Erratic. Unpredictable. Volatile. Take your pick of the descriptions used when it comes to biotechnology stocks. Each of these adjectives can be a fitting descriptor to the industry most of the time.
However, not all biotechnology companies fall under that category. Some are reasonably stable, offering steady and increasing profits.
Vertex Pharmaceuticals (VRTX) is one of those biotechnology stocks that you can simply buy and hold for over a decade without losing any sleep.
One of the key factors in Vertex’s success is its monopoly on the cystic fibrosis (CF) market.
CF is a rare and life-threatening genetic disease that affects a patient’s digestive system and lungs. To date, there is no cure for this condition that overshadows the lives of 68,000 individuals in the US and the EU. However, there are treatment options for it.
Vertex developed the first-ever FDA-approved drug, Kalydeco, for the condition. As expected, it gained the much-coveted head start that led to its dominance today.
Its closest rivals, Proteostasis Therapeutics (PTI) and Galapagos NV (GLPG), are years away from ever catching up to the Massachusetts-based biotechnology stalwart. Neither has an approved drug as of today.
Since the approval of Kalydeco in 2012, Vertex stock has been enjoying an upward trajectory. With the recent addition of another CF blockbuster, Trikafta, the company is anticipated to keep its momentum.
From the moment Trikafta was released to the market, Vertex’s revenue and bottom line showed impressive growth. The drug, which is a triple combination therapy, is projected to capture almost 90% of the CF market worldwide.
Needless to say, Vertex has made it in the shade for at least the next 5 years, thanks to its CF market dominance.
In its second quarter earnings report, Vertex showed a 62% jump in its revenue year over year to hit $1.52 billion. Its net income of $837 million demonstrated a whopping 213% increase compared to the same period in 2019.
As anticipated, the star of the show was Trikafta.
The drug raked in $918 million in the second quarter alone – an amount higher than the combined sales of all the drugs in Vertex’s product line and an impressive growth from the $420 million it contributed last year.
As Vertex’s bottom line grew, its margins showed substantial improvement as well. Its operating margin for the second quarter of 2020 is at 57% compared to 44% during the same quarter last year.
With Vertex’s key metrics topping expectations, the company changed its 2020 revenue guidance from $5.7 billion to $5.9 billion, showing off a noteworthy increase from the $4 billion in sales it reported in 2019.
Although its CF pipeline has a number of promising candidates, Vertex is also looking outside the market for additional avenues of growth.
One of the most promising and exciting partnerships it forged in the past decade is with gene-editing company CRISPR Therapeutics (CRSP).
Just looking at this collaboration makes it clear that Vertex is once again playing the long game.
What we know so far is that the two companies are working on a treatment, called CTX001, for rare genetic blood disorders sickle cell disease and transfusion-dependent beta-thalassemia.
They are also developing two potential treatments for alpha-1 antitrypsin deficiency (AATD), which is a rare genetic liver and lung disorder that is similar to CF.
Detractors might point out that Vertex is a pricey stock. However, this biotechnology company currently has $71.2 billion in market capitalization.
More notably, it has no debt and holds $5.5 billion in cash. That puts the true value of Vertex at roughly $65.7 billion.
I believe that the biotechnology company’s overall outlook more than does justice for its valuation.
Granted that it is trading at 11 times its revenue and 26 times its adjusted EPS, its consistent performance and promising future ensure that its investors will be getting more bang for their buck.
In a word, Vertex remains a first-rate biotechnology stock to buy.
Global Market Comments
December 24, 2020
(TRADING THE NEW APPLE IN 2021),
Not a day goes by when someone doesn’t ask me about what to do about Apple (AAPL).
After all, it is the world’s largest publicly-traded company at a $2.1 trillion market capitalization. It is the planet’s most widely owned stock. Almost everyone uses their products in some form or another. It buys back more of its own stock than any other company on the planet. Oh yes, it is also one of Warren Buffet’s favorite picks.
So, the widespread adulation is totally understandable.
Apple is a company with which I have a very long relationship. During the early 1980s, I was ordered by Morgan Stanley to take Steve Jobs around to the big New York Institutional Investors to pitch a secondary share offering for the sole reason that I was one of three people who worked for the firm who was then from California.
They thought one West Coast hippy would easily get along with another. Boy, were they wrong, me in my three-piece navy blue pinstripe suit and Steve in his work Levi’s. It was the worst day of my life. Steve was not a guy who palled around with anyone. He especially hated investment bankers.
