Marijuana companies OrganiGram and Aphria reported their most recent quarterly earnings earlier this week. One of the companies reported surprisingly strong sales, while the other delivered disappointment. Are these marijuana stocks buys?
In this episode of The Motley Fool's Industry Focus: Healthcare, analysts Shannon Jones and Todd Campbell explain how these companies are performing and what could be next for investors. Shannon and Todd also discuss why Abbott Labs is locking horns with Dexcom in diabetes and what the future looks like for Bristol-Myers Squibb, now that its acquisition of Celgene is official.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the video.
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This video was recorded on April 17, 2019.
Shannon Jones: Welcome to Industry Focus, the show that dives into a different sector of the stock market every single day. Today is Wednesday, April the 17th, and we're talking Healthcare. I'm your host, Shannon Jones, and I am joined by healthcare guru Todd Campbell. Todd, how are you?
Todd Campbell: I'm doing well up here in sunny New Hampshire. Happy to see that mud season hasn't yet arrived. Maybe we'll skip it this year and go straight to summer.
Jones: Hey, you never know! It seems like that's happening more and more frequently. I think we'll probably hit 80, 90 degrees here in the next couple of weeks in Alexandria.
Campbell: Wow, crazy!
Jones: It is crazy! For today's topic, we've got some less crazy updates to share with our listeners. Specifically, we've got news from across the sector, including merger updates, the diabetes stock wars, and, as always, marijuana earnings updates. Todd, let's dive right in!
We promised our listeners that we would be following up on the soap opera that has been Celgene, CELG, and Bristol-Myers Squibb, BMY. The news story here has been about the fate of this $74 billion merger, which came down to a shareholder meeting last week. There's been so much politicking on both sides of this debate and whether or not this deal should go through. You had a lot of very vocal shareholders saying that this was a deal that was very poorly conceived and ill advised. Todd, what was the final verdict on this huge deal last week?
Campbell: Maybe this deal is crazy, right? Talk about things that are crazy. Maybe this deal was crazy! So, we talked on the show a few weeks back and we said OK, some big shareholders are really upset because they don't think the Bristol-Myers should be spending all this money on Celgene. They should just go it alone, and maybe even become an acquisition candidate rather than being an acquirer. When all was said and done, we ended up having over 75% of Bristol Myers shareholders vote in favor of the merger on April 12th. Virtually all of Celgene investors voted in favor of it. So the deal is done, the decision is made! These two companies will now combine into this massive behemoth with about $40 billion in combined annual revenue.
Jones: Yeah, it's going to be a massive company. I think one thing to keep in mind is, there was a lot of back and forth on this deal. When you started to see these independent proxy advisors, ISS and Glass, Lewis step up to the plate and recommend that this deal move forward, that's when you started to see some of these activists like Starboard start to step back to actually make this deal happen. In the investment community, when you have especially Glass Lewis and ISS, when they speak, people tend to listen. I think that's what you saw with this deal.
Campbell: A lot of these shares are held by passive funds, like the S&P 500 funds, etc. They pretty much just vote the way the proxy advisors tell them to vote. So, yeah, you have active managers like Wellington and Starboard and some that own meaningful amounts of shares. But with so many shares of big companies being held by these passive funds, once those advisors come out and say, yeah, go for it, it's good, it's pretty much a given that the deal is going to get done. I don't think it's necessarily a bad deal. I think this could be a very good deal. Shannon, not to bury the lede, I do plan on holding on to my shares of Bristol-Myers that I'm getting in this deal. As a refresher to listeners, as an owner, you're going to be getting $50 in cash, plus one share of Bristol-Myers Squibb, and then a chance, depending on whether or not some FDA approvals go their way, a shot at an additional $9 down the road from a contingent value right.
Jones: That $9 contingent value right, that's dependent upon approval across three different products. That is a contingent value right that requires all three to get approved. Certainly adds a bit more risk to see in that one play out. But I think all in all, to your point, Todd, this is a deal that two companies combined do make sense. Again, in the biopharma space, a lot of these deals just don't make sense and they seem to fall apart. We'll have to see if this deal will go the same way. But what you're getting here is a combined company that will be, among other things, a dominant player in the oncology space in particular.
Campbell: Biggest one. I think they'll be No. 1. $23 billion roughly in sales just from Opdivo, which is a Bristol-Myers drug with about $6.7 billion in annual revenue last year. Sprycel, Urivoid, two more drugs that Bristol-Myers brings to the table in oncology. Then, adding in Celgene's Revlimid, a $10 billion drug. Pomalyst, another drug with $2 billion in sales. And Abraxane, a pancreatic and breast cancer drug with another $1 billion in sales. So yes, a very large player in oncology. Also, Shannon, a pretty big player in autoimmune disease. They're going to be able to now market both Orencia, which is Bristol-Myers' drug that had about $2.7 billion in sales, treating RA and psoriasis, and then the psoriasis drug Otezla from Celgene, which had sales about $1.6 billion last year. So a pretty big player there as well.
