Mad Hedge Biotech & Healthcare Letter
May 28, 2020
Fiat Lux
Featured Trade:
(ASTRAZENECA’S WASHINGTON FREEBIE)
(AZN), (MRK), (PFE), (JNJ)
The coronavirus disease (COVID-19) has pushed people to gamble on unproven and untested products for as long as these can offer even just a shred of hope.
Call it the grasping for straws strategy.
The latest biotechnology company granted this kind of confidence is AstraZeneca (AZN).
The U.S. Department of Health and Human Services (HHS) recently announced its decision to provide the cardiovascular heavyweight up to $1.2 billion in funding to speed up the company’s progress on AZD1222. The problem is that the vaccine has not been proven to work.
You would think that if the US government was going to blow $1.2 billion on an unproven vaccine at least it would be on an American company. That is not the case. Pre pandemic, a drug at this stage of development would not have earned the time of day.
The experimental vaccine is a gene therapy that AstraZeneca has been working on alongside Oxford University. Aside from the funding, HHS also committed to supporting the clinical trial for this vaccine which would involve 30,000 participants.
In return, the biopharmaceutical company has agreed to send up to 300 million doses of the vaccine to the US, with the first shipment expected to be sent before 2020 ends. AstraZeneca will also provide 100 million doses to Great Britain.
Before getting too excited on this news though, it’s critical to note that AZD1222 is not yet proven effective against COVID-19.
This proposed vaccine from Oxford is created from a weakened version of a common cold virus. It was then genetically altered to disable it from growing in humans. So far, over 1,000 individuals already received this vaccine during an early stage test that started in April.
The plan is for the two companies to use the same technique that the Oxford University researchers applied to fight the Middle East Respiratory Syndrome (MERS).
Based on the results of a small clinical trial, this approach managed to prevent the transmission of MER-CoV among the patients. The goal is to replicate this success and halt the spread of COVID-19.
With AstraZeneca securing a manufacturing capacity of 1 billion doses, the first deliveries of the vaccine are estimated to start by September.
Apart from the US and the UK, AstraZeneca is also tapping the Serum Institute of India along with other potential collaborators to boost the production of the COVID-19 vaccine.
While all these updates sound promising, it’s undeniable that choosing which stock to invest in this chaotic market is not for the faint of heart.
The pandemic has clouded the earnings landscape of practically all companies across the board for at least the rest of 2020, with the uncertainty possibly spilling into 2021.
So far, several vital members of various industries have already sought unprecedented levels of aid from the state. A glaring example of this is the ailing airline industry, which has been receiving the most help from governments across the globe.
Meanwhile, AstraZeneca’s shares are up nearly double from the March bottom.
Looking at its financial history, it can be said that AstraZeneca’s ability to swim against the current is due in large part to its top-quality clinical pipeline.
In 2018 alone, the company received a whopping 23 regulatory approvals in various fields including oncology, cardiovascular, and kidney disorders.
The latest product to boost AstraZeneca’s already potent pipeline is its collaboration drug with Merck (MRK) called Lynparza.
Previously approved as a treatment for ovarian and breast cancer, Lynparza is now approved as medication for prostate cancer as well.
This label expansion allows AstraZeneca and Merck to go head to head against Johnson & Johnson’s (JNJ) Zytiga and even Pfizer (PFE) and Astellas Pharma’s Xtandi.
In 2019, Lynparza’s annual sales increased by 85% primarily because of label expansions. The drug is anticipated to show a surge in its 2020 sales as well thanks to this recent approval.
However, the best is yet to come for AstraZeneca.
While the company has put on hold a couple of its clinical trials, reports show that it has many late-stage data readouts up its sleeve. Hence, investors should be on the lookout for these announcements in the next 24 months.
Due to all the new growth products and label expansions, AstraZeneca’s top line is projected to jump by 13.7% in 2021, making it one of the fastest forecasted growth rates in the industry at this point.
For even more good news, this biopharmaceutical powerhouse disclosed that it has no intention of revising its annual guidance despite the pandemic. This announcement is tangible proof of the economic staying power of AstraZeneca’s portfolio.
AstraZeneca stock is not exactly cheap though. With its recent developments and track record, the company has definitely gained a following in the biotechnology and healthcare sector. Nonetheless, AstraZeneca has proven that it deserves its top-shelf valuation.
