Second-generation marijuana products including edibles and beverages launch in Canada's marijuana market this month, but marijuana stocks still face stiff headwinds from supply headaches and mounting quarterly losses. Is it finally safe to step up and buy leading players like Canopy Growth (NYSE:CGC) and Organigram (NASDAQ:OGI)?
In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Shannon Jones is joined by healthcare investor Todd Campbell to discuss the latest marijuana news, including Cannabis 2.0, the FDA's latest word on CBD, and the stocks you can consider buying now.
Also, Jones and Campbell weigh in on Novartis' (NYSE:NVS) big cardiovascular disease bet. Will the $9.7 billion it's paying to acquire cholesterol-buster The Medicines Company (NASDAQ:MDCO) prove to be money well spent, or will stiff competition from the likes of Regeneron (NASDAQ:REGN), Amgen (NASDAQ:AMGN), and Esperion Therapeutics (NASDAQ:ESPR) make this deal a bust?
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Dec 4, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, December the 4th, and we're talking Healthcare. I'm your host, Shannon Jones, and I am joined by healthcare guru Todd Campbell. Todd, how's it going?
Todd Campbell: It's good. It's good. I'm actually a little sore. I've been Bayer aspirin's best customer over the course of the last couple of days. I don't know if Alexandria got hit or not, but we up here in New Hampshire got a good couple strong days of snow, and it wasn't the light, fluffy stuff. It was the heavy heart-attack-inducing stuff.
Jones: Oh my goodness. So you are basically propping up Bayer aspirin, one pill at a time right now, Todd.
Campbell: Pretty much! My shoulders are regretting my decision not to invest in a snowblower yet again this year.
Jones: There you go. There you go. We have thankfully been able to dodge most of the snow here in Alexandria, but it's been getting quite cold. I am certainly feeling the chill. I just got over being sick all of Thanksgiving week, which is absolutely terrible. I'm hoping I've at least got that out of my system.
Super glad to be back on the show, because we've got a lot to cover today, Todd.
Campbell: Yes. As long as your voice holds up, we're all set.
Jones: That's right. And so far, so good. I've got my tea right beside me. But today's show, I'm excited about because we've got big news from across really multiple industries, the first of which is biopharma with big M&A news. And then, also, we're going to be giving updates on the cannabis space. That's right, lots of things happening right now in the marijuana industry. So, we'll dive into all of that and more.
But first up, let's talk about the acquisition everybody is talking about right now, and that is Novartis, ticker symbol NVS, announcing that it's acquiring The Medicines Company, ticker symbol [MDCO], really to beef up its cardiovascular portfolio. Novartis did announce that they're acquiring the company for $9.7 billion, or $85 a share, basically a 45% premium above the closing price prior to the acquisition rumor actually being confirmed. Todd, what can you tell us about this huge deal, and basically, what is Novartis getting with this deal?
Campbell: This is one of those cases where "buy the rumor" paid off. After the rumor broke, shares rallied more than 20%. And then, sure enough, the premium that was paid on top of that was another 25%. Investors are obviously smiling very widely when it comes to this acquisition.
It's interesting to see. We've seen a couple different acquisitions. There was another one which we won't talk about today, but a gene therapy acquisition for $3 billion that Astellas did this week as well. It seems like we're seeing a little bit of a return. We've talked about on the show before, some of these drug developers, they use that as a third stool or a second leg on a stool or whatever when it comes to their pipelines. You have internal development, and then also, if you're a big company like Novartis, you can step up and spend a lot of money and just acquire something that's already succeeded in Phase III trials and not have to worry about taking on that headline risk of conducting those clinical trials, and potentially having them fail.
And in doing this deal, Novartis is landing a pretty interesting medicine. It's Inclisiran and that's an RNA silencing drug that targets something called PCSK9, which is an enzyme that we've talked about in the past, which companies have been targeting to reduce bad cholesterol levels or LDLC, in a bid to reduce heart disease. I think that, to set the stage for investors who are trying to figure how big a deal this is to Novartis, and could this be worth this big price tag that Novartis is paying, a couple of statistics, just to throw out there, Shannon. First, about 50,000 people die every day worldwide because of heart disease. 50,000. I mean, that's so many people. 30 million people worldwide will suffer a heart attack or a stroke, often because of cardiovascular disease. And there are about 40 million people throughout the world who right now are still, despite the availability of cheap statins, failing to reach their target on their bad cholesterol levels. So, new therapies, theoretically, can improve upon those existing therapies and further lower bad cholesterol, maybe reducing the risk of heart attacks, stroke, and death. Obviously, a very potentially lucrative area of focus.