I got into Apple with my personal account when the company only had four weeks of cash flow remaining and was on the verge of bankruptcy. I got in at $7, which on a split-adjusted basis today is 25 cents. I still have them. In fact, my cost basis in Apple is less than the 84 cents annual dividend now.
Today, some 200 Apple employees subscribe to the Diary of a Mad Hedge Fund Trader looking to diversify their substantial holdings. Many own Apple stock with an adjusted cost basis of under $5. Suffice it to say, they all drive really nice Priuses.
So I get a lot of information about the firm far above and beyond the normal effluent of the media and stock analysts. That’s why Apple has become a favorite target of my Trade Alerts over the years.
And here is the great irony: Nobody would touch the stock with a ten-foot
pole at the end of 2018. Since then, Apple has rallied 71%, creating more market cap in a year than any company in history.
Here’s why. Apple was all about the iPhone which then accounted for 75% of its total earnings. The TV, the watch, the car, iPods, the iMac, and Apple pay were all a waste of time and consumed far more coverage than they are collectively worth.
The good news is that iPhone sales are subject to a fairly predictable cycle. Apple launches a major new iPhone every other fall. The share price peaks shortly after that. The odd years see minor upgrades, not generational changes.
Just like you see a big pullback in the tide before a tsunami hits, iPhone sales are flattening out between major upgrades. This is because consumers start delaying purchases in expectation of the introduction of the new iPhones, more power, gadgets, and gizmos.
So during those in-between years, the stock performance was disappointing. 2018 certainly followed this script with Apple down a horrific 30.13% at the lows. Maybe it’s a coincidence, but the previous generation in Apple shares in 2015 brought a decline of, you guessed it, exactly 29.33%.
But Apple is a much bigger company this time around, and well-established cycles tend to bring in diminishing returns. It’s like watching the declining peaks of a bouncing rubber ball.
This is not your father’s Apple anymore. Services like iTunes and the new Apple+ streaming service are accounting for an even larger share of the company’s profits. And guess what? Services companies command much higher multiples than boring old hardware ones. It’s the old questions of linear versus exponential growth.
An easing of trade relations with China under a new Biden administration will bring a new spring to Apple’s step, where sales have recently been in free fall. Their new membership lease program promises to deliver a faster upgrade cycle that will allow higher premium prices for their products. That will bring larger profits.
It all adds up to keeping Apple as a core to any long term portfolio.
Just thought you’d like to know.
First and foremost, thank you for what you do.
The small cost of this newsletter pays for itself a thousand times over. My returns mimic those of your portfolio for the year and for that I am grateful.
The only suggestion I would offer is to keep doing what you are doing. It is people like you that will help return the once storied name to Wall Street.
“Interest rates are the physical gravity of financial assets. The lower they are, the higher assets will levitate,” said Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, a leading hedge fund of funds.
Global Market Comments
December 23, 2020
(THE EIGHT WORST TRADES IN HISTORY),
As you are all well aware, I have long been a history buff. I am particularly fond of studying the history of my own avocation, trading, in the hope that the past errors of others will provide insights into the future.
History doesn’t repeat itself, but it certainly rhymes.
So after decades of research on the topic, I thought I would provide you with a list of the eight worst trades in history. Some of these are subjective, some are judgment calls, but all are educational. And I do personally know many of the individuals involved.
Here they are for your edification, in no particular order. You will notice a constantly recurring theme of hubris.
1) Ron Wayne’s sales of 10% of Apple (AAPL) for $800 in 1976
Say you owned 10% of Apple (AAPL) and you sold it for $800 in 1976. What would that stake be worth today? Try $120 billion. That is the harsh reality that Ron Wayne, 86, faces every morning when he wakes up, one of the three original founders of the consumer electronics giant.
Ron first met Steve Jobs when he was a spritely 21-year-old marketing guy at Atari, the inventor of the hugely successful “Pong” video arcade game.
Ron dumped his shares when he became convinced that Steve Jobs’ reckless spending was going to drive the nascent startup into the ground and he wanted to protect his own assets in a future bankruptcy.
Co-founders Jobs and Steve Wozniak each kept their original 45% ownership. Today, Jobs’ widow, Laurene Powel Jobs, has a 0.5% ownership in Apple worth $4 billion, while the value of Woz’s share remains undisclosed.
Today, Ron is living off of a meager monthly Social Security check in remote Pahrump, Nevada, about as far out in the middle of nowhere as you can get where he can occasionally be seen playing the penny slots.
