Mad Hedge Biotech and Healthcare Letter
August 4, 2022
Fiat Lux
Featured Trade:
(A SELLOFF SURVIVOR READY FOR MORE GAINS)
(PFE), (SRPT), (PTCT), (GSK), (JNJ), (MRNA)
The broader market hasn’t been putting that much faith in drugmakers these days, and this could very well be a mistake.
While 2022 has not been particularly kind to equities recently, several names in the biotechnology and healthcare sector still managed to keep themselves safe from the selloff.
Pfizer (PFE), with its COVID vaccine sales, is one of them. Admittedly, this pharmaceutical giant has not shown substantial growth in the past monthS. Nonetheless, its quarterly updates and, more importantly, pipeline have exhibited notably encouraging signals.
As a massive underperformed in the past 20 years, Pfizer has taken aggressive steps to transform its strategy. The most obvious way to shake up the business is to eliminate the bulk of its noncore products.
However, it’s not advisable to buy a company just because it has been underperforming and would then be sold at lower prices. Instead, it is critical to determine whether there’s a catalyst.
For Pfizer, the catalyst was clear: COVID.
The company was and still is at the heart of the coronavirus vaccine drives and treatments—a position that’s projected to be sustained for years to come.
The company has made a fortune from this program, and it’s still reaping the rewards in a massive way.
In the second quarter of 2022, Pfizer’s revenue climbed by 53% year-over-year to reach $27.7 billion. Based on the company’s record, this is the most significant quarterly sales during this period to date.
For context, its COVID vaccine, Comirnaty, raised $8.8 billion in sales. This is 20% higher than its reported sales in 2021 over the same period.
Meanwhile, Pfizer’s new COVID therapy, Paxlovid, recorded $8.1 billion in sales. Taken together, Paxlovid and Comirnaty comprise over half of the company’s total revenue for the second quarter.
Leveraging these growth opportunities, Pfizer has been steadily expanding its pipeline.
To date, the company has roughly 96 drugs in its pipeline. Of these, 6 drugs are in registration, while 29 candidates are queued for Phase 3 trials. There are 31 drugs in Phase 2 and 30 more in Phase 1.
Pfizer’s candidates range from treatments for inflammation, immunology, oncology, vaccines, and internal medicine to rare disease therapies.
Among the treatments in its Phase 3 study, two have been identified to bring in billions of dollars for Pfizer potentially.
One is PF-06939926, which is a treatment for Duchenne syndrome. The other is PF-06928316, which is for Respiratory Syncytial Virus (RSV).
Globally, 1 in 3,500 to 5,000 males suffer from Duchenne syndrome. This puts the number of patients at roughly 250,000, with about 10,000 to 15,000 found in the US. While it generally affects males, it can sometimes affect females as well.
In terms of market size, the Duchenne syndrome market is expected to be worth $4 billion in 2023 and $7 billion by 2027.
Currently, the major approved treatments for this condition are Sarepta's (SRPT) Exondys 51, Vyondys, and Amondys, as well as PTC Therapeutics (PTCT) Emflaza and Translarna.
PTC recorded $236 million in sales for Translarna, which is approved in Europe, and $187 million for Emflaza, approved in the US, for a total of $423 million in sales in 2021. Meanwhile, Sarepta’s overall sales reached $612 million for that same period.
Adding the rest of the minor competitors for Duchenne syndrome treatments, only $1.5 billion of the projected market value is held by the existing drugs. Clearly, there’s a lot of room for more companies to join the fray.
Meanwhile, RSV presents another lucrative market. According to the Centers for Disease Control and Prevention, this condition causes approximately 58,000 hospitalizations annually in the US.
Of these, 100 to 500 deaths are children under 5 years old and 14,000 are adults aged 65 and above. The average expense in managing adult patients alone has reached roughly $3 billion every year.
In terms of market value, the RSV market is projected to reach $4 billion by 2027. So far, the biggest competitors in this space are GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), and Moderna (MRNA).
While its rivals are challenging, Pfizer still estimates sales for its RSV vaccine to reach at least $1.5 billion annually.
Thanks to its COVID programs, Pfizer has been hailed as the undisputed leader of the pack in terms of reputation and credibility in research.
Needless to say, these factors would serve as a valuable growth lever for the healthcare giant for decades.
As one of the largest biopharmas in the world, Pfizer has established a reputation for outstanding innovation. Over the years, the company has delivered several revolutionary treatments to the market like Viagra or Lyrica.
Simultaneously, it developed Lipitor, reaching $14.5 billion in sales over 14.5 years.
Since then, it has become a highly reputable industry name. Its diverse and extensive pipeline demonstrates that it remains a company highly capable of innovating and maintaining its dominance.