The other reason that I like this deal is because you do have all these multiple shots and goals fast approaching potential approvals for drugs that arguably address multibillion-dollar indications. You have Ozanimod for multiple sclerosis; Fedratinib in myelofibrosis; bb2121 in multiple myeloma. We've talked a lot about that on the show in the past. Liso-cel, Luspatercept, all these drugs have billion-dollar-plus opportunities ahead of them if they can get across the finish line.
One of the reasons that I'm holding on to my shares is that Bristol-Myers says that this isn't a dilutive deal. Their earnings are going to grow every year from here through 2025. They have a chance for over $2 billion in synergies from cost savings. And, they think they're going to generate $45 billion in free cash flow for the first three years. That's good for Bristol-Myers' dividend, because remember, Bristol-Myers pays a dividend where Celgene didn't. I think that yields probably somewhere north of 3% right now.
Jones: Yeah. Looking forward, you're looking at six product launches, five coming from Celgene specifically. That's $15 billion in potential total revenue over these next few years. I think one thing I'll be watching, of course, is the contingent value right. That is something that is tradable. But more importantly, those three drugs, I think the longest timeline is maybe 2021.
Campbell: Yeah, March 31, 2021.
Jones: 2021 there. So, we'll have to wait some time on that. The other thing I'll be looking at is, now that this deal is moving forward, what programs will ultimately be kicked to the curb, be put on the shelf? With a lot of these mergers, even promising drug candidates sometimes just don't fit into the meshed organization and in terms of what they're looking for pipeline-wise. So it'll be interesting to see how that plays out as well. But Todd, I'm glad that you mentioned it because you knew I was going to ask, are you going to hold. It sounds like that's definitely a yes.
Campbell: Yep, absolutely! I'll stick around and see what happens.
Jones: Great! Let's turn our attention to the second big story. It's really all about the diabetes war. Competition is heating up in the diabetes space, specifically among CGM players. Two heavy hitters, Dexcom, DXCM and Abbott Labs (NYSE: ABT), ABT. Todd, Abbott Labs is looking to step up the competition with a new product that could launch in the U.S. later this year. Before we dive into that, though, I think maybe for our listeners who are new to the space, what exactly is a CGM and what is Abbott actually looking to do?
Campbell: CGMs are continuous glucose monitors. To understand continuous glucose monitors, it's helpful to understand diabetes. In diabetes, the pancreas either doesn't produce enough or any insulin. Insulin is necessary to break down and turn glucose in the bloodstream into stored energy. So in type one, you're not producing any insulin; in type two, you've developed a resistance to the insulin that you do produce. If you're not producing enough insulin and your blood sugar gets heightened because of it, it can lead to all sorts of life-threatening complications. You can have nerve damage, you can develop cardiovascular disease, you can have vision loss. In fact, Shannon, of people who are turning 50, who are also diabetic, on average, the life expectancy is shortened by about nine years.
One of the ways that people think that we might be able to improve upon those outcomes for diabetics is by better monitoring their blood sugar levels so that smarter decisions can be made about their insulin. Continuous glucose monitors allow you to do that. You take a sensor, you put it on your body, and then you're able to get really close to -- not exactly, but close -- real-time readings of your blood sugar levels that can then be used to theoretically make decisions about your insulin that could prevent highs and prevent lows that may contribute to or speed up disease progression.
Jones: The other important point is related to finger sticks. A lot of diabetics rely on frequent finger sticks to determine the appropriate insulin dosing. What these CGMs have been able to do is not only cut down on the number of finger sticks, but also there's an accuracy and even just a convenience factor that plays into it as well.
But Abbott and Dexcom have been dueling in terms of technology. I'd have to say probably Dexcom the more innovative of the two when it comes to CGMs. But ultimately, Abbott is set to release what could be one of the more innovative approaches to the CGM market. Todd, what should listeners know about their product?
Campbell: Abbott already has something on the market called the FreeStyle Libre. This was their first generation of their latest CGM. What's remarkable about this device is it does significantly reduce the finger sticks that you're talking about. Remember, in the olden days, if you wanted to check your blood sugar, you had to keep sticking your finger to get a blood sample to put in the little testing thing to find out if you needed some insulin. That's a very inefficient way of doing things. You no longer need to do finger sticks for calibrating Abbott's machine or for very extended long warm up times or to confirm that you need to dose your insulin. That's a huge advantage.
The problem with the FreeStyle Libre 1.0, as I'll call it, is it didn't include alarms that could highlight short-term highs or lows in your glucose. That's something that Dexcom's G5 and G6 incorporate. G5 and G6 from Dexcom have always been thought to be the premium product. They carry a premium price. The FreeStyle Libre is much cheaper. Last year, they launched version 2.0 of the FreeStyle Libre. It includes those alarms I was just saying were missing from 1.