Game-changing medicines, a revolutionary new treatment for sleep apnea, and the chance to be the Amazon of genetics may make Myovant Sciences (NYSE: MYOV), Allogene Therapeutics (NASDAQ: ALLO), Inspire Medical Systems (NYSE: INSP), and Invitae Corporation (NYSE: NVTA) intriguing up-and-comers.
In this episode of The Motley Fool's Industry Focus: Healthcare, analyst Shannon Jones and Todd Campbell dig deep to figure out the investing thesis behind these potentially disruptive healthcare companies. Tune in to learn:
- How Myovant Sciences hopes to improve cancer treatment with off-the-shelf CAR-T therapies.
- Why Allogene Therapeutics management ought to give investors confidence.
- What Inspire Medical's doing to help people sleep better.
- And how making genetic screening affordable for everyone is causing sales to surge at Invitae.
A full transcript follows the video.
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This video was recorded on Feb. 6, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every day. Today is Wednesday, Feb. 6, and we're talking healthcare. I'm your host, Shannon Jones, and I'm joined via Skype by healthcare guru Todd Campbell. Todd, how are you?
Todd Campbell: I'm great! I'm excited! This could be a fun show! I really love diving into these companies that nobody's ever heard of!
Jones: Yeah! For our listeners, today's show was all about under-the-radar healthcare stocks. Some of them, you may have heard of. Others likely have never crossed your path. We've got four stocks, two from Todd and two from me, that I think our listeners will appreciate.
Todd, let's just dive right in. Let's start with you. Your first stock is a genetics player known as Invitae, ticker NVTA. What is it about this stock that makes it so compelling for you right now?
Campbell: I usually do this every six months or so, Shannon, I'll go into one of my screening tools, and I'll say, "Show me the stocks that are beating the market by a significant amount over the course of the last six to 12 months that are also putting up remarkable revenue growth." I do that with market caps of less than $5 billion because I want to try and find some up-and-comers that the large institutional investors haven't spent the time and attention yet in getting to know about, and might end up driving demand later on.
Two that I'm going to talk about today, the first one here being Invitae. I have been desperately trying to find a stock that I wanted to invest in in this space since Foundation got bought out by Roche. And this is the one. I do have it in my portfolio, for full disclosure. It has a market cap of $992 million. Their goal is to bring genetic screening to the masses. They want to be a one-stop shop where you can get genetically screened for any information that you might want to know. And they want to be able to do it at a very low cost, which is key to breaking down the barrier and making this something that everybody can go out and get. I really do believe that's where medicine is going. We're going to personalized medicine. We're going to know our genetic makeup and our predispositions and what drugs may or may not work well for us based on that. That's my personal opinion. Invitae already has products on the market and they're growing very, very quickly.
Jones: Yeah, significant growth. I want to go back to something you mentioned. I don't think investors holistically appreciate just how fast the technology has moved when it comes to genetic testing and mapping the human genome. Twenty years ago, just reading one human genome took literally years and cost more than $1 billion. Today, you're talking about maybe a few hours of your work day, and we're getting closer and closer to that $100 mark in terms of mapping human DNA. The economics are coming together, the opportunity is huge. To see a company like this not named Illumina is certainly encouraging. [laughs] But yes, the growth runway for these companies is huge.
Campbell: They want to have it comprehensive, they want to do it cheaply. To give listeners some numbers here, in 2015, they were able to bill for 19,000 genetic tests. In 2016, we went from 19,000 to 57,000 billable tests. In 2017, we went from 57,000 billable tests to 145,000 billable tests. Through the nine months that have been reported in 2018, that number jumps to 206,000. In January, they said the full year was 302,000, which is double the prior year. Just remarkable demand growth.
A lot of that is because, A, the prices are falling. They say now about 28% of their business comes from individuals or institutions, and the remainder comes from third parties like insurers. They're getting more broadly reimbursed, the prices are coming down. That's allowing people to go out and get it on their own through their doctor. Of course, sales are jumping as a result. In 2019, they think they're going to do $220 million in sales. That's up from the preliminary $144 million last year and $68 million in 2017. In the span of three years, going from $68 million in sales to $220 million in sales.
Jones: If you back that out even further, if you look out over this past five years, five years ago, they were only making $1.6 million in revenue. It makes that $220 million mark even more astounding in terms of how quickly they've been able to grow sales.
But Todd, it's not just about growing the top line. They've also been able to really cut down on expenses, too.
