As another announcement reaches the country regarding a medication not fulfilling promises, healthcare investors have good reasons to getting worried. 

Amgen (NASDAQ:AMGN) has pulled back on the production of its popular psoriasis medication, but where does that leave companies like Johnson & Johnson (NYSE:JNJ) or Celgene (NASDAQ:CELG)? We've seen stocks soar with good news from the FDA, but some might have cashed in before the proof was in their pockets. 

On today's episode of Industry Focus, Motley Fool's Michael Douglass and Todd Campbell help investors understand the impact of this news.

A full transcript follows the video.

 

Michael Douglass: Amgen presents the perfect reason why you don't count your chickens before they're hatched. This is Industry Focus.

[INTRO]

Hi, Fools. Healthcare analyst Michael Douglass here. Today, for your Wednesday health care edition of Industry Focus and I'm on the phone with one of our health care contributors; Todd Campbell. Now Todd, the topic today is just -- I think, for a lot of people -- pretty surprising news out of a collaboration between Amgen and AstraZeneca (NYSE:AZN) on the psoriasis drug Brodalumab.

Todd Campbell: In preparation for this, I put on my 'way back' hat and I was trying to think of "When have I seen this before?" honestly, I can't think of a high profile drug like this failing in such a spectacular fashion in such a surprising way. This is very interesting and it's a great reminder to investors that, until the FDA gives you the green light, don't bet on an approval.

Even if you have solid Phase III data in hand. Amgen and AstraZeneca, they teamed up on this drug way back in 2012. They put a lot of time, effort and money into studying this drug. They've studied it in thousands of patients. They found, in those studies, that this drug was very effective at helping clear skin for people who were suffering with psoriasis.

This is a huge patient indication.

Douglass: Yeah. A multi-billion dollar opportunity in that indication. Not necessarily for this drug in particular, but the market as a whole, and it's been a big area. Autoimmune diseases have been a big area of growth in biotech and pharma.

Campbell: Yeah. We've got 7.5 million people here in the U.S. that suffer from psoriasis. They estimate that there's 125 million people worldwide. So, we're talking a lot of people. It's a disease that, while it's not life threatening, it is life changing. A study was done that showed that about 60% of people who suffer from it feel like their quality of life is really affected by it.

There is a significant need for therapies. That's why you've got a host of blockbuster -- billion dollar blockbuster drugs that are used to treat it. You've got AbbVie's (NYSE:ABBV) Humira, you've got Enbrel that's used in some cases, you've got Johnson & Johnson's Stelara. There are a lot of drugs.

I think that because of the market opportunity, investors looked at this drug and they said "Hey, this is a great opportunity, a great drug that Amgen can use to offset some of the risk that's going to endure -- pain will endure -- from the patent losses it's facing." So, this is one of the 'pillars' that people were looking at and saying "This will hold up, or prop up sales in the face of any biosimilars that hadn't been coming to market to threaten its market share and these other drugs."

Douglass: Right, and let's face it; Brodalumab's Phase III data looked good. It was effective, it didn't have -- they weren't reporting massive safety issues, but more recently -- earlier this week -- Amgen had a meeting with regulators and disclosed that they were walking away from it because there were issues with suicidal thoughts that would end up on the label and thought would essentially make it an unmarketable drug.

Campbell: Yeah. The unofficial reports are that there were a handful of patients who reported the suicidal thoughts, and unfortunately, there were a couple who had followed through on it. It was a big trial, thousands of patients, but even a handful is enough to make people say "Whoa. This could be a big problem."

I think in that respect it's good that Amgen is walking away. I think that's the right decision right now. At some point you have to say "These are sunk costs. We put a lot of time and effort into developing this drug, but we have other irons in the fire that, now that we know all of these other hurtles that are going to be associated with trying to market -- Brodalumab, now that we get to that point, why don't we just shelf that and just focus on Repatha, a cholesterol busting drug and we'll focus on biosimilars instead.

I think it really changes the dynamic for the market itself as well because you go from Johnson & Johnson's Stelara being threatened by these new drugs, to now saying "Maybe Stelara is not going to see much of its market share fall away." Last May Amgen and AstraZeneca said "Our drug works really well" and then in November they said "Hey, it even works better than Stelara." So, I think a lot of people were saying "Wow, Stelara's got $2 billion in sales..."

Douglass: Yeah. Do the math there, right?

Campbell: Yeah. So, this might be a real big opportunity for Johnson now that it's not going to have face against this competition. It may also help support Celgene's Otezla which got approval for the indication last fall that's off to a start -- if you measure it from prescription volume -- that's faster than the start that Stelara had.

Granted, it did about $60 million in sales last quarter -- its first full quarter since getting the approval for that indication. But that was up from $47 million the prior quarter. So, Celgene thinks this is a billion dollar drug. So, there's just one less competitor that Johnson and Celgene are going to have to out maneuver.

Douglass: Yeah. This is also -- I think you're right. Amgen made the right call because when you have an unmarketable label with these really nasty side effects, especially something that at the end of the day is -- as you pointed out -- life changing, not necessarily as dangerous as some other conditions could be.

So, you're just going to have folks that are less -- doctors are not going to prescribe something with really heavy, nasty side effects when there are other drugs that can work, and when it's not cancer. Not something really, truly, immediately life threatening.

