patient population, the use of pharmaceuticals and medications is going to climb. The majority of people who have multiple prescriptions are older people. I think there's a tremendous opportunity for Amazon to leverage PillPack.

Honestly, Kristine, I wasn't familiar with PillPack until this news broke. I'm sure millions of other people weren't, either. It's probably the best thing for the business. I wouldn't be surprised if their revenue soared in the first few days after the announcement of this deal, because it's really quite a fascinating business model.

Harjes: Yeah, I agree. I hadn't heard of it, either. Although, now that I'm reading up on it, apparently there were some rumors for a while about a very large company buying them, whether that was going to be Walmart or Amazon. When you're reading the numbers about how big this prescription pharmacy space is, it really does make me want to draw the comparison to the reported revenue of only $100 million for PillPack. So, yes, they could definitely see a sizable jump in that, just from all the publicity now. 

But, they're still tiny. They're focusing on chronic disease patients who are taking multiple pills per day, people that are opting to fill every 30 days. That's the PillPack model. Many people would prefer the 90-day fill schedule, because that's often cheaper. That's something that people might still turn to traditional channels for. 

Ultimately, when I'm looking at whether this is a huge threat to companies like CVS (NYSE:CVS), I'm not sure if the market reaction was really warranted. PillPack still works with the big PBMs. It's not trying to disrupt them. There are still plenty of reasons why traditional retail pharmacies will succeed. It's such a huge space. 

There's a need for something like PillPack, but I don't see it ever eliminating the need to go fill a prescription at, say, a CVS, especially considering that these retailers are not resting on their laurels. For example, you have CVS trying to merge with Aetna. That right there is such an opportunity to, say, offer a discount if an Aetna-insured patient fulfills their prescription at a CVS store. There are plenty of ways that these large retail pharmacies will be able to fight back.

Campbell: CVS is also experimenting with same-day delivery in some markets, they're doing one to two-day delivery. In other markets, they're allowing you to bundle together items that they sell in the front of the store in those deliveries. All of that is them laying the groundwork to be able to compete more effectively against what could happen with Amazon down the road. 

Theoretically, Amazon could leverage its Whole Foods marketplaces as a place where people could go to pick up their pillpacks. They could also leverage the supply chain geniuses. They could leverage their experience in automation and delivery to really challenge, over time, some of these things. 

But you made a very good point -- you could triple, quadruple sales, and you're not even denting the sales of these major pharmacy companies. If you look at Walgreens, Express Scripts, CVS, and Rite Aid, they control about 50% of all of that prescription drug spending. These companies are racking up hundreds of billions of dollars a year, collectively. I don't think that it's going to be a situation where PillPack puts these companies out of business any time soon. 

I think what's interesting is, PillPack has already had amazing success, given how young it is. It started in 2014. We're already at a $100 million run rate, and I imagine it could go much higher, especially if they do something fun like tie it together with Prime, do some fun things that way. 

One of the things that investors should think about, what I started the conversation with, think about -- the way that we fill prescriptions today vs. the way Amazon delivers goods. If you look at the way we do it today in the pharmacy, it's antiquated. It's not very modern-day. PillPack, being a relatively new company, they've designed their system to be very automated. 

For instance, they use robots to do the pill-picking that they're going to use to put together all the drugs to put into these individual pillpacks that they're going to send you. They synchronize all of your prescription drugs. If you take five prescription drugs a day, and all of those are getting renewals at various times throughout a course of a month, that can be very confusing for patients. Synchronizing them, getting them on the same schedule, is a big deal. I also know, Kristine, from my own time taking medication, if I don't take it in the morning, I oftentimes wonder if I actually took it that day. That obviously becomes a much bigger problem if you have lots of lots of different medications you're taking every day. 

So, I think there are advantages here in automating the whole process of fulfilling medications, but also in simplifying patient experience and improving their adherence to the medication. I think that's where Amazon might be able to really make a big dent in these traditional pharmacies over time.