Mad Hedge Biotech & Healthcare Letter
May 26, 2020
Fiat Lux
Featured Trade:
(WHY SORRENTO THERAPEUTICS WENT NUTS)
(SRNE), (REGN), (LLY)
Eyes were popping when Sorrento Therapeutics (SRNE) shares went ballistic in mid-May. The price shot up from $2.62 per share to $9.96 in a single day, a gain of 380%. Unfortunately, Sorrento’s climb was halted just as fast when the stock sank 11.5% two days after.
From the look of it, investors eventually sobered up after the initial excitement and realized that the announcement on Sorrento’s pre-clinical results promised too much too soon for a Covid-19 vaccine.
What does this mean for this company?
This rollercoaster situation is par for the course when it comes to small biotechnology companies such as Sorrento, which has a market capitalization of only $1.15 billion.
Extreme volatility is commonplace, with investors getting all riled up the moment a bit of positive news gets out only to balk the moment they fully digest the nitty-gritty of the announcement.
Get used to it. It is a new factor in the market that is roiling prices daily.
Before I discuss Sorrento’s merits and downsides further, here’s a brief background on the good news that got everyone all excited in May.
As you must have guessed by now, the company’s announcement centered on the coronavirus disease (COVID-19).
According to Sorrento, they have hit upon an “exceptionally potent antibody” for this deadly disease. The experimental “cure” is currently dubbed STI-1499.
The breakthrough hit the airwaves after Sorrento’s CEO contacted a Fox News reporter to discuss their discovery, with the executive saying that they have “a solution that works 100%.”
The company is working with Mount Sinai Health System to assess whether STI-1499 can function as a stand-alone therapy as well as a component of an antibody cocktail designed to fight off the SARS-CoV-2 virus, which causes COVID-19.
STI-1499 works by blocking the virus from attaching itself to the body, thereby effectively protecting the cells from infection.
Needless to say, the success of this antibody means big bucks for Sorrento.
It’s critical to bear in mind that results from tests conducted via test tubes and Petri dishes do not guarantee success when applied to human clinical trials -- and this is exactly the problem with Sorrento’s recent results. Cancer has been cured in rates over 100 times.
The STI-1499 trial results were all collected from lab tests. Sorrento has yet to advance to the early-stage clinical study phase. This means that the experimental vaccine is from a slam dunk at this point.
Simply put, STI-1499 has yet to be tested on living things like a mouse and then of course, on humans.
If history is any indication, then Sorrento should be prepared to handle questions about STI-1499’s efficacy. After all, less than 1 in every 5 experimental drugs designed for infectious diseases actually receives FDA approval.
To make things even more challenging for Sorrento, the company isn’t alone in thinking that an antibody regimen could be used against COVID-19.
Prior to this announcement, news has already broken out that Eli Lilly (LLY) and Regeneron Pharmaceuticals (REGN) are also studying similar kinds of approach for this disease.
Beyond its COVID-19 efforts, Sorrento only has one approved product: topical medication ZTlido. This drug, commercially released in 2018, is used to ease the pain brought about by shingles.
Since its launch, ZTlido hasn’t turned out to be a big moneymaker for Sorrento. In the first quarter, this treatment has raked in only $5.2 million in revenue.
Looking at the company’s recent earnings report, it’s clear that Sorrento has been spending more than it’s making so far.
In the first quarter of 2020 alone, the biotechnology company reported $69.2 million in net loss.
Compounding this situation is Sorrento’s fast-depleting cash to fund its operations, with the drugmaker posting a total of $21.9 million in cash and cash equivalents in the year’s first quarter.
Without coming up with more ways to generate additional capital, Sorrento doesn’t have enough bandwidth to keep the lights on any longer much less fund an aggressive coronavirus program.
As for its pipeline, the biotechnology company has two experimental oncology drugs ready for Phase 2 of their clinical trials. Sorrento also has a number of early-stage studies focusing on cancer and pain.
With all these in mind, the question remains: Is Sorrento stock worth buying today?
Although it can be tempting, exhilarating even, to run after a high-flying biotechnology stock plastered all over the news, the wise move would arguably be to restrain yourself and stay on the sidelines -- for now.
If STI-1499 fails in the clinical trials, then all of Sorrento’s gains would be wiped out instantaneously.
What I know so far in terms of the company’s plans to raise more funds is that a public offering might happen soon. If that happens, then the value of the existing Sorrento shares will be diluted.
So if you’re confident to take this gamble of either losing half your money or making it multiple times your initial investment, then this might just be your cup of tea.
However, I can see too many unknown variables for Sorrento to be a compelling stock to buy at the moment.
