Exelixis (NASDAQ:EXEL) has just introduced a new drug aimed to fight advanced melanoma. Meanwhile, in Colorado, residents get behind legislation that might bring about a new single-payer healthcare structure to its taxpayers.

On this healthcare episode of Industry Focus, Motley Fool analyst Kristine Harjes and Fool contributor Todd Campbell discuss new players in a seemingly crowded biotech landscape and a potentially groundbreaking bill for the Colorado healthcare system. 

A full transcript follows the video.


Kristine Harjes: The Swiss are on the offensive... against cancer. This is Industry Focus.

Hi, everyone! Welcome to the healthcare edition of Industry Focus. I'm your host, Kristine Harjes. And we've got Todd Campbell on the show via Skype. Our regular healthcare contributor. Todd, how's it going?

Todd Campbell: Good! How are you?

Harjes: Pretty good. It's Veterans Day here in here in the U.S., so shout out to all of our veterans that are listening today. Really excellent news out of Exelixis. And we'll also be talking about Colorado for a reason other than marijuana, for once.

But first, what does Switzerland have to do with anything? Well, one piece of Exelixis' recent news was the approval of its new drug, Cotellic, in the U.S. So this drug was approved as a combination therapy with the Swiss company Roche's (OTC:RHHBY) Zelboraf, to treat a specific variation of advanced melanoma.

Now, Zelboraf has been on the market already for five years. Sales are kind of slowing down a little bit, so I'm sure Roche investors are quite pleased and cheering for this approval, which didn't really come as much of a surprise, as the combination was already approved in Switzerland and the European Union advisory panel also recommended it's approval in the E.U., so we can probably expect one there sometime in the future as well.

So let's dig into the new drug combo a little bit. Todd, can you walk us through some of the highlights of its clinical performance?

Todd Campbell: Sure! This is an important drug, if only because it offers a new treatment option for patients with melanoma who've seen their disease advance. So essentially, with melanoma, if you catch it early, it's pretty treatable. Unfortunately, when it advances it gets a little bit more tricky.

Now the FDA has made a lot of efforts to bring a quicker pathway, if you will, of approval for different drugs targeting cancers, including melanoma. This is the most recent, I guess, example of that. Cotellic, when used alongside Roche's proven drug Zelboraf, did indeed boost both the overall response rates, so. Did you partially respond to the drug combination? Did you happen to overall response? Was it a complete response?

It did improve that to 70% from 50% if you were on Zelboraf alone. It also, though, importantly delayed disease progression. So if you go into the numbers and you look and say, OK, well, how long, how many months go by before the melanoma starts to get worse or recurs? And when patients were treated with this two-drug combo, it took about 12.3 months before the disease progressed, whereas if you just taking Zelboraf it was about 7.3 months. So that's a huge improvement in progression-free survival for the two-drug combo versus the monotherapy.

Harjes: Yeah, I mean... this is definitely a game-changing drug for a lot of people. I think one question that is really on people's minds right now that Exelixis did weigh in on a little bit is pricing. So Roche actually gets to set the price here. And I would imagine that anyone looking at this drug from a patient perspective is like, "Oh, gosh, what are they going to charge me for, to get this drug?"

So, what we've heard thus far is that Cotellic is going to be about $6,590 a month. And meanwhile, Zelboraf is about $11,000 a month. So if you add those together you get a combo price of $17,500. That's, of course, seventeen thousand five hundred a month, which is about an 8% discount to a similar treatment available from Novartis, but still looking at a really expensive drug here.

Now, of course, if you look at that from an investor's standpoint, the companies are going to be making quite a bit of money. And I've seen sales estimates all over the place for this combination. Todd, what do you believe could be a peak sales estimate?

Campbell: Right, well, we have two things that we have to consider here, right? We have, "Yes this drug is a big advance for people with tough to treat cases of melanoma." So there's the human side of it.

Harjes: For sure.

Campbell: As investors in trying to figure out if there's an investment thesis we can get behind, we have to look at it and say, "Can they make money by marketing and selling this drug?" That's where we start to get into this area when we're talking about high-priced cancer drugs absent or, realizing too that, paying for cancer treatments can be a major burden for patients.

