In patients with tough-to-treat forms of epilepsy, Zogenix's (NASDAQ:ZGNX) ZX008 may work better than GW Pharmaceuticals' (NASDAQ:GWPH) marijuana-based drug, Epidiolex. Can ZX008 give Epidiolex a run for its money, or will perceptions about its safety derail demand?

In this episode of The Motley Fool's Industry Focus: Healthcare, host Kristine Harjes and Motley Fool contributor Todd Campbell discuss how these companies are trying to reshape treatment, and what factors could determine which company captures more market share. Also, Harjes and Campbell explain why UnitedHealth Group (NYSE:UNH) investors ought to be paying more attention to the Medicare and Medicaid markets than to the market for employer-sponsored health insurance.

A full transcript follows the video.

This video was recorded on July 18, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is July 18th, 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.

We'll kick things off this episode with an update on the epilepsy drug market, specifically certain types of childhood onset epilepsy that respond poorly to existing treatment options. Last month, a company called GW Pharmaceuticals, ticker GWPH, won approval for the first-ever marijuana-derived drug, which was approved to treat Dravet Syndrome and Lennox-Gastaut syndrome. We touched on this on our April 25th episode after the drug got a thumbs-up from the FDA's advisory committee. Then, the drug went on to be approved. It's called Epidiolex. It's actually not yet available for sale because we're still waiting for it to be scheduled by the Drug Enforcement Administration.

The reason that we bring all of this up again is because there's some new news on the competition front in this space. Before we get to that competition, Todd, do you want to add any details on GW Pharmaceuticals' Epidiolex?

Todd Campbell: Investors should know basically what it is. It's a purified version of cannabidiol. We call that CBD. If you ever hear anybody talking about marijuana and they mention CBD, that's what it is. It's one of well over 100 different things that go into making up the marijuana plant. As a matter of fact, it's the second most common thing found in the marijuana plant, accounting for about 40% of its extract -- the most common, obviously, is THC.

CBD is very intriguing to medical researchers because, unlike THC, it does not cause the euphoric high that's associated with smoking marijuana. People are thinking, if CBD is useful medically, we can get away with doing that without exposing patients to the risk of that euphoria.

The other thing that I think is interesting to know, Kristine, we obviously want to update investors on what's going on with GW Pharma, we want to talk about Zogenix, which is the competitor that just had some really interesting news come out. But, I came across this stat as I was doing my research for today's show, and it really surprised me. We don't talk about epilepsy much on this show. Did you know that there are more people with epilepsy than Parkinson's, autism, and multiple sclerosis combined?

Harjes: Wow, that's super interesting. Although, with these drugs, we are talking about very, very specific types of epilepsy that are extremely rare. But, it's interesting how widespread the broader indication is.

Campbell: I think investors have to recognize, because it's such a large patient population, and because, yes, we're talking about Dravet Syndrome and Lennox-Gastaut syndrome specifically, there is obviously the potential for this to get used off-label by doctors -- once Epidiolex got approved, and once it becomes available, doctors can write prescriptions for it off-label. There's also the chance for other studies to get done in other, more common forms of epilepsy.

Harjes: That's super interesting. Let's move right along to the competitor, which is another twist and turn in this story that's worth mentioning. The company, as you alluded to, is called Zogenix, ticker ZGNX. They had massive trading days on the market on Thursday and Friday of last week. They gained 32% of their total market cap over those two days alone, based mostly on the successful Phase III data that they reported in their drug ZX008 in Dravet Syndrome.

Campbell: Zogenix is up 415% since last August. That's a mind-numbing return. Of course, the excitement is due to ZX008 and the potential for it to maybe elbow market share away from Epidiolex, if it eventually gets FDA approval. Last fall, they reported positive outcomes from their first Phase III data in Dravet Syndrome, showing that they could reduce monthly seizures in this tough to treat patient population. Then, last week, they had the results come out for their second Phase III trial -- again, significantly reducing monthly seizures in this patient population.

Kristine, you and I talk about it all the time, you can't compare two separate studies head-to-head against one another, it's just bad science to do so. But it's very hard not to do that as an investor, especially when you look at Zogenix's information or data showing a 63% median reduction in monthly seizures for these patients vs. Epidiolex, which, depending on the trial, had a reduction of between 40-50%. Arguably, what you could probably safely say is, both of these drugs are very effective.