Jones: Yes. Really, for The Medicines Company, they've been posting pretty good Phase III data this year. I think this deal really became sweetened when basically the data showed this drug was helpful in lowering LDL for difficult-to-treat patients. I will say, though, it's not terribly surprising to see this acquisition happening. You mentioned, Todd, we've started to see M&A ramp up. But for a company like The Medicines Company, Sarissa Capital, which actually was founded and headed up by Carl Icahn's protege, Alex Denner, took a sizable stake in the company a couple years back, restructured the board, restructured the company, to really hone in and focus on this one drug. So, they were selling off assets. Of course, with this drug, this is one that they gave Alnylam Pharmaceutical upfront rights for $25 million to this drug. I think this is an attempt, with this building up, restructuring, to get the company sold and to this point. Of course, for anybody who's been following the biopharma space, Alex Denner has been behind the likes of ARIAD Pharmaceuticals getting sold, and, of course, Biogen's hemophilia unit, Bioverativ getting sold off to Sanofi. So, not too terribly surprising.
But this drug in and of itself is really interesting. The PCSK9 space is really interesting, because it is a pretty competitive space, but this is a space that has struggled when it comes to launches, and really struggled when it comes to uptake, some of which has to do with pricing, some of it which could potentially have to do with convenience. But it's interesting to see how this drug is being positioned within such a competitive market space right now.
Campbell: Yeah. Just to back up a little bit and give people a top-level view of what's been happening, what this market looks like. You think about the most famous, probably, of the cholesterol-busting drugs that's ever rate made it to market, and that's got to be Lipitor. At one point, Lipitor was doing $13 billion a year in sales. I think the class overall of statins were hauling in something like $20 billion at their peak. So, this is a mega blockbuster indication. The way statins work is, they help to reduce the production of cholesterol in the body. PCSK9 inhibitors work differently. So, this drug, and Inclisiran, and the other two that we're going to talk about in a second, they work differently. These drugs, what they do is, they inhibit the production of the enzyme PCSK9, which breaks down LDL receptors in the liver. By inhibiting the breaking down of those, they increase the number of receptors in the liver; therefore, they're able to clear more cholesterol from the bloodstream. It's an entirely new mechanism of action.
Now, back in 2015, you had the first of these PCSK9 inhibitors come to market. You had Sanofi and Regeneron's Praluent in approval, and then you had Amgen's Repatha win approval. When these drugs came to the market, everybody was thinking they'd be billion-dollar blockbuster because, again, there's this huge unmet need for lowering bad cholesterol. Unfortunately, it really hasn't materialized. They came to the market with a high price, $14,000. Since then, they've continued to ratchet that price back to try and drive volume and win over payers that they frustrated early on. Even if you look at the third quarter, combined sales of Repatha and Praluent are still tracking around $240 million. Repatha did about $170 million and Praluent did about $70 million. Far below the expectations that you would have expected, especially given Lipitor.
So, the question, therefore, that Novartis thinks they've answered, the big question is, can we outperform Repatha and Praluent with Inclisiran? And they're betting yes. They're thinking, Inclisiran works differently than Repatha and Praluent. Because it works slightly differently, they don't have to dose it as often. I think the longest you can go in between right now with Praluent and Repatha is four weeks, so you're getting an injection every month for those medications. When it comes to Inclisiran, you only need two injections a year. That's pretty great, really, because it can be done right in the doctor's office when these patients who are at high risk for cardiovascular events are usually going to see the doctor a couple times a year anyways. So, Novartis is betting that they can take their existing salesforce, which already markets blockbuster drugs like Entresto and stuff in the cardiac space, they can turn them loose to sell Inclisiran, and that they'll be able to convince people that Inclisiran's favorable dosing regimen is going to improve adherence and significantly reduce bad cholesterol, and therefore reduce the risk of heart attacks and strokes. I think it's a good argument to be made. If they're right, the money that they're spending, some $9 billion, it's going to be a drop in the bucket.
Jones: Yeah, so true. And The Medicines Company's management team has come out and said they plan to price this pretty competitively. I think there's definitely an argument there.
