Shannon Jones: Welcome to Industry Focus,
the show that dives into a different sector of the stock market every single day.
Today is Wednesday, January 2nd, the first Wednesday of the new year here in 2019. I’m your host,
Shannon Jones. I am joined in the studio via Skype by healthcare specialist guru, all around
awesome guy, Todd Campbell. Todd, Happy New Year! Todd Campbell: Happy New Year to you, too! I missed you the last couple of weeks!
Jones: I missed you too! Glad to be back in the studio. More importantly, I’m glad
because today, we actually get to look back at 2018 and talk about the top performing
stocks of 2018. I don’t know about you, Todd, many of these surprised me when
I went and looked at the returns from 2018. Campbell: I bet a lot of people, after the
fourth quarter’s dismal performance, are pretty excited to flip that calendar. Anybody still
have a calendar on the wall? I don’t know. Flip that calendar and see 2019. Obviously,
a tough end to the year. But people who owned these stocks are probably smiling pretty broadly
comparing their returns against the S&P, that’s for sure.
Jones: Speaking of the S&P, looks it was down about 6% in 2018, about 4% if you include
dividends. Then as you look at biotech and biopharma, the XBI and IBB were also down
double digits in 2018. All in all, not a great 2018. But like you said, Todd, there were some
high flyers. Let’s start off with the first one. The first stock is
a stock that was actually up over 1,400%.
Campbell: What?! Jones: 1,400% in 2018. It started
off the year with a market cap right around $26 million, ended the year with a market
cap right about $2 billion. Todd, if you would have told me at the beginning of 2018 that
the stock with returns of 1,400% would have been a diabetes stock, I would have said you’re
crazy and to put down the cannabis. [laughs] Campbell: Tandem Diabetes, up nearly 1,500%
in the year, and all tied to one really game changing development that happened over
the summer. To give our listeners a little bit background here, Tandem Diabetes makes insulin
pumps. Insulin pumps are increasingly being used by people with type one diabetes who
are unable to produce their own insulin as a way of more efficiently delivering insulin
to their body, rather than having to continuously be injecting themselves with that insulin.
It’s a very competitive marketplace. There’s other players out there. Insulet is a big
player there. Medtronic is a big player there. Up until 2018, Johnson & Johnson’s Animas
was a big player there. But there were some changes over the course of 2018 that allowed
this company to shine and jump-started optimism among investors that it’s going to jump to
the front of the line in terms of sales and market share. Jones: It really came
down to this technology, the launch of their t:slim X2 with what’s
called the Basal-IQ technology that’s integrated with Dexcom’s G6 technology. In particular,
this Basal-IQ technology, now gives the patient much more convenience and more control
because now, this Basal-IQ technology can actually predict and respond to
what’s happening with the patient. Campbell: In the past, you still had to
monitor yourself for your insulin levels, program the dose in for your pump. This automates that. Essentially, what it’s done is, it pairs the pump up with, like you said, Dexcom — Dexcom
was no slouch, either. It was one of the top performers last year. This device pairs the
pump with Dexcom’s continuous glucose monitor and an algorithm. Using all three of those
things together, it basically says, yeah, you should have more insulin, here we go,
and it automatically gives you some insulin back. That’s important
because so many diabetes patients spend a large portion of their day
outside of the desired blood sugar range. Of course, that can contribute
to the progression of the disease and all sorts of other
life-threatening complications later on down the road.
Jones: Absolutely. One of the things when you look at Tandem, not only are they innovating
with the Basal-IQ technology, but if you look at their pipeline, they’ve got a number of different
innovative approaches that are really impressive. They’ve got a hybrid closed loop
system that they are currently in development with a startup called TypeZero Technologies,
actually a startup that was based out of research from UVA. They’re working to build out this
hybrid closed loop system. That could launch in 2020, maybe 2021. They’ve also got the
t:sport insulin delivery system. This is basically a next generation hardware platform.
