On this episode of
A full transcript follows the video.
A secret billion-dollar stock opportunity
The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early-in-the-know investors! To be one of them,
This podcast was recorded on Nov. 15, 2016.
Vincent Shen: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. It is Tuesday, Nov. 15, and I'm your host, Vincent Shen. I'm very lucky this week because this is my second week now that I've actually had somebody in the studio with me, which, in my opinion, is a much more enjoyable experience. I had Dan last week, and now, for crossover theme week on Industry Focus, I have Kristine Harjes from Healthcare. She's going to be talking to us today about some of the trends we've seen in consumer retail, and how they have been able to parallel themselves, in terms of healthcare and pharmacy.
Kristine Harjes: I'm excited to be here, Vince! Thank you for having me.
Shen: We came into this theme week trying to figure out some of the different combinations we could have with the sectors. Previously, we had done something on the consumer side with financials, with industrials, talking about driverless cars, bank cards, or branded credit cards at stores. But I thought it would be kind of hard to find things that would pair up well in terms of consumer goods and healthcare, because your side can be very technical, and I'm personally not very familiar with that space. But when you shared some of your notes with me and we talked about it more, I actually realized that there's a ton of stuff that's the same.
Harjes: There's a lot, absolutely.
Shen: Jumping right into it, one of the first things was increased personalization. On the healthcare and drug side, you guys take that to another level, in my opinion. We had a previous show where I spoke to Asit about Nike's NIKEiD, where you can take a base shoe, design it with the colors you want, essentially put your own decals on the heels. With Starbucks, you can really make your drink exactly the way you want. But in terms of the healthcare world, how are they viewing personalization, and how has that changed their industry?
Harjes: This is a huge trend, both in the consumer goods sector and healthcare as well. People are pushing for more and more individualized treatments and more effective drugs. One of the ways in which you can do that is make them tailored to your body's chemical composition. You get these companies like Illumina that are profiling people's genes, and they can tell every little nuance of how your genetic makeup works. With that, you can see if somebody is predisposed to a certain type of disease, and maybe there are preventive steps that they can take. On the Healthcare show, we've previously covered Illumina, which is your go-to stock if you want to have exposure to this gene profiling market.
But there are also so many drug makers that can play in here. For example, we have talked about Roche on the Healthcare show. They have a drug called Kadcyla. This is a drug that treats HER2-positive breast cancer. What that means is, your cells have been shown to overexpress the HER2 gene, which is about one-quarter of all breast cancers. How this drug works is, it's a combination drug. It has chemotherapy and Herceptin in there. That second one, Herceptin, attaches to the HER2 protein on the cell, and it prevents it from receiving growth signals. Meanwhile, this drug also carries a chemotherapy in it, but it delivers it in this very targeted way, because Herceptin knows to go after these HER2-positive cells and then drop the chemotherapy. So it's not as toxic to healthy cells. This is only approved to a small segment of patients with breast cancer. That, of course, is something you see across personalized medicine -- it's not ubiquitous. You can't just give it to every single patient anymore. But that's a good thing, it means that it's even more effective.
Shen: So, with some of the therapies and drugs that you mentioned, especially in the healthcare space, are life-saving, can help heal and treat a lot of people, very important. But, on the consumer side, maybe not quite as impactful. But, something that I noticed that's very similar to that is, if you think about a company like Under Armour, they have taken their footwear, for example, and given it a focus of trying to innovate and improve the performance that it can give each person. So, it might not currently be at the level where they can personalize every single person. We're talking about millions of pairs of shoes. But, the potential is there in that market. If you go to a specialty running store, for example, they will put you on a treadmill, have a camera to look at exactly what your step is like and try to figure out the right shoe for you.
Harjes: I think it plays into, we're all a little bit narcissistic. People are starting to expect, "Hey, I am an individual snowflake and I want the shoe that is best for me."
Shen: Exactly. So, they're experimenting right now with things like 3D printing, potentially, to open up that possibility on a more mass scale. Going beyond personalization as one of the big trends, something else I wanted to talk about is marketing, be it with traditional media like radio and television, but also digital media and social media. Retail and packaged consumer products, some of the big brands that everybody is familiar with, they spend a ton of money on marketing. At the same time, some of the big drug companies are following suit very much.
I found that, in terms of ad spending, in a report from STATNews, the pharmaceutical industry spent over $5 billion in 2015. That's up about 60% in the last four years. That is only on traditional media, like television and print, which is probably losing its share in terms of overall ad spending, because digital ad spending is growing so much in popularity. What are your thoughts on that?