But, Todd, we've talked about Amgen, Regeneron. They're not the only ones to keep in mind in this space. There's also Esperion Therapeutics, and that's ticker symbol ESPR, and that's a clinical stage biotech. It's got one drug in development, but it's a once-daily oral pill that is going after bad cholesterol. What can you tell us about this drug, and really how it's positioning itself within the midst of this very competitive landscape?
Campbell: Yeah, this is where it gets really confusing, because this has been a big back-and-forth by industry watchers over the course of the last two years. Who will get to market first? Will Inclisiran get to market, or will Esperion's bempedoic acid get to market? Now, both of these drugs are very different. We already talked about how Inclisiran targets PCSK9. Bempedoic acid works upstream of statins. Like you said, it's an oral drug, so it's not injected like Inclisiran. So, you'd take this drug as a pill either on top of your current statin regimen, or, if you're intolerant to statins -- many people are. I think up to 40% of people who start on statins end up discontinuing them because of side effects like muscle weakness. Well, you can take this pill and get your bad cholesterol levels lowered.
Like Inclisiran, Phase III studies are already done. But unlike Inclisiran, which still hasn't yet been filed for FDA approval, bempedoic acid's FDA filing has been done. The PDUFA date that the FDA has set to make a decision on it is expected in February. So, this drug will get to market first.
So, the big question will be, bempedoic acid reduces bad cholesterol by an additional 20%-30%, let's say, when used with statins. Inclisiran reduces it by 50%-55%. Will there be room for both of these drugs if they both win approval? My personal vote is that yes, they both will between approval, and then I also believe there's going to be a good market niche going to allow both of these to survive. I think that bempedoic acid could very well be a cheaper option because it's small molecule rather than complex, and, again, with the statin intolerance. Maybe what you'll see is bempedoic acid get used in statin-intolerant patients, and then, if they don't reach their target, maybe then you would also overlay Inclisiran. We'll have to wait and see.
Jones: We'll have to wait and see. A lot to look forward to. Again, Inclisiran, they plan to submit for U.S. approval by the end of the year, also file for E.U. approval by Q1 of next year. Overall, the deal between Novartis and The Medicines Company is expected to close early next year. A lot to watch in the space.
Always fun to see a resurgence, a renaissance, for any of these therapeutic areas. I've said that for neuroscience, and now, of course, we're seeing that in the cardiovascular space. And even with Amarin, I'm going to throw them in there, too. But, a lot to watch heading into 2020.
Alright, time to talk about cannabis and marijuana. Todd, you and I have talked about this space before. It's been a while since we've given updates. But I think now is probably the best time to get everybody up to speed because really, October marked the start of what's been called Cannabis 2.0, but really, all eyes have been on this month, December, for when we can actually start to see the impacts of Cannabis 2.0. And really, for most investors, we won't see the financial impacts until Q1, Q2 of next year. But, granted, December is a big month for this industry. Todd, can you tell our listeners, what is Cannabis 2.0, and what does it mean in terms of prospects of turning this industry around?
Campbell: Investors, Shannon, probably a little disappointed that the run up to Cannabis 2.0 hasn't been nearly as friendly as the run up to legalization in Canada in October 2018. It's been a brutal period to be investing in marijuana stocks. But hopefully for those shareholders, there is hope around the corner with the advent of these new, I guess we'll call it second-generation or derivative type products that contain marijuana as an ingredient. We're talking now about things like edibles, gummies and brownies, cookies, and beverages, which is another big area -- and, yes, indeed, vapes, which, up until news earlier this year of some health concerns, had been one of the fastest-growing ways for people to consume marijuana in places like the U.S. where it is legal.
In mid-October of 2019, they did clear the way, if you will, for allowing the sale of these second-generation, these derivative type products. However, because of inventory bottlenecks and some additional i's to dot and t's to cross, they aren't becoming available until this month. One of the things I think is really interesting to see, and how this is going to play out, is to what degree will these derivative products truly expand the cannabis marketplace? If you look at Canada, when they first approved cannabis, it was for dried flower for the most part, and oils. OK, great. You're probably somewhat experienced with cannabis already if you're going into one of these dispensaries to buy those products and use them on your own. Now, we're talking about having products on the shelves of those dispensaries that, theoretically, cannabis-naive buyers could go in and say, "I've always been intrigued, but I don't really want to smoke it. Now I could try an edible," for example.