That looks it could also launch in 2020, 2021. Also, they’re increasingly pushing the needle
when it comes to remote connectivity. You see Bluetooth being integrated with a lot
of these insulin pump systems, which makes it all the more convenient and gives the patient
the ability to remotely control their insulin pumps. All in all, you’ve got
a company that is delivering on innovation and also has
a pretty impressive pipeline to boot. Campbell: We have a pretty short window of
insight into just how much the launch of this insulin delivery system in 2018 is going to
move the needle on sales. They did report the third quarter results. Those were pretty
impressive. Sales were up 71% year over year to $46 million. That’s great. They upped their
guidance for the full year in October to revenue of between $160 million and $165 million.
That was up from prior guidance of up to $158 million. Always good to see that
kind of optimism for the company. You mentioned the new products that are coming
out in the 2020 timeframe. That’ll be important. There are other automated insulin delivery
systems that are in development. Medtronic actually was the first one to launch one.
They have one out there, but it’s not as convenient and easy to use as Tandem’s. Insulet has one
in development. Eli Lilly’s got one in development as well. Those could pose a competitive threat
to Tandem around that same 2020 timeframe. Johnson & Johnson got out of the business. That’s
created more of an opportunity, addressable market. That’s provided a tailwind for the company.
I suppose most investors are looking at it and saying, “Wow, up 1,480% in 2018.
Can this possibly have more room to run in 2019?” Jones: I generally think it does. Another reason, in addition to their product line,
is the fact that they are also expanding internationally. According to the International Diabetes Federation,
globally, you’ve got about 425 million people diagnosed with diabetes, of which about 10%
have type one diabetes. What you saw in 2018 with Tandem is they were starting to push
into international markets. These include places like Australia, Italy, South Africa,
the U.K., New Zealand. Canada also came on board in the fall of 2018.
All in all, with the product pipeline plus this international expansion, which I really
think they’re still very much in the early innings of, again, you’ll have to be mindful of the
competition like with Medtronic’s MiniMed system, but I do think that this could continue
to go high. Maybe not as high as 1,400% in 2019, but I still think it’s got
plenty of room to grow. Campbell: It’s a huge market, 1.25 million
people with type one diabetes here in the U.S. alone, and certainly, not everyone with
type one is using pumps. There’s still more room to grow for the pump makers.
I do wonder a little bit about valuation. The market cap has grown pretty remarkably.
Even with that upped guidance for sales of $165 million this year, that’s still trading
at a pretty good multiple to sales. But, I do agree with you that there’s a lot of
running room. Now that the company has this on its balance sheet, in better shape, it got rid
of its debt last year, as well, I think there’s some opportunity here.
It’s definitely a stock to watch in 2019. Jones: Absolutely. Let’s shift gears,
talk about the second stock. This one wasn’t as much of a surprise when it comes to the returns.
It did generate a tremendous amount of investor attention and even media attention. This was
one of the darlings of 2018, a company called Amarin, ticker AMRN. The stock was up about
240% in 2018. I think it’s currently sitting at around $13 a share. It did go as high as
$23 a share before the market carnage that happened in November and December.
Todd, in looking at this company, not surprised to see it as one of the top performers.
But, looking back at 2018, definitely surprised that it was the fish oil pill that really
led this company up, up, and away. Campbell: A lot of people have been waiting
on this company to deliver cardiovascular outcomes results that could prove that lowering
triglycerides by using Vascepa, which is its purified fish oil, did reduce major cardiovascular
events like heart attacks and strokes and the like. People just weren’t convinced up
until now that using this approach could actually move the needle for outcomes for patients.
I think it was either September or October, the company rolled out the results
from its multi-year, I think a six-year study. And sure enough, they found that if you add
Vascepa to statin therapy in people who are already taking statins, it provided an incremental
additional 25% reduction in the risk of these major cardiovascular events. That includes
a 20% reduction in death, a 31% reduction in the risk of heart attack,
and a 28% reduction in stroke. That’s impressive, and it’s important. Cardiovascular
disease claims a lot of lives every year. There’s a big need for new treatment approaches
that can help these patients avoid suffering these events. With statins alone, it reduces
it by about 25-35%, depending on the therapy or the intervention that’s being done.