Campbell: Yeah. This a scale business. As you get more and more scale, you're going to be able to increase the profitability. Their gross margins are a little bit lower than others that are already out there like Myriad Genetics, one of their competitors. Their gross margins are a little lower. As they get the scale, the profitability should improve. Right now, they're still losing money because they're investing in growing the business. That does not concern me because it's such a fast-growing business, and I think that it's a disruptive business and the market opportunity is so big that I'm willing to suffer through some losses for that.
One of the other things that attracted me to this company was the fact that this is a spinoff from Genomic Health. It got spun off in about 2012. Its cofounder and executive chairman is Randy Scott. Prior to founding Invitae, Randy was the cofounder of Genomic Health. He was also the founder of a company called Incyte. For listeners who may not be aware of it, Genomic Health has become one of the largest players in genetics. Their market cap is about $3 billion. Incyte has become a massive drug developer. Their market cap is about $17 billion. I like these been-there-done-that kind of leaders. With Randy Scott having been there and done that, that gives me a little additional confidence. He owns about 6.5% of Invitae shares.
Jones: There's a lot to like about this company. I also like that they're not just focused on the consumer side, but also partnering with biopharmaceutical companies. They've got a partnership with Sarepta Therapeutics, a company we've talked about a lot on the show. They announced they were expanding that partnership in May or June of last year. You can see how they can grow the consumer side and also grow with the biopharmaceutical side, as well. A lot to like.
Let's talk about your second stock, Todd. The name of the stock is Inspire Medical Systems, ticker INSP. They've got an innovative approach to a condition that impacts so many millions of people, sleep apnea. Todd, what is it about this company that sticks out to you as being so innovative?
Campbell: I'm one of those millions! [laughs] I actually was diagnosed with mild to moderate sleep apnea earlier in the year. I'm trying to find a solution that works well for me. That's one of the reasons that I was so intrigued by Inspire Medical. It's a little bit bigger market cap, $1.25 billion. But, it's also incredibly fast growing. The reason that they're fast growing is because a lot of people like me are struggling to find a good solution for sleep apnea.
What Inspire Medical did is, they developed a minimally invasive device that will deliver a small stimulation to a nerve by monitoring your breathing while you're sleeping. What happens with that is that your tongue will move forward a little bit so that you won't block your airway causing that apnea. This is a really, really interesting idea. It's very different than the other approaches that are commonly looked at. You have these devices like mouth guards that you can wear, that may or may not work. They didn't work for me. You have CPAP machines, which are those things you wear on your head like you're in some sort of science fiction movie that blows air into your airway to keep your airway open. That's also used. And then, of course, there's surgical options, but those can be pretty costly and the outcomes are uncertain.
This is a really interesting idea. It fits in between, OK, CPAP doesn't work for me, but I don't necessarily want to go out and get surgery. So far, sales are starting to ramp up pretty quickly as more and more insurers agree to reimburse for it.
Jones: Todd, it's not just sleep apnea that this potential implant could help, but also snoring, as well.
Campbell: Yeah! They talk about the complications that are associated with sleep apnea -- snoring, higher blood pressure, hypertension, heart failure, stroke. I'll add divorce. [laughs] If you can find something that will keep your partner happy, that's always a good thing. It's a pretty large market. Seventeen million people in the United States have moderate to severe obstructive sleep apnea. About 2 million per year are prescribed CPAPs. According to Inspire's data crunchers, about 35% or more don't comply with daily use of those CPAP machines. So potentially a very, very large market for the company that is only now just beginning to penetrate.
Sales in the third quarter were $13 million, which sounds small, but that was up 80% year over year. Not only do they have the opportunity to continue to penetrate here in the U.S., but they've also started to sell this in Europe. The sales in Europe rose 141% year over year last quarter. For the full year 2018, their guidance was $47.5 million, gross margin of 81%. They're losing about $4 million or $5 million per quarter right now. But, again, I'm not so worried about those losses because big addressable market opportunity, fast revenue growth, and a relatively disruptive product.
Jones: Disruptive in more ways than one. I have to admit, as I was studying for the show last night, I was actually in bed and I pulled up the website and I noticed that they had a remote control, you can turn the device on and off. As a mother, my first thought was, "Oh, my gosh, if my eight-year-old daughter somehow got ahold of this device and went wild, what would happen in that case?" [laughs] Todd, do you know?
Campbell: [laughs] Honestly, I think what it is, is that when you go to sleep, you hold the remote over where the implant is to activate it. Then you set it aside. Then, in the morning, you shut it off. So, just be sure you put it in a drawer. [laughs]
Jones: [laughs] Put it in a drawer. But, yeah, I do love the fact that this is an innovative product. No mask, no hose needed, and the convenience -- I know it's battery operated, so you'll have to replace the battery after 11 years or so. But like you mentioned, Todd, this is a great in-between -- not having to go through surgery, not having to worry about a CPAP, but something that is minimally invasive and could potentially bring relief to hundreds of millions of patients around the globe.
