3 Tough-Luck Tumbles in Healthcare: Are They Buys?

Spark Therapeutics (ONCE) reported its hemophilia A drug significantly reduced bleeding events and the need for prophylactic factor VIII infusions, but investors sold shares on worry that the gene therapy's safety could be a problem. Investors similarly headed for the exits with Rite Aid (RAD -51.21%) and Alnylam Pharmaceuticals (ALNY -0.06%) after the former scuttled an attempt to sell itself and the latter secured a first-in-class FDA approval. Are these falling stocks worth buying?

In this episode of The Motley Fool's Industry Focus: Healthcare podcast, host Kristine Harjes and Motley Fool contributor Todd Campbell explain why these stocks sold off and whether they're bargain-bin buys.

A full transcript follows the video.

This video was recorded on Aug. 15, 2018.

Kristine Harjes: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today is August 15th, and we'll be talking Healthcare. I'm your host, Kristine Harjes, and I'm joined by fool.com contributor Todd Campbell via Skype. We have a ton to cover today -- an update on Rite Aid's woes, a historic FDA approval. 

First, Spark Therapeutics, ticker ONCE, lost 28% of its market cap on Tuesday of last week. We weren't able to cover it on our last Healthcare show, so we're digging in today. Todd, what happened?

Todd Campbell: It's funny, I was looking at the three stocks we're following, and it's the three tough luck tumbles.

Harjes: Yeah, it's pretty much all bad news today. Buckle up.

Campbell: Investors, bear with us. We'll hold your hands and get you through this crazy time. History does rhyme. Spark Therapeutics reported data for its hemophilia A gene therapy. Like you said, it got whacked after the data got parsed by investors. That's very similar to what we saw happen back in December, when they reported interim data for the same exact gene therapy, and investors concluded after looking at that data that Spark Therapeutics' SPK-8011 may not be as robust of a treatment option as competitor BioMarin's (BMRN -9.90%). BioMarin is working on a similar gene therapy. I won't even try to pronounce the name of it, it's long, it's crazy, it has all sorts of letters in it. We'll call it by its own name, BMN 270. 

Essentially, what both of these therapies are trying to do is significantly improve the quality of life for people with hemophilia A. Hemophilia A is a disease that's characterized by an inability to produce a blood clotting factor. As a result, these patients are at risk for serious bleeds, and they must have regular prophylactic infusions of their missing factor VIII coagulate.

Harjes: Efficacy for this Spark drug, SPK-8011, was pretty strong. But, there were some concerns about safety. Seven of the patients in the trial needed to take steroids to offset the immune response that they had to drug. Some patients also showed signs of liver damage. This clotting factor that the drug is designed to help with, levels of that declined enough that two of the patients in the study required infusions of the factor replacement therapy once again.

Campbell: Let's dive into that a little bit. Back in December, SPK-8011, the doses that Spark was investigating at that time, delivered factor VIII activity levels that ranged between 9-37%. For comparison, BioMarin's data showed activity levels of 49%. You ask, why is that important, that's a lot of numbers. If you look at what's normal, activity levels of 50% and up is normal. However, if you ask any clinician, they're going to tell you that as long as you have an activity level of greater than 12%, you're likely to avoid the serious bleeds. 

I think investors might be looking at this data and saying BioMarin's is more robust, but missing the point that both of these gene therapies could significantly remove the need for prophylactic infusions. If you look specifically at the data that Spark just put out, you saw an increase in the activity levels on this higher dose cohort that are now added to their trial. 

Like you mentioned, there were some immune responses that concerned investors, though. You had five patients who were given the higher dose. They saw in those five patients a 100% reduction in both bleeding events and need for prophylactic treatment. Pretty good, 100%. But, as you mentioned, there were two specific cases where an immune response caused a decrease in activity levels below 5%, and that caused these patients to have to get steroid treatments. 

People are looking at it and saying, if seven of 12 total patients -- 12 total have been tested so far, across all cohorts -- needed to have steroids because of elevated alts that could signal some liver problems, and two needed special intervention to get themselves back on track, does that mean this is an unsafe drug?

Harjes: Right. We'll see, as we move forward. They are going to take the drug into a Phase III trial, so more data will come out then, and we can see exactly how serious these adverse events might be across a larger patient cohort. But there will be this impending competition from BioMarin. 

Meanwhile, there are other things going on with Spark Therapeutics. The name might sound familiar because we've previously talked on the show about Luxturna, which was their first gene therapy to be approved as a one and done treatment for a rare type of blindness. They also have started a pivotal trial in hemophilia B, which is another drug with an insane name that we're not going to try to say on the show. 