So, there’s still a 65% room for improvement there. Now, potentially, the use of Vascepa alongside
statins, much larger addressable market opportunity for Amarin, and theoretically puts it on the
path to have a blockbuster drug, assuming approvals go its way,
as soon as the end of 2019. Jones: Absolutely. It should be noted with
Vascepa, it’s already on the market, this would be a label expansion for them.
Right now, Vascepa is already approved to treat severe patients that have triglyceride levels
above 500 milliliters per deciliter, I believe is what it is. It’s already on the market.
As you mentioned, this does greatly expand the addressable market. Of course, as many
healthcare investors will know, we’ll start to see sales ramp up, but you’re already seeing
that even as we await approval. That’s because doctors can prescribe these drugs off-label.
You’re starting to see prescriptions already to ramp up. You’ll see even more heading into
2019. Assuming that it does get approved, you should see a nice surge there.
All in all, this was a company that for 2018, all eyes are on this data. Everybody was waiting
on this cardiovascular data. They delivered on this data. This is a company that honestly
was about to shelve this product years ago, almost didn’t make it to market. I do need
to give credit where credit is due. The management team didn’t shelve this one. They did go back,
look at the data, start to look at subgroups and find where this drug actually did work.
It’ll be really interesting to see this coupled with those statin therapies.
Campbell: One of the most exciting earnings reports for me to watch is going to be the
fourth quarter results for this company. I want to see whether or not, ahead of this
approval but following the data, doctors are starting to prescribe this off-label and driving
sales higher. The company has big plans. They were spending around $50 million on R&D
because of the study that is now ended. They’re going to move that money over now to hiring sales
people. They’re tripling their sales force. If they get approval, they’ll kick off a direct-to-consumer
marketing campaign. They’re really going to try and get this out in front of everybody.
It’s not an expensive drug like some of these other drugs we’ve talked about on the show
like PCSK9 inhibitors, those kinds of things used in this indication. Theoretically,
you could gain pretty widespread use. If you look at some of the best sellers in history,
they’ve been the statin drugs. Just look at Lipitor, $12 billion in peak annual sales at its height.
Jones: Another really interesting thing to watch in 2019 is to see if big pharma actually
comes up, pulls alongside, whether it be a partnership deal or if Amarin just gets bought
out all in all. They’ll be launching hopefully in the EU as well. They’ll definitely at least
need a partner there. I think that’ll be a big storyline to watch, as well.
Campbell: Yeah, they want to partner over in Europe. It’ll be interesting to see if
we get some news out of them in the first six months or whatever. They have not filed.
They’re debating. They’re trying to figure out, should we file and then get approval
and then try to partner up? What will that mean for economics? Or should we do it the
other way around? That’s going to be something to keep an eye on. People are also going to
want to keep an eye on a study of another drug that works similarly. AstraZeneca has
a drug called Epanova. That’s also a fish oil pill that’s in late stage studies.
Data could be coming from them in 2020. As Amarin has said in the past when asked about that
drug, the difference is that AstraZeneca’s drug does include another type of fish oil
called DHA. Historically, in trials, DHA has increased bad cholesterol levels. That’s why
historically, fish oil studies have not panned out. This is the first one that has panned out,
because Vascepa is a purified EPA fish oil. It doesn’t have DHA.
Jones: Yeah. Their management team has really been driving that point home very hard,
that this is a purified form. A lot to look forward to in 2019 with Amarin and also with AstraZeneca.
We’ve talked about two smaller up-and-coming stocks. Let’s talk about some of the larger
ones that have also generated some impressive returns in 2018. The first is a company called Abiomed.
Todd, you and I talked a little bit before this show about how 2018 was the year of medical
devices and med tech. This stock is no different. Ticker symbol is ABMD if you want to check it out.
