In this episode of MarketFoolery, Chris Hill talks with Fool analyst Shannon Jones about 2019's healthcare industry and 2020's marijuana space. Shannon explains how we got here, with so many of the biggest marijuana companies losing tens of billions of dollars this year; what we can reasonably expect for 2020 in terms of legalization and road bumps; what factors will affect what comes next for the marijuana industry; and some less traditional ways investors can get exposure to the space. Plus, Shannon shares some of the most exciting healthcare breakthroughs and trends from 2019, along with some healthcare stocks for listeners to add to their watchlists.

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This video was recorded on Dec. 30, 2019.

Chris Hill: It's Monday, Dec. 30. Welcome to MarketFoolery! I'm Chris Hill, with me in studio for the first time in a very long time, because she's been avoiding me, it's Shannon Jones. Thanks for being here!

Shannon Jones: Hey, glad to stop avoiding you, Chris, and glad that you invited me back in after, what? It's been at least a year. 

Hill: No.

Jones: It's been at least a year, Chris. 

Hill: Really? 

Jones: Yes, because we were talking about cannabis stocks a year ago. 

Hill: We're going to remedy that in 2020. We're going to get you on MarketFoolery because that's what the people want. 

Jones: The word is out there, Chris.

Hill: "We want more Shannon Jones." Let's start with cannabis, though, because we are wrapping up 2019. I talked a little bit with Emily Flippen a couple of weeks ago on this show. She had gone to MJBizCon. And you look at the coverage of that, and from a stock perspective, it is, I think, the uber-narrative of the year for the cannabis industry, which is the loss of tens of billions of dollars in market cap of the biggest publicly traded cannabis companies. When you look at that as someone who analyzes stocks, do you look at that and think a lot of this makes sense, because there was some inflation that wasn't deserved? Or, what do you think when you when you look back on 2019?

Jones: Yeah, so, I think you have to look at 2019 in the context of 2018. 2018 was really the year of euphoria, hype. "Marijuana's going to take over, it's going to be a multi-billion-dollar industry and there's not going to be any speed bumps." 2019, though, was really the reality check here. This is an industry that is being built from the ground up, and also the infrastructure is being built from the ground up around it. So, with that, 2019, we just saw a lot of missteps. We saw the bumbled rollout in Canada. There was some oversupply issues in Canada, there was also lack of access to product in Canada as well. All of the sales expectations that we went into 2019 seeing just did not pan out.

Hill: That goes to one of the things Emily talked about. When, essentially, you're creating an industry from whole cloth, it's not just a question of creating that industry. It's the support system around it. And so, here in the U.S., among other challenges, because there is not federal legalization, basic banking services is a challenge for so many of these businesses.

Jones: Yeah, and unfortunately will continue to be a challenge, Chris. I mean, you look at the Safe Banking Act, which, in 2019, it was all about, "Oh, the safe banking out will come and then we'll actually see these businesses get access to things like just being able to process credit card payments." But what we've seen in 2019, and I think will be interesting even heading into 2020, is a lot of these initiatives, they'll get started in Congress, they'll pass through the House, only to stall in the Senate. Of course, the Senate being controlled by the Republican majority right now. And so, I don't see a lot of that changing. As much as I would love to say, "Hey, in 2020, it's an election year, things are going to be turning around," at least in terms of the regulation side of things on the federal level, I don't see that happening. I think until, No. 1, the big wild card right now is, OK, with the 2020 election, who's going to get elected president? If you look across the Democratic candidates right now, all but one -- of course, that being Joe Biden -- actually believe that we'll see some sort of legalization on the federal level. But even so, it ultimately comes down to the Senate. Will it remain under Republican control? If that changes, then we could start to see some movement on things like the Safe Banking Act, even the Moore Act, which is attempting to expunge records, also implement some sort of federal tax, and really decriminalize marijuana. But until that happens, that's really the big question mark for 2020.

Hill: We talk every now and then about mindset for investors. And it sounds increasingly like, if you're looking to invest in cannabis, more so than other industries, you have to ratchet up the amount of patience that you have in terms of your expectations, because anytime you're dealing with the number of X factors at the federal governmental level that you just laid out, then yeah -- I mean, when we say we like to invest for five, 10, 20 years, we do, it's just that ideally, we're investing in companies that are also offering us some type of return in the first one to five years. But it seems like with cannabis, there will be winners, there will be rewards for investors, but it's really got to be something where your patience is higher than normal.

Jones: Yeah, I think it's patience on one hand, but also, too, I mean, it's going to be slim pickings, even going into 2020, because really, what we saw in 2019, we saw access to capital markets really start to dry up as we started to see a lot of the hype and euphoria start to wane. And so you have a lot of money right now that is sitting on the sidelines not coming into the industry. You have a lot of companies really under a cash crunch. So I think you'll continue to see into 2020 companies who won't make it. 