Ultimately, this is still a pretty early stage company. That's why you're seeing this volatility. The company had run up quite a bit based on the early data from SPK-8011. Also, they have a partnership with Pfizer (PFE -3.85%) that was very exciting to hear about. The Luxturna approval, of course, was good news. Now it's being walked back a little bit.

Campbell: I'm glad you mentioned that. If you look at December, they got hit 30% after the news broke and they compared the results to BioMarin's results. You would have doubled your money buying it at that time, when it fell. No one knows where the stock is going to go from here, but they do have a lot of interesting things going on. 

The one other thing I would mention is, in addition to the competitive threat from BioMarin, Sangamo, which is another gene therapy company, is also working on a drug for hemophilia A. It could be, while this is over a billion-dollar market, and maybe it can support multiple players, it could be, in two to three years, when all these drugs are reading out their Phase III data and making their way to the FDA, they could have to cut that pie up in a few different places.

Harjes: Rite Aid, another company with a fantastic ticker, RAD, has also had a disappointing week. The stock is down nearly 20% over the last week, following the Thursday announcement that the company is terminating its $24 billion merger with grocery chain Albertsons. The announcement came on the eve of a shareholder vote. What's the story here? 

Campbell: The company desperately wants to go to prom, but it keeps getting stood up, Kristine.

Harjes: Aw, that's so sad! Poor Rite-Aid.

Campbell: [laughs] I know! Poor Rite-Aid! Rite-Aid is the third largest of the stand-alone pharmacy players. You have Walgreens, CVS, and Rite Aid. Rite Aid came to the conclusion a few years ago that, as a stand-alone company, it was going to struggle to compete against its much bigger foes, especially because it's been dealing with, for about a decade, a tremendous amount of debt that it took on through its own acquisition spree during the 2000s. 

Initially, Rite Aid's solution was, "I know what I'll do! I'll sell myself lock, stock, and barrel to Walgreens." Regulators objected to that because they decided it would consolidate too much market power in the pharmacy market, so they blocked that deal. Rite Aid then had to go back with Walgreens and ink a new deal, in which they basically sold almost half of their stores, and a few distribution centers, to Walgreens in exchange for a pile of cash that they could then use to help delever their balance sheet. 

Then, more recently, in May, Rite Aid finally found a suitor for the rest of the company, agreeing to merge together with the venture-backed Albertsons, which is one of the largest grocers in America. If you don't know the Albertsons brand, you may know some of the other brands, which include Safeway and, in the Northeast, Shaw's. That deal, however, has now also been scuttled. That's brought us back to square one as investors.

Harjes: A lot of the biggest shareholders in Rite Aid were not happy about the Albertsons deal. They seemed to think that Rite Aid was not getting a good enough valuation in this deal. It's interesting to me that shares plummeted on the news that investors got what they supposedly wanted. I can't really explain that one. [laughs] There are no breakup fees for either company. That's at least a small positive for Rite Aid. 

Honestly, this company is really, really struggling. It's down to a $1.5 billion market cap. It still has a retail footprint, it still has a PBM, but I honestly can't say I think it's in value territory right now and might be a good buy. You look at the broader pharmacy retail landscape, and it's not even the best-positioned company in that space, and the entire space is being pressured by competition from Amazon. It has a really small scale. I don't know, I'm not very bullish on its future.

The one thing I will say is, if I could look into my crystal ball and make a prediction here, I can see the company being picked apart. If you separate the PBM from the retail business, I could see a little bit of promise in the PBM. Potentially, it could have a little bit of success if it's able to partner with some of these smaller health insurers that are looking to partner with a PBM that's not affiliated with a competitor, given how many other large PBMs are now affiliated with giant insurance companies. That would work to its advantage. We'll see. That's about all I have, as far as optimism for Rite-Aid goes. [laughs] 

Campbell: I think one of the reasons they sold off was, the hope wasn't necessarily that the deal would get scuttled, but maybe that Albertsons would rework the deal and give Rite Aid investors a bigger share of the combined company. The way the deal was structured was, Rite Aid shareholders would end up owning 29% of the combined Albertsons-Rite Aid. The problem that investors had with that is, Albertsons being privately held, very hard to value that. What is Albertsons really worth? We don't know, because it's not publicly traded. We don't have that price discovery. 