It'll be very interesting to see whether or not we get a much larger amount of pickup in sales in Canada once these different second-generation goods become available this month.
Jones: Exactly. For a lot of these companies, they've really been looking forward to the opportunity to produce these higher-margin products. Obviously, there is a premium aspect that I think they can play off of that's been really exciting. Of course, you've got a lot of picks and shovels companies that are coming on board, things like your dehydration tech, things like that, to really help move Cannabis 2.0 forward.
But we did get news this week in the derivative space that Canopy Growth, ticker symbol CGC, got some very welcome news about its beverages lines, specifically that they secured some licenses. Todd, what can you tell us about Canopy Growth?
Campbell: I think it's great news for Canopy Growth. The fact is that all of these industry participants have been planting marijuana like crazy, building up their facilities and their production. And unfortunately, there's been a lot of hiccups on the supply side. And as a result, that's creating all sorts of weird inventory bottlenecks that of late have forced some of these producers to ratchet back their production forecasts. So, the success of these second-generation products is very important to these companies. They need another way to be able to use this product that they're growing. So, winning that approval to be able to sell the beverages in Canada, I think, is very big for Canopy Growth, which is the market share leading producer or seller of legal marijuana in Canada.
What Canopy Growth is going to roll out is a product lineup that includes about 13 different cannabis-infused drinks. None of them are going to contain alcohol, at least initially, despite the fact that one of Canopy Growth's big partners is Constellation Brands, which is a big beer and wine company. They'll be non-alcoholic to begin. They'll be in roughly 355 milliliter cans that'll be pre-mixed in various flavors. I think they're going to have a ginger ale mixed with it. They're going to have all sorts of different flavors that you can choose from. They're even doing seltzer, like sparkling water beverages, under a brand called Quatreau. That could be, theoretically, popular. And each will contain either THC or CBD or some combination of the two.
I think the most potent of the ones that they're launching is something called Deep Space. Deep Space is dark-colored carbonated beverages sold in a slightly smaller can, but it'll contain 10 milligrams of THC, which is the maximum amount that Health Canada is allowing at this point.
Jones: Yeah, so, a lot to watch here. Certainly welcome news for Constellation Brands, who I believe has up to about a 40% stake in the company, but has generated losses to the tune of almost $600 million so far related to Canopy Growth. I know this new beverage line is welcome news all around, and I believe as soon as they got the licenses, they've already been up and operational, it could literally be a matter of weeks before we see those hit the store shelves. So, a lot to watch here.
But let's jump across the border, talk about what's happening in the U.S., because there's been a lot of focus on the CBD market. Of course, CBD has taken the world by storm as something to help expand that consumer market, but the FDA recently came out with a renewed stance on CBD, and there have been a number of companies that have gotten caught up in this. Todd, what can you tell us about the FDA's stance right now?
Campbell: The FDA has been talking about this for a while, so it's not too surprising that they have released basically updated guidance or updated thoughts on CBD and whether or not it poses a health risk to consumers. Especially given the how widespread interest has been in CBD-containing products, people are pretty much putting in everything right now. CBD is the non-psychoactive cannabinoid that's second most common behind THC in cannabis, and it's perceived to have significant medical benefits. In fact, there is one CBD-driven drug that's already won FDA approval on the market for use in epilepsy patients. That aside, on November 25th, the FDA did issue a consumer statement that said that CBD has the potential to harm you, and that the harm can happen even before you become aware of it. It can also cause side effects that you might not even notice, and there are important aspects to it that we just don't even fully understand. One of the concerns that they raised in this letter was that it could expose you to the risk of liver injury if you regularly ingest CBD while taking it with other medications. The FDA is clearly saying to everybody out there, "We know there's a lot of excitement about CBD. We know that a lot of people are trying to pitch it as a cure-all for everything. But just recognize that we don't have the scientific evidence yet to be able to say that there is no harm that can come from taking CBD regularly."
One of the other things, Shannon, that happened right around the same time is the FDA came out and issued half a dozen or more warning letters to different companies that are selling CBD with claims saying that CBD does this or that. You're not allowed to do that. CBD itself is not FDA approved, so I think it was very important for the FDA to come out and say, "Yes, there is a CBD drug on the market that we have approved, but we've only approved that one very specific drug. We have not approved the use of CBD overall in topicals, and drinks, and everything else that they're sticking it in now."