With that, let's shift gears. I want to talk about two stocks that are on my radar right now. The first is a company called Allogene Therapeutics, ticker ALLO. Todd, one of the first things that I like to look at when it comes to investing in biopharmaceutical stocks, especially early stage companies, is management. I think management is one of the most vital components. I like to see an experienced management team, people that have been able to bring drugs across the finish line. They've jumped through the hoops, they know how to interact with the regulators. Allogene is no exception to that. Allogene's management team is probably best known as the executives behind Kite Pharma. Todd, you and I have talked a lot about CAR-T therapy and Kite Pharma. To see Arie Belldegrun and David Chang as the faces behind this new company that just IPO'd in October, I have to say I was thrilled and excited and I cannot wait to see what happens with this stock.
Campbell: Yeah, Belldegrun isn't just known for Kite, either. He sold a company called Agensys to Astellas for over $500 million back in '07. He founded a company called Cougar Biotech that developed Zytiga that he sold to Johnson & Johnson for $1 billion in 2011. This is a person who has done some pretty interesting things. I'll be really curious to see if he can catch lightning in a bottle yet again.
It's funny, when I was looking at this stock, I realized UCART19, I saw that and I was like, "Wait a minute, UCART19, is that their drug? Or is that Pfizer's drug? Whose drug is that?"
Jones: You're absolutely right! UCART19 is a part of the deal they picked up from Pfizer and then the French-based Servier as well. So, yes, UCART19 coming back to life here.
One of the things that I really like about this company is, we've talked about CAR-T therapy, which is basically where you're taking a patient's own immune cells, their T cells, taking them out of the body, reengineering them in a lab, growing them, and then giving them back to a cancer patient to fight cancer. You've got these supercharged T cells. We've seen, Novartis has a CAR-T; Kite, of course, has a CAR-T now under the umbrella of Gilead Sciences. Obviously, you can think about the logistics that are involved with going through this process. Sometimes the wait time for patients is three to four weeks from vein to vein. There's a lot of opportunity for these next-generation CAR-T therapies to hopefully not only cut down on the time but also the cost. That's really where Allogene is focused.
It's something called allogeneic CAR-T. Basically, it's the same premise, but you're getting a healthy donor to donate their T cells, which hopefully by that point are in much better shape than, say, a cancer patient who may have gone through chemotherapy. You've got a healthier T cell that you can now give to a patient and potentially fight cancer. I love the approach.
I will say, it's a little strange for me, Todd, knowing that Arie Belldegrun sold the company Kite Pharma to Gilead Sciences for $12 billion. Obviously, I could only imagine what that pitch was like in the room. But, as soon as they sold it, now you've got this new company with this allogeneic approach that they're saying is easily going to be the CAR-T therapy moving forward. A little interesting strategic move on their part there. I do love the science. I love the management. It's still very early on. Their lead asset that we talked about, UCART19, that they picked up is in Phase I development, so it'll be a while before we start to see what the allogeneic approach can do. Again, there's pluses and minuses for both types of CAR-T therapies, side effects that you do have to watch. But this could be a way for them to actually gain traction in terms of logistics and also reimbursement.
Campbell: Greater than 10% of the people who are waiting for their own CAR-Ts to be reengineered and shipped back to be used in them actually either pass away or, because of manufacturing delays or whatever, never actually end up getting that CAR-T medication. There's a huge need for something that can be delivered off the shelf. That could be very disruptive.
You mentioned the Gilead Sciences connection. What's interesting, as I was going through the SEC filings, I noticed that Gilead actually owns 8.4% of this company. That's something to keep in mind, too. Maybe that was the negotiation there. "Why don't you take a little stake here and if it goes off well, who knows? Maybe you might want to acquire us, like you did with Kite?" Pfizer owns 25% of the company because of the deal to get their hands on UCART19. Belldegrun owns about 14% of it.
Jones: The stock IPO'd, I mentioned, in October 2018. It raised over $324 million, basically valuing the company at that time at over $2 billion. The stock is up about 24% since its debut on the markets. Right now, it's sitting at about $31 a share with a market cap of about $3.7 billion. So, yeah, this will be a company to watch moving forward. Again, very early on. Definitely put it on your watch list.
That brings me to my second stock, our final stock pick, and that is Myovant Sciences, ticker MYOV. I like stocks that have good management, have innovative science behind them. I also really like stocks that have a good news cycle coming up. Myovant Sciences, when you look at their pipeline, they could potentially have five phase 3 data readouts in 2019. It comes down to their drug which is their bread and butter, which is called Relugolix. I'm not going to say that any faster than that because I'll get tongue-tied. Relugolix is the drug behind the company.