Harjes: Which, overall, is great news for the healthcare space. Upping patient compliance and convenience, that's a great thing. We'll be right back after a quick message from our sponsor.

And we're back. Biogen, ticker BIIB, reported encouraging data from an Alzheimer's drug last week. Alzheimer's is a disease that has been a real beast for drug makers to attempt to treat, but hopes are really high that Biogen can succeed where many, many others have failed. The stock jumped 20% last Friday, which is huge for a $70 billion company. Todd, what did you make of the news?

Campbell: I know, it almost gained $20 billion in market cap in a single day, which is just remarkable. But there's a reason for that. 99% of clinical stage drugs in Alzheimer's have failed. So, when you signal that maybe you have one that might work out for such a large addressable patient market, that's potentially a megablockbuster drug in the making. 

Now, there are caveats. I'm sure we're going to get to that in a few minutes as we're having this discussion, Kristine. But I think it's an intriguing data point. As we get further in, we'll talk more about this -- investors might want to temper a little bit of their enthusiasm.

Harjes: Yeah. Speaking of data points, we don't have the full data set yet. They reported the conclusion of all this data, kind of a teaser. They said, "We will release the entire data set later." 

What we do know is that this was a Phase II trial. There were 856 patients that had early Alzheimer's. We had previously been told that the study failed at the 12-month mark. Now, this is six months after that initial 12-month point, so we're at 18 months, and they reported that in the one patient group out of five total patient groups that was receiving the highest dose of this drug, which is called BAN2401, that the progression of Alzheimer's had been slowed, and there was a reduced accumulation of amyloid in the brain. 

Todd, I'm going to kick it to you because I think you'll do a better job than I would explaining this. Why does that matter?

Campbell: We don't fully understand what causes dementia in Alzheimer's disease patients, but we do have a theory. The theory is, you can have amyloid build ups on neurons that interfere with the cell signaling to a degree that's significant enough to eventually cause those neurons to die. Initially, it starts off in memory, but over time, it progresses to things that are like behavioral and thinking and the like. 

Kristine, I was thinking of an analogy here that maybe we could throw out there. One of the things I was thinking about, have you ever been caught in a traffic jam that made you late for an appointment?

Harjes: Every single day. [laughs] I live in a city!

Campbell: [laughs] Imagine a traffic jam that's so bad that you get out, walk away, and just let the car go to rust. That's essentially what's happening here in Alzheimer's disease patients. You have a traffic jam that's interfering with the cell signaling, and eventually, we're just abandoning that neuron because the neuron is no longer able to effectively send the signal to where it's supposed to be going.

Harjes: I knew you would do a good job of explaining that! Thank you! The thing is, we're not really sure if that's what causes Alzheimer's. This is all based on the observation that people who suffer from the disease have accumulated this amyloid protein in their brains. But we're not quite sure if the two are related in a causal way. And, we've previously seen drugs that target amyloid and have been able to reduce the buildup in these plaques, but then didn't actually improve patients' cognition -- which undermines the idea that the two have this relationship, between the amyloid plaques and the actual disease itself. So, here, that's why people are so excited -- because it did both. It lowered the amount of plaques, and it also improved cognition.

Campbell: Right. This drug is being developed in concern with another company, a Japanese drug maker called Eisai Pharmaceuticals. Eisai went out and created its own measurement for evaluating the efficacy of this drug that combined together a few different rating scales and systems to create its own thing called ADCOMS. What we're talking about when we say that the highest dose hit the mark of statistical significance, it met it on this newly created endpoint that Eisai has developed. I'd be interested to see how that broke out in some of the older rating scales. Of course, we won't find that out. [laughs] 

Harjes: Right! There are still all these question marks! We don't know how many people were in that group. We also don't know if the FDA thinks this that this ADCOMS score is a valid source of data! That's a huge question mark here.