Campbell: Right. As a doctor you're not going to feel comfortable prescribing a drug that may be life ending for a disease that's not fatal. So, yeah. I think this became an unmarketable drug, Amgen's making the right decision not pursuing it. I'm not going to lie though. I'm a little disappointed in Amgen and AstraZeneca, the fact that it's come out the way it has come out. It makes me wonder "What did people know, and when did they know it?"

The fact that Amgen released the news that it's not going to participate in developing the drug anymore on the Friday right before Memorial Day makes you wonder if they were hoping to slide it in there. But I think, ultimately, it's the right decision. You and I were talking before the show. I don't know. I don't think AstraZeneca's going to be able to do much with this drug either. Amgen's basically walked away from the deal leaving it in AstraZeneca's hands.

So, AstraZeneca, theoretically, could do whatever it wants with it. It would be interesting to see what they officially decide to do with it. But Amgen's a big company. They've got a lot of experience in dealing with drugs, labels, and commercializing compounds. So, if they're saying "This isn't worth it to us." Then AstraZeneca will probably say that, too. The way that the deal was written between the two companies when they did their collaboration was that they would share the cost.

AstraZeneca paid a little bit of money, they shared the cost associated with developing it and then Amgen will collect some royalties on sales, and then they'd split any eventual profit tied to the drug. I suppose since this was the most advanced drug in that collaboration, it kind of cast some doubt on whether or not that collaboration will continue in any form, and in what shape if it does continue -- what that will look like.

Without a doubt, this basically shifts the discussion now for Amgen to Repatha and the biosimilars instead because they're going to have to rely a lot more heavily on that over the coming years to offset and threats to their drugs Neupogen and Neulasta and Epogen. It could face off against biosimilars.

Douglass: At the end of the day, it's not like losing one drug sinks Amgen, or AstraZeneca. Amgen's a big biotech. AstraZeneca is a big pharma. But given that you have both companies struggling with a patent cliff and you have both companies highlighting this drug as one of their key opportunities; it's a blow. It's a big blow, and I think with AstraZeneca, a lot of the attention now turns to some of those really early stage cancer drugs that they're looking at.

And as you pointed out with Amgen, its biosimilars and the PCSK9 Inhibitor.

Campbell: Yeah. That means there's a lot of question marks for investors. There's probably a lot of investors going "What do I do now? What does this really mean?"

Douglass: So, if you're in that position, Todd, what do you do?

Campbell: I sit on my hands. Basically this means there's less clarity than there was last week. We need to see how this shakes out. I feel pretty good about the biosimilar opportunity for Amgen. I think Repatha could be a multi-billion dollar blockbuster if it wins approval.

Douglass: Right. Which, if this reminds anyone of anything it's that the approval is not guaranteed. Even with what looks like good Phase III data.

Campbell: Yeah. Even when a company reports good Phase III data, do not count those chickens. Without a doubt. I think that you need to wait and see a little bit. If shares in Amgen retreated significantly from here then I might be willing to consider picking it up. If you own it already, I wouldn't sell it on this news.

Like you said, this isn't going to sink Amgen. When push comes to shove, it probably reduces their long term forward forecast by a half a billion dollars. There's maybe going to be a billion dollar drug. So, at the end of the day, that's not really going to be a deathblow to Amgen. So, if you're currently in it, you probably can just sit tight for the long haul. If you're considering it, just keep it on the watch list.

Douglass: Yeah. I kind of tend to be the same way. I don't find very many of the big pharmas attractive and AstraZeneca lower on that list as it is. Among the four big biotechs, me personally, Amgen's my least favorite. Just because the others have clearer growth opportunities. With Amgen it's a little bit less to find right now.

That isn't to say that any of these are necessarily 'bad stocks', it's just not my personal favorites. If I weren't over allocated in health care -- which I am -- then they still wouldn't be very high on my watch list. I think it's always important for folks to keep a pretty broad watch list because you never know when suddenly a stock's value proposition's going to look a lot better for you.

So, that's something to keep an eye out for. But, yeah; I'm with you. To me, this is important, but it's not necessarily investment thesis changing for me. For me, these were both watch list stocks, regardless.

Campbell: yeah. I think that all eyes should shift to Repatha. That's going to be -- that's the cholesterol busting drug that they're working on as a PCK9 inhibitor. It could eventually end up being used alongside statins in a very large patient pool. It'll be very intriguing to see how that plays out. I think other than it being intriguing -- and something to keep an eye on -- there's no harm in watching and waiting for a little clarity.

Douglass: Yeah. Watching is free, right?

Campbell: Exactly.

Douglass: All right. Cool. Well Todd, thanks for your take, as always. Folks, as we always want to mention on this show: here at The Motley Fool we believe in doing your own due diligence on stocks. So, never, ever, ever buy, or sell, or do anything with a stock based just on what you hear. Always do your own due diligence, and remember that folks on the show and The Motley Fool may own shares, or options on stocks that we mentioned and The Motley Fool may have active recommendations on stocks that we mention.

So, always keep that in mind. Do your own due diligence. Check back to Fool.com, and of course the Industry Focus podcast for all of your investing needs -- health care and otherwise. Thanks, much. For The Motley Fool, I'm Michael Douglass. Fool on! 

Michael Douglass owns shares of Celgene and Johnson & Johnson. Todd Campbell has no position in any stocks mentioned. The Motley Fool recommends Celgene and Johnson & Johnson. The Motley Fool owns shares of Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.