Myovant is looking at three indications, primarily focused in women's health, but they also have one in men's health. On the women's health side, they're looking at uterine fibroids and endometriosis; and on the men's health, advanced prostate cancer. The drug itself is known as a GNRH antagonist therapy, which, in short, is being studied for its ability to suppress hormones that regulate the menstrual cycle. The idea is, if you can regulate the hormones, you can improve many of the painful and debilitating symptoms that happen with uterine fibroids and endometriosis.
In 2019, they've got phase 3 LIBERTY 1 and LIBERTY 2 data reading out potentially as soon as the second quarter of this year, and also again in the third quarter in the uterine fibroids space for phase 3 LIBERTY 1 and 2. That's an indication where over 3 million women suffer in the U.S., and 250,000 actually have to undergo hysterectomies because of uterine fibroids, which are basically benign tumors. That indication in and of itself is huge.
What I really like about this indication is, this is not necessarily a new space. There are other companies out there that are developing products for it. But in Japan, Myovant is actually partnered with Takeda, and Takeda actually had positive phase 3 data in this indication. So obviously, the read-through here on the U.S. side definitely beefed up its chances of approvability. We'll have to wait and see on that. But uterine fibroids is the one to watch first for this particular company.
Campbell: Could be a big battle between this company and AbbVie down the road. AbbVie has Elagolix, that actually just got launched in one of those two indications last year. Expected sales are about $200 million there. They do think that their option is going to be better than Elagolix. It requires once-daily dosing instead of twice-daily dosing. It has a longer half-life, so they think they can compete more effectively. They picked up the drug. This is a Roivant company. People who follow the industry, this is Vivek Ramaswamy, one of his companies. Roivant is kind of a biotech incubator type of company. They go out and do these licensing deals to take drugs that have already been under some development by other companies. In this case it was Takeda that developed it. Roivant went out and acquired the rights to it, and then Takeda and Roivant went out and started up this company.
Roivant owns 61% of Myovant, Takeda owns 12% of it. Interestingly enough, as I was digging through the SEC filings, Pfizer appears to have a right of first negotiation on licensing U.S. rights to the drug if it's successful. Those rights also may apply to a deal. An interesting side note for that as people look forward to the data readouts, start contemplating, what's Myovant's exit strategy? Is it going to try and commercialize these things on its own? Or might it try and find a partner? Or might it just be up for an open acquisition?
Jones: Absolutely. You'll also need to be watching the endometriosis space. Todd, you mentioned that in regard to competitors, that's where AbbVie's Orilissa got approval last year and has been dominating the space. I see a commercial for that drug at least once a day. They've got a very strong commercial presence out there. It'll be something to watch. Myovant will have data reading out with this sometime in 2019.
Then I mentioned also the men's health program in advanced prostate cancer. For men and using this drug, decreasing testosterone is thought to slow the growth and also the progression of advanced prostate cancer. So it makes sense that they're going after that. The company does say that they're the only GNRH antagonist receptor in development for prostate cancer.
Campbell: That's interesting. I want to jump in so I don't forget. It makes sense now, with the Pfizer deal. Pfizer bought Medivation to get its hands on Xtandi, which is a prostate cancer drug.
Jones: The connection goes even beyond there. The CEO of Myovant, Lynn Seely, was actually formally at Medivation, which got bought out by Pfizer.
You see, it's all a connected network here! All in all, across all of those indications, you're looking at right now, analysts are estimating about $2.5 billion in peak sales. When I looked, market cap was right around $1.3 billion. Certainly makes a compelling buying opportunity right now, especially with these improved odds of getting across the approval finish line. The stock is sitting right now at $18 a share, up about 12% year to date. Lots to watch here, lots to like.
All in all, Todd, you and I have given our listeners four very compelling watch list stocks.
Campbell: I think they're all going to be very busy digging into these names over the course of the next weekend.
Jones: Absolutely! We'll be sure to keep you updated. As always, thanks so much for tuning in! That's it for this week's Industry Focus: Healthcare show. As always, people on the program may have interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. This show is produced by Dan Boyd. For Todd Campbell, I'm Shannon Jones. Thanks for listening and Fool on!
Shannon Jones owns shares of Johnson & Johnson. Todd Campbell owns shares of Gilead Sciences and Pfizer. The Motley Fool owns shares of and recommends Genomic Health, Gilead Sciences, and Illumina. The Motley Fool owns shares of Johnson & Johnson. The Motley Fool has a disclosure policy.