Harjes: You're right that it's bad science to compare, but the reason that we always follow that statement with a "but ... " is, people out there in the world, if you're a doctor looking to prescribe one of these two drugs, you're going to see those numbers. Even if you know they haven't been tested head-to-head, if you're looking for something to differentiate them, that's a very easy way to make the decision.

But -- here's another but -- safety is going to end up being an even more important part of this. Something that I want to point out from the Zogenix press release is that ZX008 was stated to be generally well-tolerated in the Phase III study, with adverse events consistent with those observed in earlier studies, and also consistent with the known safety profile of Fenfluramine. That's what ZX008 is a low dose of.

Todd, I want to get your input here on what you make of that, given that this drug, Fenfluramine, was part of the infamous Fen-Phen, an obesity drug that was pulled from the market back in the 1990s due to cardiovascular side effects.

Campbell: Breathing new life into an old, discarded drug. Fen-Phen was heralded for its ability to help battle back obesity. However, when push came to shove, after it got used in the real world, it was discovered that it could increase the risk of cardiovascular problems that could lead to death. So, the FDA asked for it to be removed from the market. I'm sure that many people will be weighing that in the back of their minds, doctors and patients, if ZX008 makes its way past the FDA to the market and they're trying to compare these competing drugs.

So far, in hundreds of patients studied by Zogenix, we have not seen any scary cardiovascular signals. It may be that they found the sweet spot, the right amount of dosing that wouldn't cause the cardiovascular problems, but still has efficacy.

The thing that investors ought to realize, too, though, is, you might think, "OK, this is a slam dunk, ZX008. It's Fen, who's going to want to prescribe that?" But, it wasn't like Epidiolex came through with a squeaky-clean safety profile, either. As a matter of fact, patients who get prescribed that drug will have to undergo constant monitoring to make sure they don't end up with elevated liver enzymes, because that was a problem that was observed in its trials.

There's a little bit of a debate here between, we have these two very efficacious products for a patient population that's in desperate need. Remember, Kristine, these people are suffering dozens of seizures per month. Frankly, they don't respond to the current antiepileptics on the market. The difference in 10% of efficacy when you're having dozens, that's a significant efficacy difference, theoretically. Kristine, I think it'll just come down to perceptions -- how do people perceive marijuana vs. how they perceive Fen-Phen.

Harjes: Yeah, absolutely. Price could be another component, but at this stage, it's too early to tell.

The massive $245 billion market cap UnitedHealth Group, ticker UNH, reported earnings yesterday. Expectations were pretty high, but the company managed to beat them yet again. Quarterly revenue of $56.1 billion, was up 12% year over year. Earnings from operations of $4.2 billion was up 13% year over year. Adjusted EPS of $3.14 per share was up 28%. Todd, what stood out to you in this quarter's report?

Campbell: I want everybody to write down those figures and keep them in the back of your mind as we're having this conversation. Revenue up 12%, operating earnings up 13%, EPS up 28%. Those are all things that you want to see, especially for a company as big as this. They did $56.1 billion in revenue. If you break that out, nearly $46 billion of that came from their insurance business, premiums that are being paid for health insurance.

UnitedHealthcare is the nation's largest health insurer. They insure 48.8 million people, and they do a tremendous amount of business in the commercial market, the employer business, offering plans to people who are at work, work for other people or companies. And, they have a small individual business. But it's not the commercial business that's behind this double-digit growth.

Harjes: Yeah, what really seemed to drive it was their government insurance programs, their Medicare and Retirement segment. That business segment grew revenue 12.6%. The number of people in the segment grew 10.4%. When you look at what's really driving the bottom line here, it's Medicare, it's Medicare Advantage, it's Medicaid.

Campbell: You had 26.3 million commercial members insured. That was down from 26.9 million year over year. You actually lost 600,000 members in the commercial business. Yet, that represents more than half of the membership that the company has and handles. So, yes, Medicare and Medicaid are moving the needle for UnitedHealthcare. Medicare Advantage plans, they saw their enrollment up more than 10%. They have 4.8 million people now in Medicare Advantage. Supplemental, they went to 4.5 million people to 4.36 million people. Medicaid, they went to 6.7 million people from 6.4 million people. So, they are getting a tremendous tailwind from their government programs, and that's more than making up for what we'll call a flatline in its commercial business. I guess that makes sense, because unemployment is 4.1%. How many more people can you employ at this point?