2) AOL’s 2001 Takeover of Time Warner
Seeking to gain dominance in the brave new online world, Gerald Levin pushed old-line cable TV and magazine conglomerate, Time Warner, to pay $164 billion to buy upstart America Online in 2001. AOL CEO, Steve Case, became chairman of the new entity. Blinded by greed, Levin was lured by the prospect of 130 million big-spending new customers.
It was not meant to be.
The wheels fell off almost immediately. The promised synergies never materialized. The Dotcom Crash vaporized AOL’s business the second the ink was dry. Then came a big recession and the Second Gulf War. By 2002, the value of the firm’s shares cratered from $226 billion to $20 billion.
The shareholders got wiped out, including “Mouth of the South” Ted Turner. That year, the firm announced a $99 billion loss as the goodwill from the merger was written off, the largest such loss in corporate history. Time Warner finally spun off AOL in 2009, ending the agony.
Steve Case walked away with billions and is now an active venture capitalist. Gerald Levin left a pauper and is occasionally seen as a forlorn guest on talk shows. The deal is widely perceived to be the worst corporate merger in history.
Buy High, Sell Low?
3) Bank of America’s Purchase of Countrywide Savings in 2008
Bank of America’s CEO Ken Lewis thought he was getting the deal of the century picking up aggressive subprime lender, Countrywide Savings, for a bargain $4.1 billion, a “rare opportunity.”
As a result, Countrywide CEO Angelo Mozilo pocketed several hundred million dollars. Then the financial system collapsed, and suddenly we learned about liar loans, zero money down, and robo-signing of loan documents.
Bank of America’s shares plunged by 95%, wiping out $500 billion in market capitalization. The deal saddled (BAC) with liability for Countrywide’s many sins, ultimately, paying out $40 billion in endless fines and settlements to aggrieved regulators and shareholders.
Ken Lewis was quickly put out to pasture, cashing in on an $83 million golden parachute, and is now working on his golf swing. Mozilo had to pay a number of out-of-court settlements, but was able to retain a substantial fortune, and is still walking around free.
The nicely tanned Mozilo is also working on his golf swing.
4) The 1973 Sale of All Star Wars Licensing and Merchandising Rights by 20th Century Fox for Free
In 1973, my former neighbor George Lucas approached 20th Century Fox Studios with the idea for the blockbuster film, Star Wars. It was going to be his next film after American Graffiti which had been a big hit earlier that year.
While Lucas was set for a large raise for his directing services – from $150,000 for American Graffiti to potentially $500,000 for Star Wars – he had a different twist ending in mind. Instead of asking for the full $500,000 directing fee, he offered a discount: $350,000 off in return for the unlimited rights to merchandising and any sequels.
Fox executives agreed, figuring that the rights were worthless, and fearing that the timing might not be right for a science fiction film.
In hindsight, their decision seems ridiculously short-sighted.
Since 1977, the Star Wars franchise has generated about $27 billion in revenue, leaving George Lucas with a net worth of over $3 billion by 2012. In 2012, Disney paid Lucas an additional $4 billion to buy the rights to the franchise.
The initial budget for Star Wars was a pittance at $8 million, a big sum for an unproven film. So, saving $150,000 on production costs was no small matter, and Fox thought it was hedging its bets.
George once told me that he had a problem with depressed actors on the set while filming. Harrison Ford and Carrie Fisher thought the plot was stupid and the costumes silly.
Today, it is George Lucas who is laughing all the way to the bank.
$150,000 for What?
5) Lehman Brothers Entry Into the Bond Derivatives Market in the 2000s
I hated the 2000s because it was clear that men with lesser intelligence were using other people’s money to hyper leverage their own personal net worth. The money wasn’t the point. The quantities of cash involved were so humongous they could never be spent. It was all about winning points in a game with the CEOs of the other big Wall Street institutions.
CEO Richard Fuld could have come out of central casting as a stereotypical bad guy. He even once offered me a job which I wisely turned down. Fuld took his firm’s leverage ratio up to 100 times in an extended reach for obscene profits. This meant that a 1% drop in the underlying securities would entirely wipe out its capital.
That’s exactly what happened, and 10,000 employees lost their jobs, sent packing with their cardboard boxes with no notice. It was a classic case of a company piling on more risk to compensate for the lack of experience and intelligence. This only ends one way.
Morgan Stanley (MS) and Goldman Sachs (GS) drew the line at 40 times leverage and are still around today but just by the skin of their teeth, thanks to the TARP.
Fuld has spent much of the last five years ducking in and out of depositions in protracted litigation. Lehman issued public bonds only months before the final debacle, and how he has stayed out of jail has amazed me. Today he works as an independent consultant. On what I have no idea.