As a result, people were looking at it and going, "I don't know if we're really getting the value that we deserve out of this." Maybe it would have been nice if they were able to restructure the deal where Rite Aid shareholders got a little bit bigger share of the company. But even then, who knows. Maybe they would have balked at that, as well. 

I have similar concerns about it on a stand-alone basis. Even with the pile of money they got from Walgreens, they still have, as of June, $3 billion in debt on the books. Their interest expense last quarter was $62 million. As a result of that interest expense, their net loss from continuing operations was about $42 million. Obviously, that interest expense remains a very big problem for the company. If they could solve that problem, theoretically, they would be profitable on a GAAP basis. But we just don't have a clear path for them to be able to do that. 

And, if you look at the fact that CVS is combining with Aetna, and that's going to narrow the ability for Aetna members to go to Rite Aid, and what kind of drag that puts on it... Then, you look at Walgreens, and the fact that they own part of AmerisourceBergen, so they have some synergies that Rite Aid doesn't have. There are some real concerns about how this company competes as a stand-alone.

I think it should be one of those wait-and-see stocks. Let's see how this goes over the course of the next quarter or two, see whether or not they can start to get the prescription volume trends moving in the right direction.

Harjes: Given how long this saga has already played out, I feel like we'll be covering it for years to come. This thing has really stretched on. Rite Aid claims it's in discussions with an extensive list of third parties around a range of strategic options. Take that for whatever it's worth. Supposedly, there are interested buyers. But it's pretty clear that Rite Aid is in a somewhat desperate situation. I don't know that they're going to find a deal that's more favorable than this one with Albertsons would have been.

Campbell: It may be one of those things where people go, "Oh, maybe I didn't want to object to that deal after all." Time will tell. We'll have to keep a close eye on it.

Harjes: Yeah, we'll see. For our last story of the day, Alnylam had its drug Patisiran, which is now known as Onpattro, approved last Friday for nerve damage that's caused by a rare disease known as hATTR. You would think that's good news, and it is. It's monumental, interesting news from a scientific perspective. From a stock perspective, the company's market cap actually fell a little bit in the wake of the news.

Campbell: Alnylam is working on a mechanism of action that's pretty unique. They're targeting RNAi, RNA interference. Their goal here is, genes control the production of proteins. A lot of diseases are caused by the overproduction or underproduction or incorrect production of proteins by these genes. Messenger RNA is used to execute the genes' rules to create those proteins. RNAi is a naturally occurring path that disrupts the protein production. 

What Alnylam has been able to do is develop this new drug that can interfere with the production of this protein that is, in these patients, being produced incorrectly. Because it's being produced incorrectly in these patients, it's building up in vital organs and around nerves. That's causing all sorts of problems for these patients. 

As you mentioned, it's a rare disease. This is the first FDA-approved treatment for it. Alnylam estimates that, based on the label they were given, they can treat about 3,000 people in the U.S. Their addressable market is about 3,000 people in the U.S. With a sky-high price tag, theoretically, that could still translate into a nine-figure drug. But, I'm sure we'll talk about this, there's some competition looming that we, as investors, have to be aware of.

Harjes: Yeah, absolutely. I want to talk first about the price that you mentioned, which is quite high. List price is $450,000 per year. They claim that after discounts, the price will be $345,000. [laughs] Quite the deal, there. They've also said that they're going to introduce value-based pricing, meaning that if the drug doesn't work or it doesn't work very well, you don't pay or you don't pay as much. The details on what that pricing structure breaks down to are still hazy. I think that's a big reason why investors reacted poorly to this news. Revenue forecasts with value-based pricing are very difficult to make. 

I think people were disappointed about that, and I think investors were also disappointed over the label for the drug itself. Alnylam had hoped to include some trial results that showed cardiac benefits and put that on the label itself, but the FDA disagreed with that. Then, as you mentioned, also, there is competition coming, both from Ionis and Pfizer. That cardiac benefit could have been a differentiating factor on its label that it now doesn't have.

Campbell: It's been argued that that's actually the most important part of this patient population to address, the cardiac risk to these patients, and not having that data included on the label. Honestly, I didn't think they were going to be able to get that on the label. The study wasn't powered for that. I'm not surprised that's not on the label. 

As far as the value-based pricing goes, what I've seen so far is, they're going to get a baseline reading on the patients. Nine months to a year later, they'll go back, get another exam on those patients to see whether or not their pain is being managed well and they're staying out of the hospital. If they're able to show that, in their view, they deserve the whole amount of money, the $300,000-plus. If they don't achieve that, that's when that rebate would come back into play. 