So yes, cancer drugs have gotten much more expensive over the course of the last three years. Far more drugs coming to market with $100,000 price tags. And that's why it doesn't shock me that the companies are discussing numbers around what you just outlined.

The bigger question that I have isn't necessarily, "Is the price high enough to move the needle for these companies?" It's more, "Is the competitive landscape conducive to them grabbing market share and being able to have -- outmaneuver other drugs that have also been approved for use in patients in the past year?"

On that measure, I'm not so sure. I think that we'll need to digest this over the course of the next few quarters and see how this plays out. Because investors also have to know that [Bristol-Myers Squibb] back in September won an approval for using Opdivo alongside is Yervoy alongside its BRAF-positive patients. So there's a lot of moving parts to figuring out what the economic benefit could be to Exelixis, especially given the fact that Exelixis exercised it's rights to co-promote this drug in the U.S. That means that ...

Harjes: Right.

Campbell: It won't actually be receiving royalties on sales. It actually has to pay for half of the marketing expenses associated with getting it to doctors and patients. The upside obviously being that they'll share in any profits or loss that's generated.

Harjes: Yeah, and it's really only a 50/50 share --

Campbell: There's two pie pieces of that puzzle: patient population and use or volume and price.

Harjes: Exactly. Yeah, and as you mentioned, since they are sharing in the U.S. profits, they're only getting 50% right now. And that's going to decrease as sales increase, with Roche taking the rest of it. And meanwhile it's sharing the cost as well, for marketing and commercialization.

So another thing to consider with all of this is, "Well, OK. Could Cotellic be approved elsewhere?" And it actually is being studied in other areas. I mean, the advanced melanoma landscape is looking pretty crowded already.

And there are several other experimental treatments that are hopefully on the way and going through clinical trials and showing some promise. But you look at some other options that you have for the drug and where it could potentially be another piece of the puzzle. So, it's being studied as a combination with another Roche drug. An experimental Anti-PD-1 therapy. And this could potentially be a treatment for solid tumors.

So, of course, this is still a very early stage type of drug as far as post-approval or late-stage trials go. We don't really have any way of saying exactly how much revenue it could bring in. But it's certainly something to keep an eye on.

Todd, I'm just curious if you could touch on what else is going on with Exelixis. I mean, this is just one part of their story. What else should investors know if somebody is interested in looking at that stock?

Campbell: This is an intriguing company because it's got a lot of irons that are in the fire. But it's also a company that's spending a tremendous amount of money on this research and development programs. You have to really balance the two and say, OK, "If these are really early-stage label expansion type studies, I don't know if you can put a value on how much those are worth yet." So you have to look at Cometriq, which is approved for regulatory thyroid cancer. And it's generating out sales at about $7 million per quarter. And then you have to look at Cotellic, which has just been approved. And we don't really know that the impact on the top line may be in the next year.

I think that investors need to pay particular attention over the course of the next couple of quarters, see how this plays out. They also need to be watching and see whether the FDA approves Cometriq for use in kidney cancer.

Earlier this year, actually last month, the company did submit an application for approval in kidney cancer. That clears the way for an FDA decision next year. If approved, obviously, that now would give the company three different revenue streams, if you will: irregular thyroid, the melanoma, and then the kidney cancer angle. But again, both the melanoma and the kidney cancer indication are both crowded and competitive fields. So it's unclear to me how much market share they're going to end up with.

Harjes: Yeah, I think those are all good points. And this is a company that still is losing money. They're expected to be profitable in 2019, but again, those are projections. And that's kind of a long way away. So this is almost, I don't want to say typical, because none of these stocks are necessarily typical. But it is kind of typical for a biotech, where it's fairly speculative. It's a pretty risky bet.

Another thing that I'll remind everybody that's listening is that, people on the program could have interest in the stocks that they talk about. The Motley Fool could have formal recommendations for or against. There's a lot of great research on our site, fool.com, and out there, elsewhere. You can go find statements from the companies themselves. Just make sure that you're doing your own research and don't buy or sell based solely on what you here. But, this is an interesting story. Definitely keep at eye on it.

Let's hop over to the goings on in Colorado.

