Mad Hedge Biotech and Healthcare Letter
April 2, 2024
Fiat Lux
Featured Trade:
(BREATHE EASY)
(MRK), (JNJ)
It looks like Merck (MRK) just scored a major touchdown in the drug wars, which might make the looming Keytruda patent expiration sting a little less.
Remember when Merck dropped $11.5 billion on Acceleron back in 2021 to get their hands on Winrevair (then known as Sotatercept)? That was a seriously gutsy move to soften the blow when their Keytruda goldmine started drying up.
Talk about a gamble. Acceleron didn't even have their Phase 3 trial results in hand yet. A lot of people were scratching their heads at the time, thinking maybe Merck had lost their marbles.
But fast-forward to today, those Phase 3 results drop, and here we are. Turns out Merck knows a thing or two about playing the long game.
Their new drug, Winrevair, which just got the FDA thumbs up for a rare heart condition, tackles a serious heart condition called pulmonary arterial hypertension (PAH).
PAH is no joke – it basically strangles your lungs and heart, drastically shortening your lifespan. Unlike those old PAH drugs like Uptravi from Johnson & Johnson (JNJ), Winrevair's got a completely different way of fighting back. That could be huge for patients who aren't getting enough relief with current options.
Winrevair targets that messed-up TGF-beta pathway, trying to reverse some of the damage caused by this disease.
Although PAH might be rare, affecting an estimated 15 to 50 people per million in the United States and Europe, those who suffer from it are often desperate for effective treatments.
The global PAH market is already worth a staggering $7.3 billion annually and is projected to hit $12.18 billion by 2032.
Merck's timing couldn't be better. Not only did Winrevair sail through approval, but it also dodged all those nasty black box warnings and extra safety hoops some drugs have to jump through.
Translation: this drug is about to hit the market full speed ahead.
Given the promise of this new drug, Merck must be popping champagne corks right about now. No restrictions mean doctors can prescribe this stuff far and wide – that's a probable goldmine, especially for a serious disease like PAH.
Let's not forget why all this matters. Keytruda was a $25 billion cash cow for Merck in 2023, making up a huge chunk of their revenue. Those cheap knock-offs are coming in 2028, ready to eat into that sweet slice of the pie.
But thanks to Wenrevair, that future doesn’t seem too daunting anymore.
Merck has set a price of $14,000 per vial for Winrevair, translating to an average annual cost of $212,000 per patient. While this may seem steep, it reflects the drug's potential to improve the lives of PAH sufferers and secure Merck's financial future.
Actually, analysts are predicting peak sales of a mind-boggling $11 billion – maybe even $8 billion at the low end. Either way, that's a massive lifeline for Merck as they brace for the dreaded Keytruda patent cliff in 2028.
In fact, Winrevair could pull in $500 million this year alone, jumping to $3 billion by 2027. Talk about a growth spurt.
With Winrevair set to change the PAH treatment landscape, investors can breathe easy knowing that Merck has a new ace up its sleeve.
After all, this drug is practically guaranteed to be another blockbuster, which is great news considering the looming Keytruda patent expiration in 2028.
Merck's audacious $11 billion bet on Acceleron seems to be paying off – Winrevair could easily bring in $30 billion over its lifespan.
But let's not get too carried away – Winrevair won't single-handedly save Merck in the long run. They'll need more hits to keep outperforming the competition.
For now, Merck seems like a decent hold. It's got reasonable growth potential, and you might even want to nab some shares if the price dips.
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
Global Market Comments
April 2, 2024
Fiat Lux
SPECIAL PRECIOUS METALS ISSUE
Featured Trades:
(WHAT’S UP WITH GOLD?)
Have you ever held a basketball underwater in a swimming pool and let go? It flies to the upside and pops you in the nose. That is exactly what Gold is doing.
After the barbarous relic peaked at $2,080 in May 2023, it traded like an absolute pig, giving up 8.7% in a matter of weeks.
Gold actually perfectly timed the bottom in all risk assets on October 15, 2022, when the current bull market began.
Since then it has behaved like a paper asset, tracking the S&P 500 almost tick for tick, adding a quick 28%. Although it has trailed big tech (what hasn’t), it has handily beaten many other asset classes, such as bonds (TLT), the US dollar (UUP), commodities (CORN), and energy ($WTIC).
So, what’s up with gold?
The upward pressure on the barbarous relic is coming in from all directions.