Todd, this is another one that generated some really impressive returns.
Campbell: Absolutely crushed the S&P return. Up 73.4% in 2018, making it one of the top
performing stocks within the index this past year. One of the interesting things, you were
talking about medical devices, a lot of these top stocks in 2018
have a common thread. They address, in one way
or another, cardiovascular disease. Abiomed makes heart pumps that can
be used temporarily in patients who have suffered, say, a heart attack, some sort of a cardiovascular
event, to basically bridge them as they either undergo surgery to repair their heart,
or to help them rest and their heart to heal to avoid having to have, say, a heart transplant.
Jones: Their technology is under the Impella brand. What’s really interesting is, it sounds
they don’t even have a ton of direct competition. As I was reading more and more about
their different technologies, they’re quietly, in many ways, starting to change the treatment
paradigm for many of these massive heart conditions, heart failure, heart attacks, you name it.
They’re going after nearly every single indication with little to no direct
competition as it stands, yet. Campbell: There’s been not a tremendous amount
of advance in survival rates for people who suffer these cardiac events over the last
20 years, until now. We have Abiomed and its temporary heart pumps. One of the things that
they talked a lot about in 2018 was, if you employ best practices using these pumps, you
can get survival rates to go from 50%, where they’ve tracked historically, to 75% or better.
That’s just remarkable. It can also be pretty cost saving. These are expensive procedures.
Having cardiac failure, needing a heart transplant, or open-heart surgery, these are expensive,
costly things. If you can have a product like the Impella, that allows a patient to recover
more quickly and to go home with their own heart… it’s remarkable. It’s interesting,
too, I was just going through their conference call ahead of the show to
get a feel for what we’re looking at here. There’s still a lot of running room for this
company. They think that their devices could be theoretically, over time, used in hundreds
of thousands of patients, which would, obviously, send their sales much, much higher.
They’ve got a great balance sheet, plenty of cash, debt free. Like other companies we’ve
talked about, they’re increasing the revenue guidance because of approvals in 2018 that
have expanded their addressable market. There’s a lot of reasons to like this company.
Jones: Additionally, they’re also looking internationally. For instance, in Japan, there’s
a huge market opportunity. It’s the second largest medical device market in the world.
150,000 patients seeking treatment for the indications which their products are
intended to treat, which is amazing. Right now, their current product lineup, they’ve got a total
addressable market of about 220,000 patients with their pipeline. That could now add another
300,000 patients. They’ve got two really large indications that they’re going after,
targeting some more serious heart conditions, too. As a matter of fact, for our listeners, we
actually had one of our Foolish colleagues, Brian Feroldi, sat down and did an interview
with the CEO in August 2018 to talk about the market opportunities and competitive threats.
If you’re interested, google The Motley Fool sits down with Abiomed to check it out.
Highly recommend it because he really gets down into what will be important for 2019 and beyond.
Todd, all in all, I think there’s a massive runway for this company. You’ll hear a lot
more about it heading into 2019. Campbell: I just double-checked and they’re
only 10% penetrated into the market, according to management, to those numbers
you gave of the addressable market. Jones: Huge addressable market there.
A very interesting stock to watch. Let’s round out the show by talking about
the largest of all of these stocks we’ve talked about so far, and that is the biopharma behemoth
Merck, ticker MRK. The stock was up over 35% in 2018, which is really quite impressive
when you consider that Merck is a company with a $195 billion market cap. What’s even
more impressive is that much of this stock’s attention, much of the gains, have come down
to one key drug that is the gift that literally keeps on giving. It’s the
checkpoint inhibitor Keytruda. Campbell: Keytruda is so important to this
company. You know what’s interesting, looking at the companies that we’ve talked
about on today’s show, Merck is the only one that’s a single digit year over year grower.