While Sorrento looks to be offering promising products and is on its way to fueling growth through capital fundraising methods, I have doubts on its ability to cash in big on COVID-19.
One reason is that I find the company’s timing a bit off. On top of that, I’m also not convinced on their capacity to execute particularly in terms of manufacturing.
Most importantly, Sorrento’s is not even considered as the frontrunner in the COVID-19 vaccine race.
I would prefer to wait and see how STI-1499 performs in at least two more stages of clinical trials.
At the very least, these studies would be able to give us a hint at how safe and effective the experimental vaccine is. Right now, I think there are a number of other biotechnology stocks that can provide more reasonable and even attractive risk-reward propositions.
Mad Hedge Biotech & Healthcare Letter
May 21, 2020
Fiat Lux
Featured Trade:
(THERE IS STILL MORE BANG PER BUCK WITH ZOETIS)
(ZTS)
Zoetis (ZTS) has been an investor darling since it was spun off from Pfizer way back in 2013. From day one, since this animal healthcare stock went public, shares have soared by 382%.
This stock’s popularity among growth investors stemmed from two emerging trends today. The first is the “humanization” of our pets through healthcare. The second is the rise in global demand for animal protein.
Both tailwinds have been responsible for the steady growth of Zoetis and are anticipated to continue to do so in the years to come.
With everything that has happened since we welcomed 2020, is Zoetis still a good stock to buy?
Earlier this month, Zoetis released its fourth-quarter earnings report for 2019. As usual, the company once again impressed its investors by beating estimates.
The company reported a quarterly revenue of $1.7 billion, indicating a 7% improvement from its performance in the same quarter in 2018.
Adjusted net income came in at $440 million, breaking down to earnings per share of $0.92.
In comparison, Wall Street estimates pegged Zoetis’ quarterly revenue at $1.6 billion with an EPS of $0.88.
Notably, Zoetis’ international business segments and its US market are practically equal in terms of size. Its US market raked in $861 million in revenue, showing off a 6% boost in this quarter. Meanwhile, its international sales increased by 9% to reach $791 million.
Although all these are enough to make investors happy, Zoetis’ 2020 guidance gave some of its investors pause.
According to the company, it estimates a jump in its annual growth somewhere between 5.5% and 8%, pushing its revenue from $6.3 billion to reach an amount somewhere between $6.65 billion and $6.8 billion.
However, this projection has been met with skepticism in light of COVID-19.
Looking at its reports, roughly 3% or $200 million of Zoetis’ sales last year came from China.
Despite this, Zoetis appears to be confident that it can hit its goals this year.
The company’s companion animal business, which primarily sells medicines for cats and dogs, picked up the slack from the decline of its beef and dairy cattle markets.
In fact, revenue from the companion animal arm showed an 18% jump year over year and reached $784 million.
One of the main drivers in this sector is Zoetis’ dermatology brands, Apoquel and Cytopoint. Both are estimated to bring in roughly $700 million in annual sales. Boosting this momentum are the company’s parasiticide items like ProHeart 12 and Simparica.
However, it’s the launch of Simparica Trio that generated excitement among Zoetis investors.
Simparica Trio is the company’s new chewable “triple combination parasiticide for dogs.” According to the company’s guidelines, this product is expected to add at least $150 million in revenue for the last three quarters of 2020.
This new drug’s appeal lies in the fact that it can simplify the lives of pet owners. Simparica Trio only needs to be administered once a month.
After that, the pill can be relied on as a preventive measure against heartworm disease. It can also control ticks, intestinal nematodes, and fleas in dogs. With Simparica Trio, pet owners no longer need to buy and administer multiple products.
To date, this medicine has received regulatory approval in Canada and the European Union. It’s expected to receive US approval in the first half of this year.
Simparica Trio is also expected to broaden Zoetis’ market share in the parasiticides sector, where it only ranks fourth.
Zoetis is also looking to explore the lucrative market of osteoarthritis treatments for cats and dogs.
Taking a page off the world’s top-selling drug, Abbott Laboratories’ (ABT) blockbuster rheumatoid arthritis treatment Humira, the animal health company plans to create pain medication based on the same technology. If Zoetis succeeds, then it’ll be the first company to address this unmet market.
Apart from these, Zoetis will also expand its services to include diagnostics as well as digital and data analytics.
In fact, the company has started investing in “precision livestock farming.” A good example of this initiative is its Smartbow technology, which is a dairy cow monitoring system that utilizes motion detectors. These are attached to the animals’ ears in an effort to identify patterns that can signify health issues.
