Spending on hepatitis C drugs saw a jaw-dropping 743% bump in 2014. Tune in to learn what that means -- and what it doesn't -- for drug makers Gilead Sciences (NASDAQ:GILD) and AbbVie (NYSE:ABBV), the two major players in the hepatitis C field.

The Express Scripts (NASDAQ:ESRX) Drug Trend Report also had important news about SGLT2 drugs and PSCK9 inhibitors, used in the treatment of diabetes and to lower cholesterol, respectively. Join us for details on these major drug trends and what it means to investors, on this health care edition of Industry Focus.

A full transcript follows the video.

Michael Douglass: Inside 2014's drug spending trends; this is Industry Focus.


Hi Fools, health care analyst Michael Douglass here, and I'm on the phone with Todd Campbell, one of our contributors from New Hampshire.

Todd, spring has certainly come down here in Alexandria. I don't know if it's quite reached the Great White Northeast, though.

Todd Campbell: Yes, we've got a lot of gray because we haven't had any fresh snow!

Douglass: Oh gosh, that's the worst!

Campbell: We're now in the non-pretty stage of the snow season, heading straight on into the mud season.

Douglass: Got you. Lovely, looking forward to that!

Something interesting came out recently. Express Scripts did their commentary on drug spending from last year; a 13% increase in spend compared to the year before, driven by, was it 31 or 33% increase in specialty drugs?

Campbell: 31% upward in spending on specialty drugs. That was primarily driven by -- which I'm sure we'll get to in a minute -- the jump in spending on hepatitis C therapies.

Douglass: Yes, let's jump right into that number, because while the spending on hepatitis C drugs wasn't that big when compared to the totality, it was certainly the most impressive growth -- a 743% bump, to be precise, which is just ... I would probably use the word "jaw-dropping."

Campbell: Jaw-dropping, eye-opening, eye-popping. Any of those work.

Douglass: Yes. Let's talk our listeners through what happened there a little bit.

Campbell: I think the thing that investors really have to recognize here is that a lot of that spending jump is because so many people were warehoused for treatment ahead of the approval in December of 2013, for Sovaldi, which is Gilead Sciences' drug that got approved and went on to have an unbelievable year; $10 billion worth of sales last year from Sovaldi alone.

You're comparing that 743% jump to a very, very low baseline, because not that many people were treated in 2013.

But still, we're talking about just phenomenal spending on the category; Sovaldi with $10 billion in sales, Harvoni which got approved in October, doing over $2 billion in sales, and combined $12.4 billion in sales for Gilead Sciences' hepatitis C drugs in the first year following the approval.

Douglass: Yes. One of the things I think investors are dealing with, with Gilead -- and one of the reasons it's, for biotech at least, a comparatively cheap stock ... it doesn't have a price to earnings ratio in the hundreds -- is that the expectation is that drug spend increase is going to ramp down.

Although, still looking at what I would consider still pretty impressive spending increases. What, 66.5% increase in hepatitis C spend expected in 2015, 55% in '16, 44% in 2017. These are still pretty darn big numbers; maybe not 700%, but still pretty darn big.

Campbell: These are huge numbers. I think that investors are focusing too much attention on the competitive risk and the pricing concerns that came out after AbbVie got their drug, Viekira Pak, approved in December.

People have said, "They're going to have to do all this discounting, and it's a price war," etc., etc.

You still have to recognize that the price drop, yes that's going to crimp a little bit, but it's going to be more than offset, most likely, by an expanded population of treatable patients because now you've got these insurance companies that won't be rationing care anymore, to just the sickest of hep C patients.

Douglass: Right, and you also have the Medicaids engaging as well, and a lot of other government payers that Gilead sees a lot of opportunity for this year, particularly in Europe.

This is one of those things where, if you asked me what's the best stock in hepatitis C, as a Gilead shareholder -- and I know you are too -- we'd probably both say Gilead. But that's not to say that AbbVie's going to necessarily have an awful year either. This is one of those big, growing markets that can probably support multiple big players.

Campbell: Yes. A study just got conducted by the highly respected MD Anderson Cancer Center, in Texas. The study found -- or estimates forecast, however you want to look at it -- $136 billion is going to get spent on hep C medicine in the next five years; $136 billion. This is a truly massive market opportunity for these drug makers.

Douglass: Yes. Certainly a lot to go on there! And a story of course, for folks who have listened to Industry Focus for a while know, a story that's very near and dear to our hearts, one that we're always keeping a very close eye on, just because it's so interesting.

Let's talk about less impressive growth numbers -- it's pretty hard to get 700%! But in other areas, diabetes spending was up 18%. Express Scripts put a lot of that because of the approval of the new SGLT2 drugs like J&J's (NYSE:JNJ) Invokana

Campbell: Yes, Invokana was the first one to win approval, and as a result it's had the edge in gaining market share, and this is a new class of drug so it's going to be increasingly used. There's no getting around it.