But I think as long-term, Foolish investors, that also gives us tremendous opportunity, because we can afford to be patient. There are companies out there, segments of the market within the cannabis space, that are really attractive. I'm thinking about multi-state operators. There's a company called True Leaf, it's a multi-state operator based out of Florida. It's got about a little over 40 dispensaries. But they are planning to expand in places like Connecticut, Massachusetts, California. This has been a very financially disciplined company. They're actually profitable. The stock has been up year to date. I mean, they have been one of the bright spots in a lot that's been happening. But I think multi-state operators right now have kind of been thrown out with all the other bigger names that have really had a very, very tough year. I think that's one space to look at for long-term investors. 

Another space, Chris, that I think is really interesting, is just some of the other picks and shovels plays. So I'm thinking about companies like EnWave, they make dehydration technology. We know a lot of these companies are trying to bring down the cost of production in cannabis. This is a company that's really expediting that entire process by helping them to dehydrate the plants. So that's another one that I really like. Valens Groworks, they're an extractor. Emily and I had a chance to interview someone from their management team. Really impressed by their strategy and their place within the derivatives market. Canada recently legalized derivatives. So, we're talking about your edibles, your cannabis-infused beverages. This is a company that's, I think, really going to be shaping what that looks like. I'd say, if you're a Foolish long-term investor, think about picks and shovels plays, and also think about, on the U.S. side, the multi-state operators.

Hill: Should we expect to see, certainly in 2020, but maybe even for a year or two after that, consolidation here in the U.S.? It just seems like some of these smaller companies really can't sustain themselves.

Jones: Absolutely. Absolutely. I mean, it's only a matter of time before we start to see even more headlines with that heading into 2020. I think it's not even just among the cannabis players. I mean, consumer packaged goods companies are really seeing this as an opportune time, especially now that valuations have pretty much been cut in half, sometimes 75% or more for a lot of these companies. So, yes, I think you'll continue to see consolidation. You'll continue to see partnerships, and you'll continue to see consumer packaged goods companies coming into play as well.

Hill: Healthcare as an industry is enormous. If I were just to ask you, what are your five biggest healthcare stories for 2019, I could probably just go get a sandwich, because of all of the things that have gone on in healthcare this year. I'm not going to do that, but I'm curious, when you think back on 2019, what stands out to you? Whether it's individual stories involving individual companies or trends.

Jones: Yes, gosh, there's so much to cover in the healthcare space, but I will give you the biggies. So I think first and foremost, 2019 and really into 2020 is about personalized medicine, precision medicine. And in particular, if you're an investor, you're going to be looking at the cancer space. Cancer, second leading cause of death globally. By 2033, researchers are expecting 21 million new cases. This is a huge, huge area. But there was a report, I believe, released just yesterday from Evaluate Pharma. For 2020, eight drugs are expected to generate over $1 billion in sales. Guess how many of those are for cancer drugs? Just guess. 

Hill: I'm going to say at least half.

Jones: You're exactly right. Half of those drugs are just for cancer care. So, these are companies like Merck, a big biopharma company. They've got their big blockbuster drug Keytruda. Bristol-Myers Squibb -- of course, they did the acquisition with Celgene. Now they're an even more formidable foe in cancer care as well. So, that's one area that I think all healthcare investors should be watching, is oncology. 

Another one, Chris? The gene. We saw over the last year, really over the past two to three years, so much focus on gene editing. Some for the good, some for the bad, and it's still really, really early for companies like CRISPR Therapeutics, which is really kind of being seen as the pioneer in the gene editing space. But it's still very early. We just got some early data with their partnership with Vertex Pharmaceuticals. That was encouraging. But I'd say, for investors, focus so much on really early stage data because we're still years out from being able to invest confidently in those spaces. But I do think there are opportunities, especially with diagnostics and gene sequencing. 

Here at The Fool, of course, Illumina is a big one. But I guess for our listeners, I'll also throw out a company called Guardant Health. They've carved out a niche in diagnostics, and specifically in cancer care. This is a company that has just been exploding. They're the leading provider of something called liquid biopsies. And I see your face, Chris, because I think you're getting ready to say, "Theranos." I will say, this is not of the Theranos variety.

Hill: I wasn't going to say that. 

Jones: You were going to say that! [laughs]

Hill: [laughs] I wasn't going to talk about Theranos.

Jones: Yes, you were. This is a company that's actually doing it, Chris. Of course, liquid biopsies, it's an alternative to the more invasive and really painful biopsies for cancer care. But they've got a method to draw blood, find and analyze on the genetic level the tumor DNA that circulates in the blood. So, they've got a number of different tests out there. We've talked about it on the Industry Focus: Healthcare show, so I won't go too far into that. But this is a stock, I mean, that's just been exploding, and I'd even say for their revenue, revenue up 181% to $61 million in their last quarter. This is a company that's actually doing what Theranos wanted to do, and they're doing it in a smart way.

