Mad Hedge Biotech and Healthcare Letter
November 4, 2021
Fiat Lux
Featured Trade:
(A LONG-TERM STOCK FOR MONOPOLY AFICIONADOS)
(VRTX), (ABBV), (GLPG), (CRSP), (MRNA)
If you want to insulate yourself from the daily gyrations of cryptocurrency but still benefit off the massive phenomenon known as cryptocurrency, then I have the perfect stock for you that trades on the New York public markets.
You don’t even need to open a cold wallet on a crypto exchange to partake.
Silvergate (SI) provides fiat-money services for the world’s biggest cryptocurrency exchanges and financial institutions.
It’s been the personal banker for the digital currency industry for eight years already.
So I just want to remind readers that this isn’t just some flash in the pan type of operation and they possess an official bank charter.
Many people have been coming around to the conclusion that digital asset — this digital currency market is here to stay.
It's not going away.
What does that mean for Silvergate?
Well, first, the stock is up over 600% this year as the price of Bitcoin has exploded to the upside.
Second, SI customers are going to maintain deposits on Silvergate’s platform because of the health of the industry and the services SI provides in order to take advantage of the opportunities they hope to pursue.
It’s satisfying that a stronger balance sheet coincides with a net interest income up 24% compared to last quarter and up 99% compared to the same period last year.
SI’s moat is as strong as ever.
The Silvergate Exchange Network (SEN) is a division that facilitates USD transfer between cryptocurrency exchanges and institutional investors.
And if you look at the SEN activity in the third quarter, its conservative leverage and skyrocketing consumer demand make the stock an ideal buy.
Let’s peel back the layers a little.
One of the great things about the Silvergate Exchange Network, the platform that they have developed, is the network effect and the fact that, as they onboard customers and continue to add products and services, those customers just become stickier.
Since the accumulation of more customers, there is a natural kind of lag between adding a customer and when they get their funding and start using the SEN and other SI products.
Usually, it takes about 1 to 2 quarters to ramp up their product usage and so I do expect the next earnings to be great.
But the real story this past quarter is the continued growth of SEN Leverage.
And in a market that was, you look at the bitcoin price throughout the quarter and you look at the trading volumes which correlate to maintaining a high average deposit, and then start to deploy those deposits in SEN via higher leverage.
Obviously, when the price of crypto is higher than the previous quarters, there is more capital flowing through the SEN.
The cherry on top is the leverage which this bank can supercharge profits — rinse and repeat.
The company currently provides such services to 93 cryptocurrency exchanges and 771 institutional investors such as hedge funds.
Noteworthy clients include Binance.us, Coinbase, Fidelity Digital Assets, PayPal, and CME Group. It also has 360 customers engaged in activities such as crypto mining or building decentralized finance services.
Like any other bank, the company lends out money while only using a portion of its deposit as collateral in a process called fractional reserve banking.
With the rise of the $172.15 billion decentralized finance (DeFi) industry, there are now more opportunities than ever for investors to buy and hold cryptos and earn fixed income with them.
As a result, expect heightened demand for Silvergate’s fiat-crypto services as the crypto and DeFi industries develop.
The stock is a little long in the tooth, but it just demonstrates the belief in the industry and SI has a massive head start over traditional banks who are hesitant about diving deep into the crypto space and funding crypto.
Naturally, that is the caveat about this stock, and banking is not a monopoly which could easily see the JP Morgan’s and Morgan Stanley’s infringe on SI’s turf.
A wave of competition could see net interest income diminished, SEN damaged, and deposits lessened, but I don’t anticipate a full steam ahead type of pivot into crypto from the traditional banking system because their CEOs are not on board.
These CEOs have shown they are willing to go as far as “fintech” but don’t have the stomach for funding crypto.
Old habits die hard.
Use large dips of 10% to add to this unique banking name.
Investors have a myriad of biotechnology stocks to choose from. However, most of these options are still in the developmental stage for their first blockbuster product that can hit at least $1 billion in sales annually.
Then, there are biotechnology companies like Vertex Pharmaceuticals (VRTX).
Vertex has a storied history of launching blockbuster names in the market for rare and hard-to-treat diseases.
Among the products in its portfolio, what stands out is Vertex’s work on cystic fibrosis (CF) treatments.
CF is an incurable genetic condition that can damage the lungs and the pancreas. So far, Vertex has four CF treatments available and holds 97% of the market share worldwide, valued at roughly $6.36 billion in 2020.
The company’s latest CF treatment, Trikafta, is already projected to generate roughly $5 billion in sales after only less than 2 years since its release.
Thus far, Vertex has reported an annualized sales run rate of $7.2 billion in its second-quarter earnings report for 2021. This number is expected to climb higher as the company increases its penetration rate in the CF market in the coming years.
Given its history and trajectory, Vertex is projected to generate $10 billion to $10.5 billion in sales for its CF franchise by 2024.
Considering the lucrative CF market’s potential, it no longer comes as a surprise that more and more competitors are entering the space. However, none can even be considered as a close second to Vertex.
AbbVie (ABBV) partnered with Galapagos (GLPG) to come up with a combination CF treatment a few years back, only to get stalled in Phase 2 trials.
It remains to be seen if AbbVie, which eventually acquired the entire CF line from Galapagos, will be able to develop a drug worthy of challenging Vertex’s dominance in the arena.
The driving force behind Vertex’s success is its operating model, which works overtime to exhaust all resources to protect its CF revenue.
Throughout the years, the company has been consistent in its efforts to keep developing innovative CF treatments and expanding its coverage to include more mutations.
In turn, these new drugs all but guarantee that Vertex enjoys a stable and secure cash flow for years.
For example, the IP protection for Trikafta will reach up to the late 2030s. If innovations on the drug are discovered, then this can very well extend into the 2040s.