Harjes: It is incredible to me that we're still doing this. This is not something that you see in pretty much any other country in the world. New Zealand is the only country that comes to mind as a major established country where you can have drugmakers directly advertising to consumers. There's a pretty strong lobby against it. The American Medical Association has called for a ban on these DTC, direct-to-consumer ads, in November 2015. There has been legislation introduced. There are a lot of lawmakers that don't think you should be able to do this. If you think about it, I can sympathize with that argument. On the one hand, it's good for patients to know about these chronic conditions they might have and not even realize it. It's good that it encourages people to go see doctors and ask questions and know their treatment options. On the other hand, you have doctors reporting that patients come in and are like, "I saw this specific drug on TV, and that's the one that I want." And that might not be the best drug for them. And if you're the doctor in that situation, your hands are tied, because the patient can easily leave and go to another doctor, and you don't want to do that. Meanwhile, you can also have patients demanding the brand name when there might be a generic, which is literally the same exact chemical compound, but yet they're demanding that they want this specific one because of an advertisement.
Shen: We will talk more about the branding and how important that is, especially with examples, like you just mentioned. I've always been surprised, as well, like you mentioned, you don't see prescription drug commercials -- especially right now, because TV is the biggest format that they advertise on -- you don't see that and other places. You mentioned New Zealand, and there's the United States, and I think those might be the only two major markets where that happens. But looking in terms of the incentives, it makes a lot of sense for the big drug companies to do this. I have a list here of the 20 most advertised prescription drugs in 2015 by spending. Again, this is only with traditional media. It doesn't get into the digital side.
Harjes: Yes, which is harder to track and report on.
Shen: Exactly. Humira, which I'm sure you're familiar with, spent over $350 million from what I could find. Correct me if I get any of this wrong. First nine months of 2016, those first three quarters, revenue for Humira was $7.6 billion. That is enormous.
Harjes: That sounds about right. (laughs)
Shen: So, they have plenty of incentive to do this. At the same time, in my research, I have seen some arguments that people say, being able to see one of these commercials, people might become aware of the symptoms they describe, of a condition they didn't realize they had. So, it's not just a black-and-white issue, necessarily.
Harjes: There's absolutely some gray space. One of the other interesting nuances is just how much information does the drugmaker need to disclose in these ads? This especially becomes an issue when you consider how social media has become a bigger presence in ad budgets. If you only have 140 characters in a tweet, you can't possibly say every little thing that the FDA wants you to. I don't know if you've seen magazines that have drug advertisements in them, but it'll be one page of the ad, and then you flip it over and there's two pages of all the prescribing information.
Shen: I've seen that.
Harjes: If you have a tweet, how are you supposed to do that? Is it sufficient to just have a link, "Full prescribing information here"? Or what? It's another grey area.
Shen: The question becomes, how often do people click on those follow-up links? Otherwise, all you end up seeing is that marketing message. With something like prescription drugs, it can be very important that you get that full picture. One other related item I wanted to bring up was, something else that people are taking up arms about in terms of prescription drugs and what their marketing looks is, they often use animated characters and cartoons. The thing that I think about that was cracked down on in the '90s was big tobacco. They had famous characters like Joe Camel, the Marlboro Man, and they would have them dressed in leather jackets and t-shirts, looking cool. And a lot of people argue that this was targeting tobacco toward children. Eventually, in the '90s, I think it was President Clinton who signed the bill banning the use of these characters. In your opinion, do you feel that using animated, funny looking characters -- sometimes it might be for a condition, or something that's not as serious -- overall minimizes the risk of certain drugs, even though they have a lot of side effects?
Harjes: My hunch here would be, the use of cartoon characters would be more prominent in drugs that are in conditions that have a visible effect on a person. Because you don't want to depict somebody that's really sick maybe getting a little bit better, which is unfortunately the case with a lot of these drugs. The tiny little marginal improvement is enough to get approval, because that is better than nothing. But if you were then to advertise that drug, depicting the reality of it is not exactly an uplifting picture.
Shen: Yeah. Moving along here, because we have quite a few other trends and topics I wanted to touch on, we had talked about branding a little bit and I want to dive into that a little bit more. In terms of my world, consumer retail, people understand how powerful branding can be. Think about a company like Coca-Cola, a chain like Wal-Mart or Amazon, they have obviously built out their models in a way to try and draw you in to be a repeat customer. A report from Bain & Company says that just a 5% increase in retention rate can potentially boost your profits by 25% to 95%. Pretty powerful stuff. At the same time, I noticed -- and we talked about this before the show -- some of the branding in this space is not so much for the companies, like a Coca-Cola overall, but for their specific products. How does that play into the dynamic when somebody goes in for treatment?
Harjes: I would argue that the power of branding in healthcare might even be stronger than it is in consumer goods. I was going to say not as much on a margin standpoint, but actually, it is, and here's why. There are so many drugs out there that have very devoted patients, particularly for chronic conditions. If you've been taking this forever and ever, and all of the sudden its patent wears off, so a generic version comes out, a lot of patients will actually choose to stick with the branded version. Maybe they don't understand that a generic is literally the same chemical compound, it's identical. Maybe it's just laziness, like, "If I've been taking X drug, that's what works for me." Medicine is not something you want to mess around with. It's not like, "Oh, I usually wear New Balance running shoes, let me try out the new Nike model. Eh, I don't like it, I'll go back." It's very different when you're talking about putting a chemical into your body.
