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 JP 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 JP 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 JP 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. 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 JP 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 towards 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: Yeah. 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: Yeah. 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 JP 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 re-engineer
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. 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 JP 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, I believe, is
just called "JP 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, just 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.