Campbell: Yeah. Not to downplay too much, obviously there's a significant need for Alzheimer's disease medications. Even if you can delay progression for six months, 12 months, whatever, any amount of time would be a meaningful improvement for patients and patients' lives. The burden on caregivers alone is tremendous. The spending on care for these patients is tremendous. I saw one study that said, on average, Medicare pays about $24,000 a year for a patient with Alzheimer's. For comparison, patients without Alzheimer's, it spends about $7,400 on. There's an important need to develop therapies not only because it's going to, obviously, improve peoples' quality of life, but also, it could save the overall market a lot of money.

Harjes: Yes. This is definitely a big deal because of what it represents, which is that Biogen could be one step closer to getting an effective Alzheimer's treatment to market. Interestingly, this is not their major Alzheimer's drug. This is kind of a side drug. The one that people really focus on is called Aducanumab. This is their drug that is in Phase III. It is the most valuable drug candidate in their pipeline. This is the one that everybody is watching. 

The data that came out about BAN2401 is promising because it works in a similar but not identical way to Aducanumab. But really, when you compare the peak annual sales and the potential to actually get to the market -- because Aducanumab is in a later stage than BAN2401 -- that's the reason that this stock jumped.

Campbell: The other thing is, this is in people with minimum to moderate cognitive deterioration. Theoretically, I would assume that, if you were able to deliver this in people with severe dementia, then, wow. But, I would imagine that there could be some more room for volatility in results as you enroll thousands and thousands of patients into what will be a Phase III trial for this drug. It's going to be very interesting to see. 

We've talked about this on the show, we have great articles on fool.com talking about it -- so many Phase III medications for Alzheimer's disease have failed. This year alone, we saw Merck shutter development of their bace inhibitor. We say Johnson & Johnson shutter development of their bace inhibitor. Eli Lilly and AstraZeneca stopped developing one of their late-stage Alzheimer's disease compounds. So, even if you have a victory in Phase II in hundreds of patients, very hard to extrapolate that out into a win in Phase III.

Harjes: Then, putting it all together, what does this mean for Biogen? Do you think this news makes their stock more or less of a buy?

Campbell: After the move, I have a hard time arguing that you go out and buy it up here at these levels. That was a significant rally. If they have a winner, yeah, it's going to be gangbusters. But there are a lot of question marks here. I don't want to lay out odds on a Phase III success or failure for this drug, but the odds are stacked against a success until proven otherwise.

Harjes: Yeah, absolutely. When you look at the broader company, this is a company that's struggling in various areas. There's stiff competition coming their way in multiple sclerosis, which is the core of their business. They've had a lot of recent growth from a drug that we've talked about on the show called Spinraza. We actually just talked about them a few weeks ago when we were discussing PTC Therapeutics and their drug, which could potentially compete with Spinraza. There's also a gene therapy on the way which would probably completely eat Spinraza's lunch if it hits the market. 

For me, looking at Biogen, I think so much of their market cap is tied up into really high hopes for their Alzheimer's disease pipeline. As you just said, Todd, I don't want to even try to put numbers behind those odds. I know that they're not high. They're definitely fighting an uphill battle here, just statistically looking at the failure rates over all of time.

Campbell: Right. To be clear, listeners, we're not rooting against Biogen. We want them to succeed. There's been a big push, Bill Gates and others have come out and said, "Listen, we need more innovative, new approaches to tackling this disease." Maybe this is one of them. Maybe this will eventually become one drug that advances us toward a multi-drug combination therapy that really, really improves patients' lives. But that still remains to be seen.

Harjes: Yeah, huge opportunity here. You're right, we will be rooting for them, absolutely. But as investors, we'll be rooting from the sidelines.

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. Today's show was produced by Dan Boyd. 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 JNJ. Todd Campbell owns shares of Amazon. His clients may have positions in the companies mentioned. The Motley Fool owns shares of and recommends Amazon and Biogen. The Motley Fool owns shares of JNJ. The Motley Fool recommends BRK-B and CVS. The Motley Fool has a disclosure policy.