Mad Hedge Bitcoin Letter
August 4, 2022
Fiat Lux
Featured Trade:
(ANOTHER CRYPTO HACK)
(SOL), (BTC), (ETH)
The price of Bitcoin is holding up quite well in the short-term as Robinhood fires 23% of its workforce, Bitcoin cheerleader and now former CEO of MicroStrategy quits his post, and another security debacle.
Security infrastructure in any unregulated market is paramount simply because the assets aren’t insured.
Once taken, might as well gift the robbers a card on the way out.
The stakes become higher when hackers know they are less likely to be chased after or quantified once they steal what they are looking for.
Regulated and insured industries are tied to government oversight and when that’s the case, congressional committees often look into industries they are directly tied to if things run amuck.
The optics couldn’t be worse for crypto as we bounce from consecutive security breakdown to the next.
It’s almost as if the last coin not getting hacked will be the last one standing.
It’s getting that bad as the crypto “winter” has triggered a wave of bankruptcies and encouraged smash-and-grab hacking schemes preying on crypto holders who are down and out.
This time it was Solano, which is the 4th biggest cryptocurrency, with a market cap only behind Cardano (ADA), Ethereum (ETH), and the bellwether Bitcoin (BTC).
Solana, known for its speedy transactions, has become the target of the crypto most recent hack after users reported that funds have been drained from internet-connected “hot” wallets.
An unknown actor drained funds from 7,767 wallets on the Solana network resulting in upwards of potentially $50-$100 million.
The attack – which has affected only “hot” wallets or wallets that are always connected to the internet, allowing people to store and send tokens easily – does not appear to be limited to Solana.
Users have reported that USDCs were emptied as well.
The attack has compromised other wallets including Phantom, Slope, Solflare, and TrustWallet. Wallets drained should be treated as compromised and abandoned, Solana warned as it encouraged users to switch to hardware or “cold” wallets.
Phantom, a fast-growing Solana-based wallet that hit $1.2 billion in valuation in January, said it’s “working closely with other teams to get to the bottom of a reported vulnerability in the Solana ecosystem.”
Developers still don’t know how the hack happened and might never figure it out.
The hackers are that far ahead of the game.
Solana spokesperson Chris Kraeuter said the company’s engineers “are currently working with multiple security researchers and ecosystem teams to identify the root cause of the exploit, which is unknown at this time.”
The Solana attack comes hot on the heels of hackers exploiting almost $200 million in digital assets from cross-chain messaging protocol Nomad.
The “free-for-all” attack, which saw more than 41 addresses drain $152 million — 80% of the stolen funds – was made possible by a recent update to one of Nomad’s smart contracts that made it easy for users to spoof transactions.
The word is out there and hackers are clued up, they are moving fast to take advantage of the green shoots nature of the security infrastructure.
An infrastructure not tested by time is prone to gaps in defense and that is what we are seeing.
I have the conviction that if the bellwether Bitcoin is taken down by hackers, that could be the beginning of the end for crypto for this iteration.
In that unlikely scenario, we will experience a precipitous drop from the $23,000 per coin today.
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“Logic will get you from A to B. Imagination will take you everywhere.” – Said Theoretical Physicist Albert Einstein
Global Market Comments
August 4, 2022
Fiat Lux
Featured Trade:
(A NOTE ON ASSIGNED OPTIONS, OR OPTIONS CALLED AWAY),
(TLT), (TSLA)
In the run up to every options expiration, which is the third Friday of every month, there is a possibility that any short options positions you have may get assigned or called away.
If that happens, there is only one thing to do: fall down on your knees and thank your lucky stars. You have just made the maximum possible profit for your position instantly.
Most of you have short option positions, although you may not realize it. For when you buy an in-the-money vertical option spread, it contains two elements: a long option and a short option.
The short options can get “assigned,” or “called away” at any time, as it is owned by a third party, the one you initially sold the put option to when you initiated the position.
You have to be careful here because the inexperienced can blow their newfound windfall if they take the wrong action, so here’s how to handle it correctly.
Let’s say you get an email from your broker telling you that your call options have been assigned away. I’ll use the example of the Microsoft (MSFT) July 2022 $200-$210 in-the-money vertical BULL CALL spread.
For what the broker had done in effect is allow you to get out of your call spread position at the maximum profit point 7 days before the July 15 expiration date. In other words, what you bought for $8.80 is now $10.00!
All have to do is call your broker and instruct them to exercise your long position in your (MSFT) July 2022 $200 calls to close out your short position in the (MSFT) July 2022 $210 calls.
This is a perfectly hedged position, with both options having the same expiration date, and the same amount of contracts in the same stock, so there is no risk. The name, number of shares, and number of contracts are all identical, so you have no exposure at all.
Calls are a right to buy shares at a fixed price before a fixed date, and one options contract is exercisable into 100 shares.
To say it another way, you bought the (MSFT) at $200 and sold it at $210, paid $8.80 for the right to do so, so your profit is $1.20 cents, or ($1.20 X 100 shares X 12 contracts) = $1,440. Not bad for an 18-day limited risk play.