Earlier this week, it was announced that a proposal involving a single-payer healthcare system in Colorado will officially be on the 2016 ballot. Now, that's pretty exciting. They needed to get almost 100,000 signatures to get it on the ballot, and they collected way more than that. Absolutely crushed it. They got 158,000 signatures. So what are Colorado residents weighing in on here?

Todd Campbell: Colorado voters are not afraid to shake things up, are they?

Harjes: Not even a little bit.

Campbell: Haha. You know the approval, obviously, of marijuana was groundbreaking, if you will. And new ground could also be broken if voters pass legislation next year that would allow for a single-payer system for people who live and earn money in Colorado, wherein the residents will be able to pick their provider, go to the doctor, and the state of Colorado would pick up the tab.

Harjes: How on earth are they gonna pay for that, Todd?

Campbell: It's going to be pricey. Estimates are pegging the cost around $25 billion.

Harjes: And that's coming from the backers. They're the ones saying that. That's not even the opponents.

Campbell: Yeah, $25 billion. I mean, it's probably gonna be much higher than that. I mean, who knows, right? But they're trying to -- they're trying to attack a situation that is on the minds of everyone, especially now that we're in open enrollment.

A lot of people are signing up for health insurance for next year. Insurance premiums continue to climb. And one of the ways that the proponents think they can rein in those costs is by getting the private insurers out of the marketplace. You get rid of their administration, rid of their profit, and you negotiate directly with the drugmakers, directly with the hospitals and the primary-care physicians.

You get maybe better pricing, and then you pay for that through taxation rather than premium payments. So, what they're saying is, "OK, we'll pay for that $25 billion by instituting a 10% payroll tax; 6.67% of that payroll tax is going to be picked up by the employer. The remainder will be picked up by the employee." But at the same time, yes, you're paying more in taxes, but now you won't have to pay your insurance premium. Or your co-pays.

Harjes: Yeah, and moving that budget over to government is kind of a huge expansion of government for the state. It would literally double the size of their budget. However, you get people that are in support of this bill, that the initiative could slash $5 billion from what residents currently pay in premiums.

Campbell: Yeah, I'm skeptical of all of those numbers at this point. I think that we'll probably get more insight as people really dig into this and the battle goes on. It escalates next year ahead of the election and the vote. The costs are what the costs are. I mean, we know. Anyone who's been listening to our program knows that the expenses that they're tied to, next-generation medications work better and care is climbing. And those expenses have to be paid for somehow.

So you can say, "OK, it's going to be a 10% tax, and we're gonna make up the saving somewhere else." But at the end of the day, the drug companies are still going to want to make more money next year than they did this year. The primary-care doctors are still going to want to make more money next year than they do this year. So, you know, what does that mean? Does that mean taxes continue to go higher and higher and higher? No one knows, right?

So I don't think necessarily by saying, "OK, we're gonna go to single payer, that we're going to eliminate cost increases for the system." It's more that we're going to shift them and we'll better understand what those costs are. Now, that's going to have big implications potentially. Both to the insurance companies, obviously. They're getting cut out of that market -- 5.3 million people live in Colorado. But it could have implications in a lot of different ways. So, we're going to have to watch this vote very carefully. And pay attention to the debate as it rages on next year.

Harjes: I mean, there are so many good points being brought up on both sides of this argument. I saw one critic contend that nearly one-fifth of Colorado jobs are somehow associated with the healthcare industry. And the guy that says that, says that a single-payer system would destroy the industry. So you're talking about a lot of people there. And obviously, the tax itself would affect everybody. Particularly if you're self-employed, you're going to be paying that tax just completely yourself. Like all of that 10%, instead of just paying a third of it and having the rest of it being picked up by your employer.

So, clearly, a lot of moving pieces here. And this is a very new proposal to be officially on the ballot. So I'm sure people on both sides of the argument are going to be weighing in a ton more. And so chalk it up to the list.

We've already talked about a couple of other things on this program that will end up being theoretically, or probably, or definitely on the 2016 ballot. So, lots to watch for in the next election cycle.

Todd, thank you so much for all the great information that you shared, as always. And folks, thanks for listening!