Jones: And that's so true, and I think it's not just the regulatory framework that I think a lot of investors and even the industry is waiting for right now, because really, regulation does make it very clear in terms of what is a drug, what's a dietary supplement.
We also got news from Charlotte's Web, the basically number one market share leader in CBD, that they are awaiting a class action lawsuit about, basically, their products being mislabeled as dietary supplements. It's them and another company that basically will ultimately be wrapped up. But there are a lot of CBD companies right now that are marketing their products as dietary supplements, and when you actually go to the FDA and their Q&A for this updated guidance, one of the questions is, "Can CBD products be sold as dietary supplements?" Their answer is no. Literally, in no uncertain terms, based on available evidence, the FDA has concluded that THC and CBD products are excluded from the dietary supplement definition under the FD&C Act. So I think there's still a lot of gray area, and now, what you're starting to see are companies not only subject to the regulatory risk, but now you've also got this legal risk. I think if anything, it really just reinforces the need for the FDA to come out with more clear guidelines. I love the fact that they're giving some updates, but it still leaves a lot to be desired.
But looking ahead, I think right now, one of the biggest questions that I think we get here at The Motley Fool, and really, I think most investors are asking this right now is, is this a bottom? Have we hit a bottom in the marijuana industry? And now, with Cannabis 2.0, can we expect to see things turn around? Todd, what do you say to that?
Campbell: Well, these stocks are clearly selling at a deep discount to where they were last year, but you have to worry about anchoring bias, where you take a price and you say, it's cheap relevant to this price, or it's expensive relative to that price. I think that the best way to look at this emerging group is to say to yourself, what are the prices to sales forward? Looking forward, what are they trading, price to sales? Unfortunately, some of these companies are still very expensive when you look at the price to sales ratio. I think Canopy Growth is still trading at something like 20X forward sales, and they're losing a boatload of money every quarter still.
I think, probably, one of the ones that I'd be most interested in if I was looking to be speculative and try and buy one of these on sale would be OrganiGram, the symbol there is OGI. It's trading at about 4X forward sales. Because of the hydroponics it uses, it's one of the most efficient producers of cannabis. So that's an interesting stock that I might consider looking at. I'd also consider looking at Trulieve, which is a U.S. dispensary focused on Florida. The symbol there is TCNNF. It's growing pretty rapidly in the medical marijuana market down in Florida.
I really think that there's a lot of risks still to these stocks. You've got political uncertainty. Hey, if the vote goes a certain way in November of 2020, you could easily get legalization of marijuana that breaks down all sorts of barriers and increases their use. If it goes another way, then it's probably status quo, and you're still going to be fighting against these regulatory and political roadblocks to try and establish market share.
When you look at Canada, the Canadian market is worth about CA$6 billion a year. Right now, I think only a third of that is done in the legal marketplace. So, you're going to need to see them open up more dispensaries and create more shelf space for these products, and then have that translate into sales. You can still go out and buy on the black market cannabis for less money than it costs in the legal market. These secondary, derivative products, I think you really need to wait and see how they resonate with consumers. If they resonate, great, because you're not going to be able to buy that on the black market. So, I think you have to wait and see when it comes to some of these Canadian periods. If you're more speculative, maybe you give it a go on those two names that I mentioned.
Jones: Exactly. And I think the U.S. multi-state operator space is really interesting, especially for the ones that are profitable and very cost-focused. You mentioned Trulieve. Trulieve is definitely a great company to consider. I really think a lot of the U.S. multi-state operators that are operating in a legal sense get overlooked. I came from an investor conference a few weeks ago, and there was so much talk about those MSOs that are operating well, operating efficiently, and operating a very disciplined approach. Even former Canopy Growth CEO Bruce Linton mentioned that he is eyeing the U.S. MSO space. I think that's interesting. Obviously, with a lot of the sales guidance for a lot of these companies being cut in half in some respects, I think you've got to make sure that whatever you're investing in, that they are very disciplined when it comes to costs, especially as we wait for a lot of these derivatives to come online and we start to see the impact.
Again, that probably won't happen until next year at some point. But, a lot to watch and a lot to like in this space. Certainly, we'll keep all of our listeners up to date on all the latest happening in the marijuana industry. But as for us this week, that'll do it for Industry Focus: Healthcare. We want to thank you for tuning in.
As always, people on the program may have interest 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 being mixed by Austin Morgan. For Todd Campbell, I'm Shannon Jones, thanks for listening and Fool on!