Last Thursday closed out the 34th annual J.P. Morgan Healthcare Conference, where hundreds of healthcare companies gathered for announcements about their plans for 2016.

In this week's Industry Focus: Healthcare, Kristine Harjes and Todd Campbell go over three of the main highlights: AbbVie's (NYSE:ABBV) standout guidance announcement, Johnson & Johnson's (NYSE:JNJ) plans for M&A, and a huge, exciting new project that's seeking to radically transform cancer treatment as we know it.

A full transcript follows the video.

 

This podcast was recorded on Jan. 20, 2016.

Kristine Harjes: The Super Bowl of healthcare; this is Industry Focus.

Hello, everyone! Welcome to Industry Focus, healthcare edition. I'm your host, Kristine Harjes. I am joined by Motley Fool healthcare contributor Todd Campbell on the line via Skype. Todd, welcome back!

Todd Campbell: Always happy to be here! Looking forward to today's conversation.

Harjes: Yeah, me too. So, last week, really exciting time in healthcare, as alluded to. Basically the Super Bowl of healthcare was last week. It's a four-day long conference known as the J.P. Morgan Healthcare Conference. This was the 34th annual one? Yeah?

Campbell: Yeah, granddaddy of them all, too. 400 companies show up and basically update investors in the universe on how they're hoping to change the world for the better in terms of healthcare.

Harjes: Yeah. So, it's a really important event for the industry, definitely sets the tone for the rest of the year, since it always occurs in early January. And we get a lot of good news stories out of it. So, what stood out to you, Todd?

Campbell: Well, this was an interesting year. Unless you haven't turned on the television set or checked your Yahoo! Finance feed or something like that ... the market has been tumbling. Usually, when you've got J.P. Morgan going on, a lot of healthcare stocks will pop because of things that the management is saying. Obviously, with the market in a sell-off mode, that didn't really happen this time around. So a lot of the headlines, if you will, have been buried for these companies. So, a few that did stand out, that when all the dust settles, maybe people will start to go back and look at and say, "Hmm, this is intriguing to me," of those, I think one of the most intriguing was AbbVie. AbbVie is, as you know, one of the biggest biopharma companies out there. It's a company that does $24B a year in annualized sales, but people have been nervous about this stock. For good reason.

Harjes: The reason you're alluding to, I could probably say with certainty, is their humongous reliance on Humira. Yeah?

Campbell: Yeah. Humongous.

Harjes: Yeah. Making us both nervous.

Campbell: They get 60%+ of their sales from one drug, and that's the immunology drug Humira, which is used to treat conditions, say, like rheumatoid arthritis, and psoriasis. This is a big drug. It operates in a huge market, $47B market. And this drug brings in $14B a year for AbbVie.

Harjes: Yeah, it's the best-selling drug on the planet.

Campbell: Yeah. And normally, that's a good thing. 

Harjes: Yeah, people are probably like, "Why are they worried about this?"

Campbell: Yeah. What's scary about that is their composition of matter patent.

Harjes: That's the important one.

Campbell: It is. And it expires at the end of this year. And as a result, as we know from past history, when patents expire, generic drugs can come on the market. And when they do, they can gobble up a lot of market share, and a lot of sales.

Harjes: So, the only reason that there is a little bit of a question mark on this one is because Humira is a biologic drug. So, it's not particularly easy to get a generic version of that. You've heard us talk about biosimilars before on the show, that's what the generic version would be. It would be a biosimilar. So, it's not a direct replica. It's not that easy.

Campbell: Right. These things are made from living organisms. You're not going to be able to duplicate it exactly.

Harjes: Exactly. So, we have Amgen creating this biosimilar for Humira, and they're looking to get it approved. They filed in November for the FDA. But they're running up against these patent issues.

Campbell: What's interesting here, and I think this is what's intriguing or exciting about the J.P. Morgan Conference, is when AbbVie came out and address their investors, they said, essentially, "What biosimilar threat? We don't see that happening any time soon." Although the composition of matter patent is expiring this year, AbbVie's management seems to be very confident that methods of use patents that protect Humira into the early 2020s will keep these biosimilars at bay. And if that's the case, then AbbVie is saying that their sales for Humira won't fall in the next few years, they'll actually grow.

Harjes: They'll actually grow! That's insane. I have never seen a company say that before. "Oh, yeah, we might lose patent on this key drug, and sales are going to grow!" That's not how this works.

Campbell: It doesn't. And granted, there's a lot of moving pieces to this. I'm not a patent lawyer. I've dug into some of the backstory here. Amgen and others are trying to show that these patents won't hold up. Amgen, Biogen, and these companies have, obviously, lots of resources, lots of people on their team, if you will, that are working hard to ensure that they don't violate these patents. So, there's still the chance that biosimilars come to the market before 2020. But at the same time, AbbVie... you don't necessarily go out and tell investors a long-term forecast unless you feel pretty confident. In the case of AbbVie, they think Humira sales could go to $18B by 2020. And if so, their total sales could grow to $37B from their $24B pace today.