What's interesting is, the value-based pricing deal is a rebate. We've heard a lot in the media about the concept of getting rid of rebates. I don't know how that value-based pricing would work if Alnylam couldn't offer rebates anymore. I don't know how that would work. That's something to keep in mind. 

You did also mention the competitive landscape. That's fast evolving. If you look at Ionis' drug, they're working with their spin-out, Akcea, on that drug. They've already won approval in the European Union for it. Alnylam has the first FDA-approved drug for this indication, but it's Ionis and Akcea that have the first European approval for this indication. And, the FDA approval for Ionis' and Akcea's drug is expected in October. You're not talking about a very big head start for Alnylam, which means you're going to end up making this decision based on what the doctor views as being the most efficacious and safest treatment, the easiest dosing ritual, etc. I'm not sure we can come to any conclusions on which of these is the better drug. 

Then, you look at the Pfizer situation, which is really interesting. Pfizer is expected to roll out data later this month for a drug called Tafamidis. That's a Phase III trial, and it's specifically designed to evaluate the cardiac impact. Theoretically, if that trial's data results back up and show this is very good at reducing hospitalizations because of cardiac problems, it could end up carving away a lot of this relatively small market. It's a 3,000-patient market in the U.S. the way that Alnylam can target it. Maybe they're looking at it and saying, Alnylam has a high-priced drug, only 3,000 patients that they can treat, maybe they lose some of those to Ionis and Akcea, and they lose some of them to Pfizer.

Harjes: The Pfizer drug is pretty interesting. It's an oral drug, so it has the convenience edge. It's also been on the market in Europe for years. It has an established safety track record. If I'm a doctor and I'm trying to decide which medicine to prescribe, I'm probably going to choose the one that I know is safe. 

This is not all bad news. It's still awesome news for patients, to have this treatment on the market. Even though there are around 3,000 people that the drug can currently address, it's widely believed that this is a more widely spread disease that could affect around 50,000 people worldwide, it's just under-diagnosed. Previous treatments were just for symptom management. To have a drug that can come in and actually silence the gene responsible for it is pretty cool. This is also the first time that an RNA interference drug was ever approved by the FDA! This is Nobel prize-winning technology. Very cool from a scientific perspective, from a patient perspective. 

It's also good news for Alnylam, in terms of validating its RNAi-based platform. They have three other late-stage RNAi drugs being developed. Hopefully, this goes a long way to validate that, yes, the FDA will approve RNAi drugs.

That said, though, if you tie it all together, the stock is sitting at $9 billion in market cap. That, to me, seems pretty expensive. I would say that indicates that success is expected now for all of those other late-stage drugs.

Campbell: That's a great point. In the past year, a lot of exciting technology that you and I have talked about for the last couple of years is finally making it to market. One of the things investors are seeing is, there's a big difference in how investors value clinical-stage companies vs. commercial-stage companies. Oftentimes, what ends up happening is, it's not that easy to jump out of the gate with a big commercial success, even if you have pie in the sky forecasts for it. So, investors tend to move into other, more exciting clinical-stage companies. As a result, the share price of these stocks tends to trade sideways to down, at least until we get a couple of quarters behind it and can actually see that, yes, this is indeed a very big market they're able to tackle.

Harjes: All told, we covered three stories of stocks losing value this week. I want to end us on some optimism. I'm taking this from FDA commissioner Scott Gottlieb regarding the Alnylam approval. He says, "The approval is part of a broader wave of advances that allow us to treat disease by actually targeting the root cause, enabling us to arrest or reverse a condition rather than only being able to slow its progression or treat its symptoms." Overall, I think that's very positive news for the whole medical landscape. Having one and done models, where you can get in, target the root cause of a disease, and rather than having patients have to manage their symptoms for the rest of their lives, being able to actually get at that root cause and stop or reverse the disease itself, is really great news. I love seeing companies working on this type of treatment.

Campbell: It only took 16 years to do it, but they did it! [laughs] 

Harjes: Yeah, it has taken Alnylam a long, long time. You can just hear their management team being like, "Finally! This is the best moment of my career! It has taken me decades to do this!" They definitely did not have an easy pathway.

Campbell: Right. If you toss aside the dollars and cents of it, this is, like you said, such an exciting time for patients.

Harjes: 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 Austin Morgan. For Todd Campbell, I'm Kristine Harjes. Thanks for listening and Fool on!