Hill: Let me go back to a couple of the companies you mentioned. You named-checked the big ones, like Merck, Bristol-Myers Squibb. There was a long stretch of time where any investment you made in the big pharma companies was going to pay off for you as an investor. And then, I haven't run the numbers exactly, but it seems like there was just as long a time, or roughly as long a time, where it was a really stagnant business. As a group, they just weren't doing well for investors. Is the pendulum swinging back the other way?

Jones: Absolutely, and I think it's because they're shifting away from a lot of those me-too generic products. Those are easy to get to market, but they really didn't make sense in terms of the economics for investors. But what we're seeing is the infrastructure. The FDA is really incentivizing companies to go after high-unmet-need areas. They're getting through their approval timelines faster. They're given more exclusivity to protect them from competitors coming onto the market. So, these companies now are shifting, or they're acquiring companies who are really focused on personalized medicine, and even more so high-unmet-need opportunities.

Hill: I'm going to you on the spot with this. For a lot of people, and I'm going to include myself in this group, when we're thinking about investing in any kind of drug manufacturer, any kind of pharmaceutical company, invariably, we are all faced with at some point in that process, whether we're doing the research on our own, or we're working with an advisor who's laying out the case for, "This is why you should think about investing in this stock," at some point, we are faced with trying to process what this company's relationship with the FDA is. And you've already touched on this a little bit. But, what is one tip you can give investors in terms of separating the more promising opportunities from the red flags? Because, again, anyone who's ever looked at a drug stock, you're either reading or hearing from someone like, "Well, here's the thing. They're at stage two. In the next six months, we think they're going to be ... " And it's like, OK, I'm not an expert in the FDA. And we've seen it cut both ways in terms of extremes. We've seen, over the last few years, stocks that have dropped 30% in a single day because a late-stage drug completely fell through. And then, we've seen other stocks pop 30% because they made an announcement, or they just made it past the first hurdle. How do you process all of this?

Jones: Yeah, that's a great question, and probably one not easily answered. But I will say, it is harder to do that nowadays for a number of different reasons.

Hill: Really?

Jones: Yes. 

Hill: Darn, I thought it was going to be easier. 

Jones: [laughs] One, because of what you mentioned, Chris. I mean, just getting through the approval timeline is hard. It's challenging. I believe it's like 90% of drugs don't even make it through to approval. But that's not the end. And what we're seeing more and more of moving forward is, even if you get to approval, now your drug has to be commercially viable. People have to want to prescribe it, and patients have to want to take it, and insurers have to want to pay for it. Those are all factors that are a huge part of it. So it's really not even just the FDA. We've seen a lot of companies that have done very well, got a drug onto the market. I remember my first investment was in a company, unfortunately, that didn't make it in terms of the commercial viability, but they made it through to approval. So, I'd say the FDA is one aspect for that. 

But if you're an investor in this space, what you really want to focus on, even if you're not going to get into all the clinical data, which I think you should, but even if you're not going to focus on that, is, OK, what is the market opportunity for this drug? Is this a market opportunity where the company is going to have some pricing power, get some exclusivity, either from the FDA or from their patent being exclusive for longer to hold off competition? And then, too, I mean, just think about it -- if I have to inject myself every day, on my own, with a needle, especially if I don't have any symptoms, what's the likelihood as a patient that they're actually going to do that? It's probably pretty low. So, I think for everyday investors out there, just take a step back. Think about, what is the market opportunity? How can they price it? If you're talking about a million-dollar price tag, I know payers aren't going to pay for that; patients probably aren't going to take it if it's an injection. Think about it from a very practical standpoint and start there.

Hill: Last thing before I let you go. You're a longtime host on Industry Focus. Anyone who listens to Industry Focus has benefited from your hosting the Wednesday Healthcare episode. And for those who have already listened to Industry Focus, they now know the news that you're moving on. And so, I basically called you in here to yell at you because I'm angry that you're moving on. 

Jones: [laughs] Yeah, very bittersweet, Chris. I mean, the Industry Focus: Healthcare podcast every week has really been my baby, my heart, but there's a lot of things happening here at The Motley Fool. 

Hill: There certainly are. 

Jones: Earlier this year, I did take on the role of director of programming for Tom Gardner's Discovery suite of services. And as you can imagine, that is a full-time job times two.

Hill: And growing. 

Jones: And growing. So, I will say, that doesn't mean I will be going away anywhere. I mean, I will hopefully be in the studio giving some updates, especially some of the more notable ones. But also, too, Todd Campbell, Brian Feroldi, who have been guests, they'll also be showing up on the Industry Focus podcast, just in different areas, and maybe a little less frequently.

Hill: All right, and I'll get you in here from MarketFoolery more than once a year.

Jones: We'll see. I won't hold my breath.

Hill: Shannon Jones, always good talking. 

Jones: Always fun. 

Hill: As always, people on the program may have interests 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. That'll do it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Chris Hill. Thanks for listening! We'll see you tomorrow.