Despite the overwhelming success of its CF franchise, Vertex knows not to rest all its eggs in one basket.
The company has been working on expanding its expertise. A telltale sign of this decision is its burgeoning partnership with CRISPR Therapeutics (CRSP).
So far, the two have created a promising gene-editing treatment, CTX001, which targets rare blood diseases and sickle cell disease.
Looking at their timeline, the therapy could be ready for regulatory review by 2023.
Other than CTX001, Vertex and CRISPR have been developing several mRNA-based treatments currently under Phase 2 trials.
Among them, the therapies generating the most excitement are the ones targeting pain and rare kidney diseases.
For acute pain treatments alone, the US market is already worth $4 billion. To this day, the non-opioid medication market remains an extremely attractive space.
Needless to say, a product offering an approved safety profile and high efficacy could easily grab the multi-billion sales potential.
Meanwhile, riding on the momentum of its mRNA programs, Vertex also partnered with Moderna (MRNA) to develop more therapies for rare and hard-to-treat diseases.
While its collaboration with Moderna has yet to reveal its prime candidates, there’s a strong possibility that one of them would be a gene therapy for CF.
CTX001’s addressable market is highly lucrative and still exclusive to hyper-specialized companies.
This top-priced orphan gene-editing treatment could rake in annual sales within the range of $3 billion and $4.5 billion. This estimate covers roughly 3,000 to 4,500 patients every year, with average individual spending of $1 million.
Although this price might sound too steep, keep in mind that CTX001 treats lifelong incurable diseases. Typically, patients spend an average of $200, 000 annually.
If successful, this treatment from Vertex and CRISPR could provide a one-and-done answer to the suffering of these patients, justifying the steep price tag.
Overall, I see Vertex as a stock selling a pretty reasonable price.
Considering its relatively young pipeline, though, this should be seen as a long-term investment—one that has been tested and proven to be successful at targeting multi-billion-dollar markets.
“Worse than tulip bulbs.” – Said CEO of JP Morgan Jamie Dimon when talking about Bitcoin
Global Market Comments
November 4, 2021
Fiat Lux
Featured Trade:
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
When John identifies a strategic exit point, he will send you an alert with specific trade information as to what security to sell, when to sell it, and at what price. Most often, it will be to TAKE PROFITS, but, on rare occasions, it will be to exercise a STOP LOSS at a predetermined price to adhere to strict risk management discipline. Read more
Mad Hedge Technology Letter
November 3, 2021
Fiat Lux
Featured Trade:
(AVOID THIS TECH STOCK)
(Z)
Zillow iBuying division, Zillow Offers, registered a meager average gross loss per home sold of $80,771.
This division did so bad that they are closing it down translating into a culling of 25% of the workforce.
Zillow's co-founder and CEO Rich Barton is to blame for this disastrous attempt at going from a digital ad company on a real estate platform to a full-blown house flipping company.
This idea probably looked good on paper at first (though I'm not sure how) but executing it was hell.
It seemed that nobody even considered the carrying costs, such as HOA fees, local property taxes, utilities, home insurance, appraisal costs that added up to most of the gross loss per house.
And the fact that competition to buy housing lately has resulted in buyers offering well above the listed price should have sent a warning signal to stay out of this.
It is hard to understand how they would ever make a profit while employing 2,000 full-time iBuying employees to carry this out.
Even if profit could be possible, it would be minimal at best.
Zillow partially blamed the algorithms for the lack of success, but I would lean towards saying this was a hopeless endeavor from the start.
The failure has led to a total write-down of more than $540 million and the company said it was halting new purchases of homes, so at least they got that right.
In the earnings report, Zillow Offers purchased homes during the last quarter for prices higher than it believes it can sell them.
It also could be a sign for a short-term post-pandemic market top in housing.
Flipping houses doesn’t work when buying at the market peak and Zillow, who possesses the most real estate data out of anyone, should have known that.
Yes, housing prices are unpredictable, but this is not a type of business that can scale.
Flipping houses also has to do with finding anomalies, bargains, or renovating fixer-uppers which are hard to do now because supply chain disruptions and the labor shortage are causing a backlog in home repairment services.
Instead of going so far off the path from their core business, they should have just bought Bitcoin in 2018 or even big tech and sat on the couch and watched it appreciate.
We all try to minimize our cost of doing business and Zillow chose to shoulder outsized risk in an unscalable business.
Zillow Offers tried to offer homeowners a fair market cash offer; or at least that was the plan.
The idea was to grow that service and offer it to a wider audience. But because of the price forecasting volatility, the company had to reconsider and management probably realized they needed a lot more capital which would create massive problems in the quarter-to-quarter balance sheet.
Remember selling ads is a remarkably predictable revenue stream for these platforms.
Much of their revenue are annuity-like.
The competition in the market amid other iBuyers meant that most proposals Zillow Offers made to homeowners were rejected.
Only 10% of offers from Zillow were accepted because the housing market has largely been irrational the past 18 months.
I commend Zillow for cutting their losses, and they still need to work through their backlog of already purchased homes which will surely result in a higher than $80,000 per unit loss.
Zillow ended the quarter with 9,790 homes in inventory and 8,172 homes under contract that it will still purchase, which it will sell over the next six months or at least try to.
The company should do what it does best — sell ads.
Consequently, Zillow’s stock has been battered peaking at $200 this February and now at $70.
I personally wouldn’t touch Zillow stock with a 10-foot pole, and would be suspicious of management if they announce some grand plan to regain momentum.
Management needs wholesale changes to get back to its core competencies.
It’s a crime that it took 3 years for Zillow to figure out this was a cruddy direction.
"Life is not fair; get used to it." said the Co-Founder of Microsoft Bill Gates.