Harjes: Right, that's a finite number of total people that are commercially insured.

Campbell: Yeah, absolutely. I think there are some takeaways here that investors are going to have to be paying attention to when it comes to UnitedHealthcare. If you're interested in investing in large healthcare companies, I think you have to consider insurance companies. Of all of the insurance companies that are out there, UnitedHealthcare has to be at the top of the list of companies to have on your list. However, you're going to need to pay particular attention, as we go from here, specifically to that Medicare and Medicaid business.

I happen to think, I don't know if you agree with me, that there are some very big natural tailwinds that could support ongoing growth. Maybe you don't get consistent growth of 10% year over year out of this company forever. But the number of people who are going to be covered by Medicare and Medicaid is going to soar between now and 2050.

Harjes: Yeah, that's a huge demographic tailwind behind it. I don't think anyone's arguing with that.

Campbell: 83.7 million people by 2050. That's almost double where we were in 2012. That's age 65 and up. UnitedHealthcare is the largest player in the Medicare market. They have a 24% market share by enrollment, according to the latest research by Kaiser, which tracks this kind of stuff. If we assume that baby boomers are going to continue to get older and Medicare will still be around, it's probably safe to assume there are going to be a lot of people who are going to choose Medicare Advantage. Kaiser's research shows that enrollment in Medicare Advantage plans is up 71% since just 2010.

Harjes: Another note that I want to point out on UnitedHealth is that where they stood out in this quarter was on the bottom line. They were able to control expenses really well, specifically their Medical Care ratio, which is a measure of how much they're spending on medical costs as a percentage of total revenue. That dropped by 30 basis points to 81.9%. They're expecting that to come in around 81.5% for the year. This is a remarkably consistent number. This is company that is, quarter after quarter, able to keep its expenses in line.

Campbell: That's the big thing. They're investing very heavily in the use of technology to help prevent expensive care. They want to create more price transparency so that their members can go out and actually comparison shop for services. That could save a lot of money, help keep that MCR down.

They're also doing some really interesting, laying the ground work for any kind of a shift toward value-based care, away from fee-for-service care. Of course, that could also help them control some costs and continue to reward investors. The other thing that investors should recognize is that they're very aggressively buying back their stock. That's also supporting the bigger than expected increase on the bottom line.

Harjes: The share buybacks are kind of an interesting thing. This company is, on the surface, a pretty shareholder-friendly company, but their shares outstanding has been pretty steady over the last year or so, even going back before that. But, they have a new 100 million share buyback program that was just announced in June. If they do execute that without granting an excessive number of shares to their employees and whatnot, to level the other end of the seesaw there, that 100 million shares would bring their outstanding share count down about 10%.

They do have a dividend -- which you would expect for a company this big and this consistent -- but it's only 1.4%. It's supported with plenty of cash flow coming in. Their payout ratio is in the low 20s, so they could easily bump that even higher, although it does seem like their preference is to do more of the share buybacks. Which, if you think about the amount of political uncertainty and the amount of investment that you need to be doing just to keep up with the changes in the healthcare landscape, I think that seems like a reasonable distribution of capital.

Campbell: The only thing that I would say is, we'll poo-poo the 1.4% because that's less than the S&P 500. You could buy the SPY and get a higher dividend yield than buying UnitedHealthcare's stock. I think investors should also recognize that that dividend payout was just increased back in June by 20%. So, you have a relatively low payout, but they're making a commitment to increasing that dividend over time. A 20% increase in dividend for this year not bad at all, not shabby.

Harjes: Yeah, with a ton of room to grow, as well. Any final thoughts before we wrap up?

Campbell: I think, investors trying to figure out the puts and takes on this, the things to keep in mind ... if you go back to earlier in the show, talking about the epilepsy drugs, I think you just need to wait and see how this shakes out with the DEA scheduling of the marijuana drug, Epidiolex. That's going to be relatively important. If they get favorable scheduling, it can get prescribed, and refills can get prescribed more easily. That could increase its use relative to Zogenix's competing drug.

When it comes to the insurers, again, keep a close eye on policy in Washington and what ends up happening with Medicare and Medicaid going forward. It seems like that's really what's going to be driving the results of these big insurers over the course of the next few years.

Harjes: Sounds good. Thanks a bunch, Todd! 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 is produced by Dan Boyd. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.