There may be multiple things going on. Keytruda is absolutely what was driving the
car in 2018 for its success. We’ll get into those numbers in a second. Maybe also,
investors were getting a little nervous and wanted to get a little bit more protection. As we’ve
talked about in the past on the show, pharmaceuticals, especially cancer drugs, not really
something that is tied to economic activity. If you need the drug, you need the drug. A lot of
times, people tend to go in a flight to safety to some of these pharmaceuticals. We also
saw one of the top S&P performers in the year was Eli Lilly. Over here at Merck,
Keytruda has become the most widely used of these checkpoint
inhibitors. What these checkpoint inhibitors do is, they allow the immune system to find the
cancer cells, because sometimes cancer cells will hijack a mechanism called PD-1 that allows
them to tell the immune system, “Hey, we’re just normal cells! Don’t attack us!”
Well, as more and more trials have been conducted that have proved that Keytruda is effective
and safe, it’s getting more and more widely used. In the first nine months of 2018,
this drug alone did $5 billion in revenue. In the first nine months. It’s just remarkable.
That was up almost double in the first nine months, including an 80% year over
year jump in the third quarter. Jones: That’s not at all shocking. When you
look at Keytruda right now, it’s already approved for use in 12 different indications across
eight different tumor types here in the United States. That’s just the United States.
You can see, Keytruda certainly has a very long growth runway ahead of it.
Not only that, Keytruda is being studied in more than 30 types of cancer. 850 different
studies around the world, 500 of which are these combination studies, which I think you’ll
hear more about in 2019, as we did in 2018, to see how these checkpoint inhibitors like
Keytruda or Bristol’s Opdivo work in combination with these other immuno oncology products.
Certainly, a lot to be had moving forward. But, certainly, Keytruda has been
the growth story of the year for Merck. Campbell: 2019, things to watch. They have
five applications that are awaiting a decision from the FDA that could, again, expand even
further the addressable market. They have a number of other readings that are coming
out from trials they’re conducting that are going to come out over the course of the next
18 months. You’ll want to stay tuned for those. Overall, peak sales estimates for this drug,
I’ve seen as high as $12 billion or something like that by 2024. Even though it’s on track
to do $7 billion in sales this year, you could still see this go another 50% higher from
there. That’s more than offsetting declining sales from Zetia after losing its patent production.
That was their multi-blockbuster drug to help reduce bad cholesterol levels. Once that lost
patent protection, people were worried, what are they going to do to be able to offset
those sales? Obviously, Keytruda is doing that. That’s why you’ve got this company that’s
still putting up relatively solid growth for a company its size in 2018.
The other thing that we should remind our investors is that it’s a dividend paying stock.
That’s always nice. Because their balance sheet is so good and Keytruda has been so
successful, they’ve been able to increase their buyback authorization and boost
their dividend. Those are tailwinds, as well. Jones: Yeah, absolutely. A lot to like here
with Merck. Really, a lot to like with all four of these companies heading into 2019.
I must say, coming out of 2018 with the market being down and with biotech stocks getting
hammered, it’s so good, so refreshing to see companies like these four companies that are
not only innovating, making money, but also, more importantly, they’re improving patient
outcomes and the quality of patient care. With so many negative headlines, it’s so good
to see these companies innovating where it matters and winning where it matters most.
Campbell: The one thing I will do as we wrap up the show, tempering a little bit of enthusiasm
here, I did go back and look at the top performers of 2017 to see OK, the top 10 performers in
the S&P in 2017, how many of those repeated in 2018? Only four of them did. [laughs] So, just
because you had a very strong 2018 does not guarantee you’ll have a strong 2019.
Bear that in mind when you’re considering these stocks. But, it’s fascinating oftentimes to look at these names and see what people are doing.
Certainly, names worth adding to watchlists. Jones: Absolutely! Wise, wise words from
Todd Campbell here. That’s it for this week’s show. We want to thank our listeners so much
for tuning in. 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 Austin Morgan.
For Todd Campbell, I’m Shannon Jones. Thanks for listening and Fool on!