One interesting trend that I have to bring up when talking about generics is the concept of biosimilars, which we have talked about previously on the Healthcare show. They are essentially generic versions of more complex drugs that can't necessarily be chemically synthesized into an exact duplicate. Because of that, they're called biosimilars for a reason. They're similar. And they are, effectively, the same thing, but not exactly. And because they're also very complex to make, they're not as cheap. Generic drugs are maybe 10% of the cost of the brand name. Biosimilars, not so much. You're looking at maybe 40% off, 60% off. So I don't think you're going to see as many people -- and this is a very new thing in the healthcare market, the prominence of biosimilars -- my guess is that you won't see nearly as many people leaving their brand-name drug that they know and love for a biosimilar.
Shen: Yeah. I think, when it comes to whatever medicine you might be taking, it's an innately personal thing. Like you mentioned, for someone who needs treatment for some kind of chronic illness, if you've been taking it for so long and it's something that had a very prominent, visible effect in improving your life and making you feel better, I can totally understand, more than what shoes you wear, what you're drinking, what you're eating, that's going to be something that would be incredibly difficult to break from. Even over-the-counter medicine, and the fact that you see Tylenol, for example, and its off-brand replica, there's a pretty substantial difference in price, but still, in a lot of cases, people reach for the brand name because of the comfort that they get from the fact that they feel like, "That's going to be the quality that I'm expecting," even though it might be exactly the same. And they advertise that on the box. Check the ingredients label of the Tylenol --
Harjes: Right, the store brand will say, "Compare to _______." And you look at the back of the boxes, and it is the same thing. It has to be.
Shen: Yes. OK, so, here's something that Asit and I spoke about recently in terms of supertrends in the consumer retail space. I want to touch briefly on loyalty programs. On the consumer retail side, everybody can look in their wallet or keys and see a lot of different things, credit cards, maybe their airfare, supermarket, plenty of options. How is that playing out in terms of the healthcare space?
Harjes: For that, I would really point to the retail pharmacy space. In particular, you have these stores that are essentially the same. CVS, Walgreens, Rite Aid. For me, and for a lot of people, proximity is what determines which one of them you're going to use to fill your prescriptions, or to walk in and buy Tylenol or whatever it is you're looking for. But, there are little things these companies can do to try to keep their customers loyal. The best example of this that I can think of is Rite Aid with their Plenti program. This is something you might have discussed previously. It's a group effort among a bunch of big-name companies: Exxon, AT&T, Macy's, Hulu --
Shen: There's a ton of retail partners in this.
Harjes: They all got together and they made this co-op loyalty program so you can share your loyalty points throughout all of them. Whether that's going to be enough to encourage people to go to Rite Aid as opposed to the CVS that might be a little bit closer, I'm not sure, particularly when you consider that these stores are often right next to each other, or at least in the same strip mall -- it might be enough.
Shen: On top of the Rite Aid Plenti program, which I think is particularly attractive because of what you mentioned -- its network of retail partners -- I was looking at CVS, they have their ExtraCare Rewards, Walgreens has its Balance Rewards. I'm curious, in terms of the retail pharmacy business -- I feel like when I go to each of these stores, they're all very similar. If it's not proximity, how much does product selection, in terms of magazines, candy, or other products beyond the prescription counter, have a draw, if it's not just proximity?
Harjes: I think it's so easy for these companies to offer the same stuff, the stuff that works the best. One thing I will point out here, though, is CVS having gotten rid of cigarettes. That was a huge move for them.
Shen: Oh yes, I remember that.
Harjes: This was a while ago. I can see that having both positive and negative impacts on consumers. I can see people saying, "That's a great brand," if you're a non-smoker and you support healthy things like that. But if you're a smoker, then you're not going to go to CVS because you can't pick up a pack of cigarettes on the way out. Realistically -- this is another thing we talked about on the Healthcare show previously -- that move for CVS was a branding move, but it was more for their PBM side of the business, which is their pharmacy benefits management, which essentially negotiates drug prices. For that, it mattered a lot more that they had this brand image of, "We're cigarette-free."
Shen: Sure. If I recall correctly, they had estimated that would have something like a $2 billion impact on their sales. For a company the size of CVS, their top line is multiples and multiples of that. So, it should have been minimized. You may argue that there may have been an effect in that people who previously would have bought cigarettes and other products, now they lose on some of that revenue. But, like you mentioned, it seems like that wasn't really their main concern.