Zoetis has been one of the most attractive stocks on the market since 2013.
While a lot of healthcare and biotechnology companies are at risk for increased volatility this year especially with the US presidential election, this animal health stock should be relatively resistant to political drawbacks.
Mad Hedge Biotech & Healthcare Letter
May 19, 2020
Fiat Lux
Featured Trade:
(PFIZER’S LATEST COVID-19 VACCINE ENTRY)
(PFE), (BNTX), (MRNA), (INO), (CTLT), (SVA), (EBS), (MYL)
Clearly, the long-term solution to this health crisis, and possibly the only hope we have to returning to “normal,” is a safe and effective vaccine.
Companies and health experts around the world have stepped up to that challenge, with investors eagerly anticipating the stocks of the businesses to successfully deliver a vaccine to catapult in value overnight.
This is one of the driving forces behind Pfizer’s (PFE) relentless pursuit of a coronavirus vaccine.
Here’s a quick recap of where Pfizer was before this major announcement.
Pfizer was first recognized as an aggressive player in the vaccine race when the healthcare giant partnered with German biotechnology company BioNtech (BNTX).
After months of working together, Pfizer announced that it aims to produce 10 million to 20 million doses of COVID-19 vaccine by the end of 2020.
So far, Pfizer is testing at least four distinct variations of its vaccine called BNT162. The trials will test roughly 360 individuals, with the study expanding to involve thousands of volunteers if one or two variations of the vaccine indicate progress.
Conclusive data will be available in June or July this year. Meanwhile, Pfizer’s coronavirus vaccine candidate, co-created with BioNtech, is projected to be ready for launch by October.
In an effort to make room for the production of BNT162, Pfizer decided to outsource the production of some of its own branded products to various manufacturers such as Catalent (CTLT).
This move means that instead of paying contract manufacturers to produce millions of doses of a vaccine that might fail to even leave the warehouse, Pfizer has taken it upon itself to produce BNT162 in its own facilities.
According to the company’s estimates, it will cost approximately $150 million to produce BNT162. Since Pfizer is using its own facilities, it could jumpstart the distribution of up to 20 million doses of COVID-19 vaccine even before 2020 ends.
This move to ramp up the manufacture of an experimental drug candidate is a surprising gamble for Pfizer. However, the possibility of having millions of doses of this potential vaccine ready to ship at a moment’s notice could make it a worthwhile risk.
In terms of competition, Pfizer is racing against several biotechnology companies searching for a COVID-19 vaccine in the US and abroad.
One of them is Moderna (MRNA), which has a $19 billion market cap and funding access worth $2.4 billion including government endowment.
Moderna collaborated with Lona (OTC: LZAGY), which is an international chemical manufacturer, to scale up its production power.
Apart from this, smaller biotechnology companies like Inovio Pharmaceuticals (INO) and Novavax (NVAX) are involved in the COVID-19 vaccine race as well.
Inovio is backed by its history of vaccine research on the swine flu outbreak in 2009 and the 2013 avian flu.
Novavax, which has a modest market cap of $82.2 million, received government funding worth $4 million to help the company move forward with clinical trials.
Additional financial support was also sent by the Coalition for Epidemic Preparedness Innovations. In terms of manufacturing, Novavax has been working with Emergent BioSolutions (EBS) to meet production demands.
Outside the US, two of the frontrunners are Chinese companies CanSino Biologics and Sinovac Biotech (SVA).
The stocks of various micro-cap companies have been on the news since the COVID-19 vaccine race started. Several of these smaller firms used their newfound popularity to boost their stock price and generate additional capital to fund their operations.
I think there are several biotechnology and healthcare companies that warrant following. However, there remains a dearth of data on these companies working on the COVID-19 vaccine. Choosing the best stock from these names at this point demands too much guesswork, an investment strategy I have never endorsed.
The harsh reality is that most of these smaller companies will most probably never manage to get a program off the ground and into a conclusive efficacy trial. The main reasons are limited capital, restricted bandwidth, and lack of will to move forward.
Small companies, particularly in the biotechnology and healthcare sectors, typically lack the money and manpower to efficiently run a program without sacrificing the rest of their R&D efforts. For those companies that manage though, the pace will likely be too slow to actually merit a meaningful place in the market.
Investors looking to invest in the surging COVID-19 vaccine space should turn to companies that hold the greatest odds of success. That means larger and more established companies with global testing, regulatory, and manufacturing capacities.
This is not to dissuade anyone from taking a dip into the small-cap companies pool though.