Express Scripts is forecasting that spending will grow another 18% in each of the next three years. Now, that's pretty remarkable because diabetes is the biggest class for spending, out of any indication on the traditional side of health care spending.

It's the biggest by far; it's more than two times more per year, per member, than the next highest category, so you're talking about almost 20% growth per year for the next three years. A lot of that obviously is going to be tied to the increasing prevalence of the disease, but it's also because of these SGLT2 drugs, which work differently than prior generation drugs.

What these drugs do is help the kidney deal with blood sugar differently -- better. It helps to regulate those blood sugar levels better than you would be able to regulate using traditional long-acting and short-acting insulin.

This is a drug that's going to get used alongside of these other therapies, rather than instead of them. As a result, spending is going to climb for diabetics over the course of the next few years.

Douglass: Yes. It's interesting, when you look at the 2014 trend for diabetes, that 18%; you get a 16.3% bump in cost, and just a 1.7% bump in utilization. We certainly know that health care costs are a big concern for payers, for the public, for taxpayers; just for everybody!

But we're also going to see that continual growth in utilization as the population of folks who are diabetic increases.

Campbell: Right, and to take that one step further Michael, we have to also look at it and say utilization was up 1.7%, but if you look in all indications, utilization actually dipped slightly last year so that's pretty solid growth in utilization, and again that's tied to that prevalence.

Douglass: Absolutely. Let's talk, finally, about another class of drugs that Express Scripts called out, the PSCK9 inhibitors, which you and I have talked about a few times in the past. Let's start with a little bit of background on them, and then we can get into the opportunity and Express Scripts' worry there.

Campbell: Yes. For more than 20 years now, doctors and patients have been waging a war to get cholesterol levels down. Battles are being won, but the war is far from won. Heart disease remains the biggest killer of Americans every year. It accounts for about one out of every four deaths, so there's a significant unmet need to reduce the incidence of heart disease.

Statins are an important weapon in that. It's a huge market. Lipitor, at its peak before it lost patent expiration, was a $12 billion a year drug. This is the most widely prescribed category of drugs out there.

What's happening is that companies like Amgen (NASDAQ:AMGN) are developing new drugs that work in a different way than statins, that can be used alongside statins to get cholesterol levels even lower.

What they're finding is that if you can reduce the level of bad cholesterol in the body, you've got potentially less of a chance of having a blockage that leads to either a heart attack or a stroke.

That has got Express Scripts' attention because it's looking at it and saying, "These are new biologic drugs. Statins have been around for 20 years. They're cheap, they're readily available, and they're used very widely. What happens if all of the people who are taking statins eventually start also taking these new PCSK9 drugs too?"

Express Scripts is guessing that the pricing of these drugs could come in around $10,000 a year, and with 71 million people with high cholesterol? It could be a massive, massive indication.

Douglass: Right. Of course, some caveats here, right? Will the PCSK9s ultimately end up being dosed alongside statins in all cases? Kind of hard to say, because right now they've been really targeting folks who cannot take statins. Whether that's a longer term opportunity or not, I think remains to be seen.

But, certainly a lot of potential. Just the initial numbers that you see for these PCSK9 inhibitors are in the $2-3 billion range, and frankly it could be bigger than that. There's, I think, a lot of excitement around those.

Campbell: Right. You make a great point; right now, neither of these drugs -- there's one from Sanofi (NASDAQ:SNY) and Regeneron (NASDAQ:REGN), there's another one from Amgen -- they have not been approved by the FDA yet.

Amgen's going to get an FDA decision in August. The decision will be for a smaller patient pool, people who are basically intolerant to statins and still have very stubbornly high bad cholesterol levels. They have rare forms of genetic disease that make them intolerant.

At the beginning, yes, the patient population is going to be pretty small. I think what people are looking at is, they're saying, "We're assuming that over time, that will expand." Like you said, you need to take that with a grain of salt because anything can happen in clinical trials.

Douglass: Yes! As biotech investors find out, unfortunately every week, all too often what seems to be a slam dunk or seems to be a certainty, just doesn't end up happening.

Todd, thanks for your insight here today, as always. Folks, we got some great questions last week, and we'll get to them over the next couple weeks. If you've got anything on your mind; health care, biotech, pharmacy, med tech -- or insurance, for that matter -- anything at all related to health care that's on your mind, shoot us an email! HC@fool.com -- that's "HC" like "health care" at fool.com.

As always, as we usually let people know on Industry Focus, people on the program may have interests in the stocks they talk about. Usually we try to call it out, but sometimes we miss one. I think Todd and I both own J&J, by the way -- and The Motley Fool may have formal recommendations for or against stocks that are mentioned in this podcast, so don't buy or sell stocks based solely on what you hear.

Thanks much. Stay tuned for Industry Focus tomorrow. Check back to Fool.com for all of your investment needs, health care and otherwise, and Fool on!