Harjes: Yeah. Those are pretty lofty numbers. But what stands out to me about that is that they're still pretty reliant on Humira even then. So, you've got the projection for Humira, but if you add up projections between Humira at $18B and their hepatitis C drug, the Viekira Pak at $3B projection for 2020, and then you've got Imbruvica that they're projecting $5B. So, you add this together, and you get $26B of their $37B of expected sales just from those three key drugs. So, to me, this looks like they're going to continue to have this reliance, this somewhat worrisome overdependence on Humira.

Campbell: Yeah. They're heavily reliant on drugs, there's no question about that. They have very few drugs generating a bulk of sales, and that's something that investors are going to have to be aware of. They're going to have to track this. They do think that they can diversify over time. They've got some interesting drugs in oncology that are coming through the pipeline and starting to make their way through the FDA. This is one to watch.

But again, not many companies go out there and issue long-term forecasts. They're giving you a specific number that they're targeting for 2020. And the only other company in the biopharma space that jumps to mind that's done that is Celgene (NASDAQ:CELG). So, it's a very small grouping of companies that are willing to stick their neck out. And I think that'll resonate with investors. Once everything settles down here, I think investors are going to look at that and they're going to start to say, "Hmm, maybe this is an interesting stock for me to consider, especially given its tasty 5.7% dividend yield."

Harjes: For sure. Speaking of dividend yields, let's talk a little bit about Johnson & Johnson. I found their call really interesting.

Campbell: Yeah, that was a really interesting J.P. Morgan presentation, too. One of the reasons is because J&J took the typical script of, "Here's my PowerPoint presentation, I'm going to put it up and walk you through it," and kind of threw it in the garbage and said, "Let's do a fireside chat instead. Let's just talk about healthcare, let's talk about what we're doing to improve healthcare."

And during that conversation, their CEO basically... I don't want to say tipped his hand, because it's not like he said they would buy X/Y/Z company. But he did say, "Hey, we're still on the hunt, and we're looking for small companies that we can tuck in as part of our goal for research and development, bring in some companies that are maybe in phase 2, and see if we can get some new drugs on the market that way."

Harjes: And this is a company that ended last quarter with $37B in cash and short-term investments. And they kick off some $11B a year in free cash. So, they have the money to do it. And to me, it just looks like it's a matter of time before they pull the trigger.

Campbell: Yeah. I think one of the things CEO Gorsky said in the conversation was, they went back and looked at the 10-20 years in the past and said how have they gotten their drugs on the market. 30% of their free cashflow goes toward R&D and M&A. And it's split, roughly, I think 55% goes to internal R&D, 45% goes to external deals, collaborations, acquisitions, and the like. It doesn't seem like that's going to change anytime soon.

Harjes: Gorsky weighed in on that split, the 55-45, saying that's a good balance, that's where they want to be.

Campbell: That means, probably, that investors who are trying to figure out, what does that mean for J&J, what targets might they be going after, in the past, $2B or less. It doesn't seem like they like to do you much larger than that. Hey, they could surprise us. But in the past, things like Cougar Biotech, which they bought to get ZYTIGA, a multi-billion-dollar prostate cancer drug. Recent deals have all been in that $2B or less area.

Harjes: The Cougar acquisition was $1B, if I recall. One that stands out to me that was a lot bigger than that was Synthes. I'm not sure if I'm saying that right. But in 2012, their biggest buyout up to that date. This was a $21B acquisition. And it didn't seem like it really went very well. So I'm wondering if this is Gorsky and Johnson & Johnson acknowledging that, "Hey, we have done bigger deals, and they haven't been great. So we're going to stick with the small deal route."

Campbell: Big deals are hard. You look at a big deal and say, "Okay, well, maybe I can capture some synergy." Obviously, Pfizer's trying to do that, and other companies are trying to do that, merge larger companies together, remove a lot of the costs and drop more money to the bottom line. But they're also very complex.

They're hard, there's a lot of moving pieces. It's not as simple as being able to say, "Hey, look, we found this really interesting small molecule or biologic drug, we just need some help getting it to the finish line." Yeah, I think, to your point, they're looking at it and saying, "You know what? Small deals may be more profitable for us over time, if we leverage all of our knowledge and experience for that benefit."

Harjes: So, along the lines of collaboration and working to get drugs to market, the most exciting thing that came out of J.P. Morgan, in my book, was a collaboration announced that was called Moonshot 2020.

Campbell: Yeah! This was, I think, probably the biggest news. In a normal year, this would have gotten investors' attention, and made them pretty darn excited. Patrick Soon-Shiong is probably, I'd call him in the top five of biotech entrepreneurs. He's a billionaire, he's successfully built and sold two multi-billion-dollar companies. And his latest venture, if you will, is Moonshot 2020, which involves a bunch of different companies, academic research organizations, government organizations, doctors, insurers, payers, you name it. He's brought them all together, and their goal is pretty crazy.