Out of Central Casting
6) The Manhasset Indians’ Sale of Manhattan to the Dutch in 1626
Only a single original period document mentions anything about the purchase of Manhattan. This letter states that the island was bought from the Indians for 60 Dutch guilders worth of trade goods which would consist of axes, iron kettles, beads, and wool clothing.
No record exists of exactly what the mix was. Indians were notoriously shrewd traders and would not have been fooled by worthless trinkets.
The original letter outlining the deal is today kept at a museum in the Netherlands. It was written by a merchant, Pieter Schagen, to the directors of the West India Company (owners of New Netherlands) and is dated 5 November 1626.
He mentions that the settlers “have bought the island of Manhattes from the savages for a value of 60 guilders.” That’s it. It doesn’t say who purchased the island or from whom they purchased it, although it was probably the local Lenape tribe.
Historians often point out that North American Indians had a concept of land ownership different from that of the Europeans. The Indians regarded land, like air and water, as something you could use but not own or sell. It has been suggested that the Indians may have thought they were sharing, not selling.
It is anyone’s guess what Manhattan is worth today. Just my old two-bedroom 34th-floor apartment at 400 East 56th Street is now worth $2 million. Better think in the trillions.
7) Napoleon’s 1803 Sale of the Louisiana Purchase to the United States
Invading Europe is not cheap, as Napoleon found out, and he needed some quick cash to continue his conquests. What could be more convenient than unloading France’s American colonies to the newly founded United States for a tidy $7 million? A British naval blockade had made them all but inaccessible anyway.
What is amazing is that president Thomas Jefferson agreed to the deal without the authority to do so, lacking permission from Congress, and with no money. What lies beyond the Mississippi River then was unknown.
Many Americans hoped for a waterway across the continent while others thought dinosaurs might still roam there. Jefferson just took a flyer on it. It was up to the intrepid explorers, Lewis and Clark, to find out what we bought.
Sound familiar? Without his bold action, the middle 15 states of the country would still be speaking French, smoking Gitanes, and getting paid in Euros.
After Waterloo in 1815, the British tried to reverse the deal and claim the American Midwest for themselves. It took Andrew Jackson’s (see the $20 bill) surprise win at the Battle of New Orleans to solidify the US claim.
The value of the Louisiana Purchase today is incalculable. But half of a country that creates $17 trillion in GDP per year and is still growing would be worth quite a lot.
Great General, Lousy Trader
8) The John Thomas Family Sale of Nantucket Island in 1740
Yes, my own ancestors are to be included among the worst traders in history. My great X 12 grandfather, a pioneering venture capitalist investor of the day from England, managed to buy the island of Nantucket off the coast of Massachusetts from the Indians for three ax heads and a sheep in the mid-1600s. Barren, windswept, and distant, it was considered worthless.
Two generations later, my great X 10 grandfather decided to cut his risk and sell the land to local residents just ahead of the Revolutionary War. Some 17 of my ancestors fought in that war including the original John Thomas who served on George Washington’s staff at the harsh winter encampment at Valley Forge during 1777-78. Maybe that’s why I have an obsession about not wasting food?
By the early 19th century, a major whaling industry developed on Nantucket fueling the lamps of the world with smoke-free fuel. By then, our family name was “Coffin,” which is still abundantly found on the headstones of the island’s cemeteries.
One Coffin even saw his ship, the Essex, rammed by a whale and sunk in the Pacific in 1821. He was eaten by fellow crewmembers after spending 99 days adrift in an open lifeboat. Maybe that’s why I have an obsession about not wasting food?
In the 1840s, a young itinerant writer named Herman Melville visited Nantucket and heard the Essex story. He turned it into a massive novel about a mysterious rogue white whale, Moby Dick, which has been torturing English literature students ever since. Our family name, Coffin, is mentioned seven times in the book.
Nantucket is probably worth many tens of billions of dollars today as a playground for the rich and famous. Just a decent beachfront cottage there rents for $50,000 a week in the summer.
The 2015 Ron Howard film, The Heart of the Sea, is breathtaking. Just be happy you never worked on a 19th-century sailing ship.
Yes, it’s all true and documented.
“It’s really dangerous to look for rationality in the market, so much of it is psychology…. Stocks will rotate from flawless to hopeless,” said Howard Marks of Oaktree Capital Management.
Global Market Comments
December 22, 2020
(A CHRISTMAS STORY),
(MY FAVORITE SECRET ECONOMIC INDICATOR)