The most important is that we have reached the end of the Fed tightening cycle. Interest rates are far and away the biggest driver of prices for the yellow metal and there is a rising consensus that the next big move is down, not up.
New bull arguments have also come to the fore. The war in Europe has prompted massive buying of all precious metals by panicky individuals, including silver (SLV), with a collapse of the US dollar imminent, also driven by lower US interest rates.
And how will Europe eventually end the crisis? With a Russian defeat, which will lead to a global economic boom and massive government spending. And while they are losing the war, both Russia and China are stockpiling gold to bypass trading sanctions. Exporting gold from China currently carries the death penalty.
How far will the gold get this time? The gold bugs say we’re going to break the old high and power on through to the inflation-adjusted high at $2,300. After that, we’re looking at $3,000 an ounce.
But there is a trade here in precious metals space for the nimble. My pick has been to buy lagging silver, which offers much more bang per buck if the sector starts to build a head of steam.
Here are the handy formulas to remember. Gold stocks (GOLD), (NEM) go up four times faster than the underlying metal because of their high leverage. Silver stocks go up twice as fast as gold and silver stocks rise four times faster than the underlying silver.
It all boils down to one conclusion: buying Wheaton Precious Metals (WPM) for subscribers are already long. (WPM) doesn’t actually own any silver mines but strips off royalty streams from third-party silver mine operators just like a REIT.
"The greatest show on earth is happening elsewhere. Southern trade is becoming turbocharged," said Stephen King, chief economist at HSBC, about the enormous new trading routes forming between Asia and Latin America, who calls the network the "Southern Silk Road"
BigBear.ai (BBAI), a leading provider of artificial intelligence solutions for defense and national security, has experienced significant stock volatility in recent times. After a promising start following its IPO, the company's shares have witnessed a decline. However, a closer analysis of BigBear.ai's fundamentals, market opportunities, and recent developments suggests there may be substantial potential for the stock to rise again.
This article will explore the factors that could propel BigBear.ai's stock back to higher valuations, offering insights for investors considering the AI sector.
Understanding BigBear.ai's Core Strengths
- Innovation Leader: BigBear.ai stands out in the AI space for its focus on decision dominance – the ability to make informed, timely decisions driven by predictive analytics and machine learning. It positions the company as a valuable asset within the defense and intelligence sectors, both of which rely heavily on data-driven insights.
- Mission-Critical Solutions: BigBear.ai's offerings, including predictive maintenance, cyber defense, and real-time analytics, are designed to address critical pain points within government agencies. This translates to robust demand for its services, bolstering its long-term revenue prospects.
- Strong Contract Backlog: The company boasts a substantial contract backlog, providing revenue visibility for the foreseeable future. This backlog offers stability and reduces volatility often associated with emerging technology companies.
Market Opportunities: The Rise of AI in Defense and Beyond
- Government Spending on AI: Spending on AI-driven technologies by the U.S. government is expected to surge in the coming years. The focus on data analysis, predictive capabilities, and enhanced decision-making aligns perfectly with BigBear.ai's solutions.
- Expansion into Commercial Spaces: While BigBear.ai's core competency lies within the government sector, the company is actively venturing into commercial markets like healthcare, energy, and logistics. This diversification could open up new revenue streams and reduce reliance on government contracts.
Factors Behind BBAI Stock's Previous Decline
To fully understand the potential for a rebound, it's essential to consider the reasons behind BBAI's previous decline:
- Sector-wide Correction: The recent dip in the stock isn't unique to BigBear.ai. Many AI and tech stocks faced a correction period due to macroeconomic headwinds, changing investor sentiment, and valuation adjustments.
- Uncertainty in Revenue Growth: While the company saw significant growth early on, recent quarters have shown fluctuations in revenue, leading to some market uncertainty.
- Short Selling Pressure: BBAI has faced pressure from short sellers, which can exacerbate volatility and impact investor confidence.
Reasons to Believe in a Stock Price Rebound
- Compelling Valuation: The current price of BBAI stock could be considered undervalued compared to its peers and growth potential, creating an attractive entry point for long-term investors.
- Expanding Contract Wins: BigBear.ai continues to announce significant contract wins, demonstrating its growing reach within the government and commercial sectors. These wins reinforce confidence in the company's ability to drive revenue.
- Strategic Partnerships: Collaborations with major tech players like Palantir enhance BigBear.ai's capabilities and potential client base.
- Focus on Profitability: The company is now emphasizing a path toward achieving positive EBITDA, signaling its commitment to long-term financial stability.