Sounds like a good trade to me.
Weird stuff like this happens in the run-up to options expirations like we have coming.
A call owner may need to buy a long (MSFT) position after the close, and exercising his long July 2022 $200 call is the only way to execute it.
Adequate shares may not be available in the market, or maybe a limit order didn’t get done by the market close.
There are thousands of algorithms out there which may arrive at some twisted logic that the puts need to be exercised.
Many require a rebalancing of hedges at the close every day which can be achieved through option exercises.
And yes, options even get exercised by accident. There are still a few humans left in this market to blow it by writing shoddy algorithms.
And here’s another possible outcome in this process.
Your broker will call you to notify you of an option called away, and then give you the wrong advice on what to do about it. They’ll tell you to take delivery of your long stock and then most additional margin to cover the risk.
Either that or you can just sell your shares on the following Monday and take on a ton of risk over the weekend. This generates a ton of commission for the brokers but impoverishes you.
There may not even be an evil motive behind the bad advice. Brokers are not investing a lot in training staff these days. It doesn’t pay. In fact, I think I’m the last one they really did train.
Avarice could have been an explanation here but I think stupidity and poor training and low wages are much more likely.
Brokers have so many legal ways to steal money that they don’t need to resort to the illegal kind.
This exercise process is now fully automated at most brokers but it never hurts to follow up with a phone call if you get an exercise notice. Mistakes do happen.
Some may also send you a link to a video of what to do about all this.
If any of you are the slightest bit worried or confused by all of this, come out of your position RIGHT NOW at a small profit! You should never be worried or confused about any position tying up YOUR money.
Professionals do these things all day long and exercises become second nature, just another cost of doing business.
If you do this long enough, eventually you get hit. I bet you don’t.
Calling All Options!
"Artificial Intelligence is potentially more dangerous than nukes," said Andrew McAfee of the MIT Center for Digital Business.
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Mad Hedge Technology Letter
August 3, 2022
Fiat Lux
Featured Trade:
(LOSING ITS MOJO)
(NFLX), (AMZN)
The reversion to the mean crowd who like to do no research and just buy certain shares when they go down anticipating a quick rebound needs to avoid former streaming darling Netflix (NFLX).
The company has gone from bad to worse and like your black sheep little brother who loves to play the victim, avoid at all costs!
NFLX has parlayed deteriorating content with an even worse future game plan that screams subscriber bleeding.
The headwinds are adding up to something that will be insurmountable quite soon and I don’t believe that has been accurately reflected in the stock price yet.
Let’s take the running of their clean brand.
They are damaging the brand by integrating it with a lower-cost, ad-supported tier in early 2023. This comes on the heels of Netflix tapping Microsoft to be its partner on the ad-supported offering.
For many years, NFLX was adamant they would never go this route only to do an about-face.
Already losing subscribers, inserting ads to only muddy the content further won’t move the needle in terms of improving the quickly eroding content quality.
Like on a sinking ship, they are trying to chug as many whiskey bottles as possible before the ship goes underwater.
Netflix had warned investors last quarter that it expected to shed around 2 million subscribers but only lost around 970,000 during the three-month period ending June 30.
This artsy game of claiming a pyrrhic victory because the subscriber loss was only around a million and not 2 is insane.
A million subscribers lost is detrimental to any subscriber-based company in any sphere of business.
And remember, NFLX is supposed to be the preeminent growth company, yes, the one that is losing 1 million subscribers every 3 months.
Let’s rate the business model today.
Will the median consumer bite at a monthly NFLX subscription?
In the current market environment, which is characterized by inflation, consumers alter spending. In concrete terms, this means that consumers are concentrating on fewer streaming services.
Also, an NFLX content archive that is shrinkflating doesn’t help and I am not talking in terms of volume.
They no longer have access to the hit shows of old like Friends or Seinfeld that many Millennial viewers love to watch because other streaming platforms have recalled that content.
Times are lean to the bone for NFLX these days.
What we have today is a streaming service that can’t make in-house blockbusters apart from Stranger Things and after that, the kitchen is barren.
Weirdly enough, NFLX executives have turned to anime as if it’s a broad solution to the content woes.
I’ll give you a hint - it’s not.
Stealing content ideas from their 14-year-old daughter won’t hack it in this climate.
Even worse, they are taking classic anime titles from Japan and Americanizing them.
This type of Frankenstein anime is hard to watch.
The conclusion of Stranger Things Season 4 is peak NFLX for 2022 as pitiful as that sounds.
The search for content has really gone into full drive with Amazon (AMZN) picking up France Ligue 1 soccer league rights for $250 million per year on a 3-year contract.
Things have moved on a lot in the content world with American tech companies scouring the world for quality content while NFLX has been stuck in neutral.
The stock has gone from $700 to $200, and the poor executive decisions today mixed with inferior content means that they will underperform any tech rally that is manufactured to end the year.
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