Harjes: And I think that was factored into the estimate. And, the PBM is the majority of their revenue, so if it helps them a little bit there and dings them more on the retail pharmacy side, that's OK, that probably nets out.
Shen: Last two -- trying to work through these relatively quickly -- this is something that's been very prominent recently in headlines, and that's with price transparency. On the retail side, you don't see this quite as much. A really good example that I could think of was T-Mobile. T-Mobile and its CEO, John Legere, he has his Un-carrier initiatives. Basically, these have been breaking industry standards in terms of billing, practices in terms of what your data is, how those things work out. These uncarrier initiatives are designed to be very friendly to the consumer, and honestly put some egg on the face of the competing wireless service providers like Verizon and AT&T, by saying, "They have these really shady billing practices, they're charging you for overages, we're going to stop doing that." Even on your cable bills, in some cases, Comcast has gotten flak, for example, for adding fees below the line so they can basically market, "Your monthly service will be $50," but in actuality there's $15 more of fees and they're just reclassifying it. So there are some moves on the retail side with price transparency. But in the healthcare side, it's really something we're seeing in the headlines quite a bit in terms of the EpiPen and some other controversies. What's going on there?
Harjes: Those were some really good examples. When we first brought this up as a topic, the way that I saw this going was, we would talk about how, McDonald's, you walk in and there's a menu and there's prices and you know how much things are going to be, then I was going to paint this stark contrasting picture of healthcare where everything is so murky and you can't see what anything's going to cost until you get the bill. But yeah, those examples you described have a lot of a lot of symmetry. For example, there is this big issue in healthcare coverage where you might not know exactly how much you're going to be charged for some sort of procedure. So you go to a clinic and you know that the clinic is in network. But, you don't know that every single doctor that might see you within that clinic -- or maybe just one person involved in your surgery -- is not actually in network. And then you get slammed with this big bill, and it's a surprise, it's always a surprise. California, in September, passed this law called ABO72. That's supposed to protect people from this by limiting the patient's financial obligations to what they would have paid had the provider been in network.
So, you start to see these little incremental steps, because people are demanding it. They can no longer accept that when you go to a hospital, you don't get a menu like you get at McDonald's, that says "Here's what everything is going to cost, and the right to refuse an extra $42 Band-Aid." You just get the bill at the end. We do have a shift going on within the industry where people expect to know what they're going to pay beforehand.
Shen: I honestly could see that as a huge point of differentiation for certain service providers within the healthcare space. You can go to one hospital that is much more open and transparent about what you're paying for and everything, and on the other side it's a bit murkier, and I can see people valuing that transparency and turning there.
Harjes: Yeah, it's a competitive advantage. It's a competitive advantage for hospitals. You see them starting to post reviews online of open and honest feedback. It's a differentiator for insurers, for example, if you have an app that's really easy to use, people can see what they're going to pay, and they value that.
Shen: Absolutely. Last one. This one is something that's pretty new, and that's also developing in the consumer space. That's with subscription business models. We've seen the success with some of those. I don't know if you're familiar with Dollar Shave Club, but they were recently acquired by Unilever, a really big company in the consumer retail space, for about $1 billion. In my opinion, very much proof of concept of how lucrative this can be. Then, some other big ones that people are familiar with, think Birchbox, Blue Apron. The main idea on the consumer retail side is, you can very quickly build loyalty with customers, because they've signed up to get something every month, every two weeks, whatever it might be. And they can sample a lot of new products without being overwhelmed with the very many choices out there now. How is that playing out on the healthcare side?
Harjes: You wouldn't think there's an obvious connection here, but I'm going to draw the parallel between a subscription business model on the CG side of things with chronic disease treatment in healthcare. It is very lucrative for these consumer goods companies to have customers that are signed up, and are basically signed up for life. If you sign up for Spotify, and all of the sudden that's where all your playlists are and your friends are on there, you're not leaving. You're going to keep paying that $9.99 or however much it is indefinitely. You can kind of see a parallel business model with chronic treatment. If you're taking a drug for the rest of your life as a treatment rather than a cure, that money comes in day in and day out. And I think that's actually a fairly nefarious part of the healthcare business model, but I will point out that its one saving grace is, if a disease could be treated -- some people will criticize healthcare companies, saying that they are making these treatments because they want you to have to take the drug for the rest of your life --
Shen: Instead of making a cure?
Harjes: Yeah, that they could make a cure and it would be one-and-done. That's not the case. If that was possible -- that you could make something that could cure it -- somebody is going to do that, because as soon as you make a cure, you have stolen all of that market.
Shen: Sure. Well, I think that's all the time we have for today. If anyone has any more questions, be it on the consumer side or the healthcare side, you can reach out to us and the rest of the IF crew via Twitter @MFIndustryFocus. You can send us any questions or comments via email to
Harjes: Thanks, Vince!
Shen: Thanks, everyone, for listening and Fool on!