Technical Analysis and Analyst Ratings
While fundamental analysis provides a strong foundation, technical analysis can offer additional signals about the direction of BBAI stock. Recent technical indicators suggest a potential shift in momentum, with the stock possibly forming a base for a new upward trend.
Moreover, several Wall Street analysts maintain a bullish outlook on BigBear.ai, setting price targets significantly higher than the current share price. While these targets shouldn't be taken as guarantees, they indicate expert optimism about the company's future prospects.
Important Considerations
Before investing in BigBear.ai, it's crucial to acknowledge the inherent risks associated with any stock, particularly those in the volatile technology sector. Here are some factors to consider:
- Dependence on Government Contracts: A considerable portion of BigBear.ai's revenue stems from government work, which can be subject to budgetary constraints or shifts in political priorities.
- Competition: The AI market is crowded with established players and fast-emerging startups. BigBear.ai will need to maintain its innovation edge to stay ahead.
- Execution Risk: Even with a compelling vision and strong potential, BigBear.ai must demonstrate consistent execution in delivering projects and achieving its financial targets.
Conclusion BigBear.ai, while not without inherent risks, possesses the potential for substantial growth and a stock price resurgence. Its unique focus on decision dominance, strong government ties, and expanding market opportunities make it a compelling player in the AI sector. Investors with a long-term perspective and a tolerance for some volatility may find BBAI stock to be a worthwhile addition to their portfolios.
Mad Hedge Technology Letter
April 1, 2024
Fiat Lux
Featured Trade:
(THE STREAMING WARS WIND DOWN)
(NFLX, (PARA), (WBD)
For certain segments of the technology sector, it sure does feel like they are fully saturated.
I am not referring to AI, because that is in the early innings of a seismic movement.
However, let’s take a look at streaming.
This category was invented by Netflix (NFLX) and now the whole country pays for streaming.
Netflix had the first-mover advantage and took the initiative.
For the leftovers, the pain and struggle with creating a profitable streaming business is real.
Is the year 2024 the year when streaming management has that Aha moment?
Many have instructed us to stay on board the ship while losses bleed uncontrollably.
Everyone is fighting to be one of the three or four streaming services people can’t live without.
Paramount Global (PARA) is under pressure to abandon its namesake streaming service, and Warner Bros. Discovery (WBD) is desperate for partners that offer Max a better chance to compete with the likes of Netflix.
Let’s look at Disney right now.
Streaming grew quickly from launch in 2019 — we’re talking now about Disney+, ESPN+, and Hulu — but even with strong sales, they are sitting on big losses.
Disney board member Nelson Peltz is unhappy, as outlined in a 133-page manifesto published March 4, that Disney “belatedly” entered the streaming game and has a “poorly planned" strategy to catch up with the likes of Netflix.
He takes issue with Disney trying to achieve scale in streaming by buying Fox’s entertainment assets for $71 billion in 2019 because he thinks it exposed the company more to the dying linear TV business.
He also can’t believe that a company reporting more than $22 billion of run-rate streaming revenue annually is still losing money.
Peltz wants a digital strategy for the ESPN sports assets..
Peltz wants a succession plan put in place for current CEO Bob Iger, who extended his contract with Disney last year after a coming-out-of-retirement return to the company in 2022.
In February, Disney teamed up with Fox and Warner Bros. Discovery to create a streaming service for college and pro sports that you can currently only find on TV.
That seems like what Peltz was asking for. Disney also invested $1.5 billion in Epic Games and gave access to the Fortnite maker for gaming portrayals of Star Wars, Marvel, and Avatar.
The bottom line here is that streaming is not nearly as profitable as many insiders first thought.
Streamers thought they could scale up and acquire subscribers at a loss and then raise prices.
That business model was only for Netflix to accomplish because they started so much earlier than anyone else.
The best of the rest are now saddled with loss-making companies and the cost of content post-covid has never been pricier.
Netflix shares have had a nice run in the last 365 days going from $180 per share to over $600 per share.
A lot of that price movement was an acknowledgement that they are dominating streaming compared to the other legacy corporations that have tried their hand in this game.
Instead of jumping into the legacy TV players turned streamers, I would tell readers to wait for Netflix on the dip.
It’s been tried and tested over time and any big dip should and will be bought by investors.
There is not a lot of room for stocks other than Netflix in a sub-sector of rather scarce any AI.
“In the business world, the rearview mirror is always clearer than the windshield.” – Said American Investor Warren Buffett