Rather, I would recommend to simply keep these biotechnology companies on your watch list and see how the situation develops. After all, these are decent stocks on their own right.
Nonetheless, it’s still too early to tell how their long-term business models look like outside the search for a coronavirus vaccine.
In comparison, Pfizer has a proven track record of being a great investment. The company has been showing off a decent dividend growth for 10 consecutive years, reporting an annualized dividend worth $1.52 per share.
More importantly, this biotechnology and healthcare company is showing no signs of slowing down anytime soon. In 2019 alone, Pfizer introduced six new drugs on the market and shared that it has 95 more in its pipeline.
Keep in mind as well that Pfizer’s current price of roughly $37 per share -- a far cry from its 52-week high that reached $44.56 -- is significantly lower than the industry average at the moment. For a stock that presents such a wealth of opportunities, Pfizer offers significant value to its investors.
Mad Hedge Biotech & Healthcare Letter
May 14, 2020
Fiat Lux
Featured Trade:
(JOHNSON & JOHNSON’S BIG CORONA PLAY)
(JNJ), (MRNA)
One of the world’s biggest biotechnology and healthcare companies did not reach this status by betting on unproven strategies, but Johnson & Johnson (JNJ) recently made a huge gamble on an experimental vaccine for the deadly coronavirus disease (COVID-19).
Going all-in on this bet, JNJ committed to co-fund with Biomedical Advanced Research and Development Authority (BARDA) the development of a coronavirus vaccine. The two companies pledged over $1 billion for the manufacture of this experimental treatment.
Why is this a big deal?
Drugmakers typically wait to receive positive results before they even consider breaking ground on facilities designed to mass-produce any potential drug.
JNJ and BARDA’s move means there will be warehouses full of this coronavirus vaccine candidate even before we find out whether or not it can successfully prevent COVID-19.
Simply put, Johnson & Johnson decided to mass-produce a vaccine without any proof that it could even be effective.
The company is so confident about this that it believes it could hit the market by 2021 -- a stunning claim considering that it generally takes three to seven years, and at times even longer, to push a vaccine from the initial stage to market launch.
Although claiming such an incredibly short timeline is generally laughable, the FDA has been quite flexible when it comes to efforts to fight the pandemic.
Realistically speaking though, JNJ is unlikely to win this race.
While the giant drugmaker is obviously one of the most promising companies to join this fight, several companies are already further along in their efforts to find a COVID-19 vaccine.
A good example is Moderna (MRNA), which recently started Phase 1 of its clinical trials for a potential COVID-19 vaccine.
The company, which is working with the National Institutes of Health, will determine the safety and ability of its vaccine to trigger an immune response in the patient’s body. To date, there are 45 volunteers involved in this trial. Each of them will receive two doses of Moderna’s experimental vaccine.
Even if JNJ fails to make a fortune from its COVID-19 vaccine candidate, the company still has what it takes to ride out the pandemic and subsequent economic crisis. Actually, it has the ability to come out practically unscathed.
Throughout its 133-year history, (JNJ) has been a steady company that managed to survive six significant recessions so far.
A good example of its resilience was demonstrated during the Great Recession in 2008 up to 2009.
While the S&P 500 Index dropped by as much as 57%, (JNJ)’s shares fell by a maximum of 35%. With firm leaders and adjusted operational earnings growth, the company actually recorded an average earning-per-share growth of 7% from 2007 to 2009.
The company has also consistently paid and even continuously raised its dividend for the past 57 consecutive years -- a track record that can reassure even the most skittish investor.
A huge part of its success is the diversity of its portfolio, with several segments ready to pick up the slack if one sector begins to falter. (JNJ) has its hands on various segments including pharmaceuticals, medical equipment, and of course, consumer goods.
(JNJ) staples like Tylenol, Visine, Band-Aid, Neutrogena, and its line of baby products are the types of purchases that people need in good and bad times. These company brands offer a strong foundation for JNJ even in a recession. If you think about it, consumers rarely go about their days without using at least one JNJ product.
A review of (JNJ)’s performance in the rough years in the past paints a picture of a company strong enough to overcome this looming recession. In fact, it’s easy to believe the company’s fiscal guidance for 2020 which projects a 5.5% growth in sales and expanding margins.
Only a handful of companies can be considered “recession-proof,” and (JNJ) is definitely a part of that select few. Investing in this dependable business is a solid choice.
For more about (JNJ), please visit their website at https://www.jnj.com. For more about Corona vaccine winners, please click here.