They want to take as many drugs as they can, figure out how to combine them together, they want to map out the genomes of 100,000 people, figure out what kind of cancers they have and how best to attack them, and basically spark a major revolution in cancer treatment over the course of the next 5+ years.

Harjes: And the thinking behind this is that, when you look at cancer immunotherapies, a lot of these drugs work best in combination. But it can be pretty tricky to test combinations of your drug with some other random company's developmental-stage drug. So, if you can bring them together, the hope is, through this project, they can test them in combination a lot more effectively, and they can track it. And you have all this information about the specific genetic mutations that each of these patients have, and you're going to have them, ideally, in this big old database that you can plug into and see exactly what works for what set of genetic mutations and information that you have, and hopefully be able to get really individualized and effective care to market faster.

Campbell: Yeah. This is a moonshot. But typically speaking, combination therapy trials have involved some sort of a novel new drug that's maybe still in the clinic, and how does that pair up with something that's already approved and on the market. And you're right, this is really kind of unique and game-changing in the way that they're looking at it and saying, "Okay, let's take everybody's pipelines, and let's dive into them and see, in those pipelines, what drugs may work best with other drugs," with the goal of creating therapies that are less toxic to patience than they are today, because obviously, chemotherapy is a shock-and-awe way of attacking cancer; and also are more effective.

And a big focus of this is going to be on immuno-oncology, focusing on how to reengineer the natural killer cells in our immune system and the T cells in our immune system so that they're better able to find and destroy cancer. And if they're able to do that, then we could see a really big change in the treatment paradigm and how we battle back against cancer.

Harjes: Some of the companies that are involved in this are Amgen, Celgene, GlaxoSmithKline, NantWorks, and also interestingly, both Independence Blue Cross and Bank of America, which is a self-insured company. 

Campbell: Yeah, what's really interesting about that is that, for the first time that I can remember, you actually have payers, insurers -- Bank of America is self-insured -- working together with these companies on developing these next-generation therapies. That's kind of revolutionary.

Harjes: Yeah, it's pretty cool. Independence Blue Cross has about 10M people that they cover in 34 states and D.C. They said they'll cover the patient costs related to the trails for its members, and they'll cover the genomic sequencing, too.

Campbell: And what's also interesting too, it jumped out at me just as you were going through that list of names of those who are participating in the Moonshot, is Celgene, because anybody who's followed Patrick over the years knows that his last company was Abraxis, which is the maker of Abraxane, which he sold to Celgene just a few years ago.

Harjes: Right. I think there's also some NantWorks partnerships between Celgene and NantWorks.

Campbell: Well, he is an entrepreneur, so he's created this Moonshot, and he's tucking in his own companies that are doing some pretty interesting things, including NantKwest (NASDAQ:NK). So yeah, absolutely.

Harjes: As always, people on this program may have interests in the stocks we're talking about, and The Motley Fool may have formal recommendations for or against them, so don't buy or sell anything based solely on what you hear. But Moonshot is definitely something to keep an eye out for. And also, J&J going forward, and will AbbVie hit their guidance. Definitely a lot of interesting stories that came out of the J.P. Morgan Healthcare Conference.

If you're looking to read some more about what happened, the Fool has published a ton of articles on the conference and the different presentations. The article, is called "J.P. Morgan Healthcare Conference 2016 Roundup," something like that. Give it a search, or shoot us an email, and I can send you the link. A whole list of articles that our contributors have written, distilling the news, pulling out the highlights. If you're looking for even more reading, maybe you're getting all snowed in... Todd, is it supposed to snow by you?

Campbell: Yeah. They're saying we're going to get hit pretty hard up here in New Hampshire.

Harjes: I wasn't sure if it was going to be that far up. I think I heard a foot for Boston.

Campbell: Yeah, we should get something, but you know, you never know with New England weather. Anything can happen.

Harjes: Of course. Well, they're calling for two feet in D.C. Anyways, all of our East Coast listeners, if you're going to end up being snowed in and want even more reading, definitely shoot us an email at industryfocus@fool.com. We've compiled a list, we went through all of our articles from 2015 and we pulled out Fool.com's absolute best from each month. It's maybe six or seven articles from every month of 2015, the best of the best, it's an awesome list, really interesting. I'm happy to send that to you, just write us in. Todd, thanks so much, as always, for being here. And we'll talk to you all next week.

Kristine Harjes owns shares of Johnson & Johnson. Todd Campbell owns shares of Bank of America and Celgene. The Motley Fool owns shares of and recommends Celgene. The Motley Fool recommends Bank of America, Biogen, Johnson & Johnson, and Yahoo. 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.