Biotech Letter - John Thomas - Mad Hedge Fund Trader

Merck’s Big COVID-19 Expansion

Leading biotechnology and healthcare giant Merck (MRK), with a market capitalization of $203.75 billion, has been a low-key player during the pandemic.

Now, it finally reveals its grand plans via three major initiatives that aim to create a vaccine and design a novel antiviral against the coronavirus disease (COVID-19).

While Merck has been slow to take part in the COVID-19 war, it’s definitely making up for the lost time by announcing a promising acquisition and two collaborative projects in the works.

The first of the three deals is Merck’s acquisition of Vienna-based biotechnology company called Themis Bioscience. This small-cap biotech develops a range of vaccines and other therapies for infectious diseases.

One of Themis Bioscience’s pipeline candidates is a COVID-19 vaccine, which is a collaborative effort with the Institut Pasteur. Another promising candidate in Themis Bioscience’s pipeline is its late-stage work on a Chikungunya.

Through the acquisition, Merck will be able to access these works and hasten the development of the vaccine.

The second deal is Merck’s collaboration with a nonprofit scientific research group called International AIDS Vaccine Initiative (IAVI). This partnership aims to create a COVID-19 vaccine as well.

This will be a powerful collaboration since IAVI also received $38 million in funding from the US Health Department’s Biomedical Advanced Research and Development Authority (BARDA) to help them with their vaccine development initiatives.

Apart from IAVI, BARDA also awarded over $2 billion in funding to other vaccine developers like AstraZeneca (AZN), Phlow, and Moderna (MRNA).

Together, IAVI and Merck aim to optimize the latter’s recombinant vesicular stomatitis virus (rVSV) technology which has been used for Merck’s Ebola vaccine called Ervebo.

The third deal is Merck’s partnership with privately held Ridgeback Biotherapeutics, a Miami-based biotechnology company founded in 2018.

The collaboration intends to develop an oral antiviral treatment, dubbed as EIDD-2801, which can be used for COVID-19.

So far, this developmental drug had been proven safe in a trial with healthy volunteers. Clinical testing for COVID-19 patients has already commenced.

Under the terms of the deal, Merck will own exclusive global rights to EIDD-2801.

The giant biopharma will take charge of the clinical development, manufacturing, and regulatory procedures. In exchange, Ridgeback received an undisclosed amount in upfront payment and milestones. The smaller biotechnology company will also be entitled to a share of net proceeds from the COVID-19 treatment.

Prior to these deals, investors have been curious as to why Merck was missing in action amid the government’s “Operation Warp Speed” for COVID-19 treatments and vaccines.

With this triple play, Merck has signaled that it’s also going all-in on this pandemic and will pull out all the stops to be on the same level as the efforts from other major biotechnology and healthcare players like GlaxoSmithKline (GSK), Pfizer (PFE), and AstraZeneca (AZN).

The strategic moves from this healthcare giant clearly underscore the incredible demand for any vaccine that actually survives the R&D gamut, as every nation across the globe frantically looks for a vaccine to boost their people’s immunity.

While companies such as CanSino (HKG:6185) and Moderna go neck to neck to take the lead in the clinical race, we all know that two companies cannot handle the production of a vaccine for the entire world -- offering Merck a slot at a place in these chosen group of companies.

Outside its COVID-19 efforts, Merck recently chalked up another win for its blockbuster melanoma drug Keytruda. This time, the top-selling medication expanded its use to advanced colon cancers.

Based on key findings, Keytruda lowered the risk of the disease’s progression or even death by 40% compared to chemotherapy.

Results show that the tumors of patients given Keytruda did not grow for 16.5 months. In comparison, chemotherapy patients experienced tumor growth in 8.2 months.

Even prior to the expansion of its indications, Keytruda sales have continued to make headway.

In the first quarter of 2020, sales of this cancer drug reached $3.3 billion, showing off a whopping 45% year-over-year jump.

With this new addition to Keytruda’s indications, sales of this drug is expected to climb even higher this year.

Apart from that, Merck’s HPV vaccines, called Gardasil and Gardasil 9, performed well in the first quarter as well as sales of both HPV vaccines increased by 31% to reach $1.1 billion.

Another strategic effort for Merck is delving into drug development focused on neurodegenerative diseases like Alzheimer’s, Parkinson’s, and Huntington’s disease.

This initiative was kicked off by Merck’s move to buy a GSK startup, called Calporta Therapeutics, for $576 million in 2019.

It was followed by forging a two-year partnership with Almac Discovery this year. Apart from neuro-related diseases, the two companies are looking into developing therapies for cancer and viral diseases as well.

To further boost its pipeline, Merck completed a deal with Taiho Pharmaceuticals and Astex Pharmaceuticals worth $50 million in upfront payment plus incentive payments of up to $2.5 billion.

The company is also working on spinning off its "Women's Health, Trusted Legacy Brands, and Biosimilars” products into a brand new company with a focus on oncology and vaccines as well as animal health. If things go smoothly, the spinoff should be done by the first half of 2021.

Overall, Merck has proven itself as a stable dividend stock that investors can simply buy and hold for years.

The biotechnology company has managed to post a profit every year for the past decade, actually hitting double-digits most of the time within that period.

This is a trend observed in Merck’s first quarter report as well. The company posted $3.2 billion in profit on sales worth $12.1 billion. This represents a respectable 27% profit margin.

June 2, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
June 2, 2020
Fiat Lux

Featured Trade:

(TEN MORE REASONS TO BUY AMGEN)
(AMGN), (CELG), (ADPT), (BGNE)

Ten More Reasons to Buy Amgen

Biotech Letter

In this current coronavirus market, discovering a stock that can survive the pandemic without suffering a major hit is akin to finding the Holy Grail.

This is why I’m on the lookout for undervalued names that offer strong dividends and a stable balance sheet.

In my search, I once again came across the biotechnology pioneer Amgen (AMGN), a 40-year-old company that has continuously proven its critics wrong.

After four decades in the business, this healthcare heavyweight has yet to show any signs of slowing down. If anything, Amgen has been consistent in its efforts to show off its promising pipeline.

In 2020 alone, the company reported at least 39 drug candidates in its pipeline, with practically half already in Phase 3 trials.

As one of the founding fathers of the biotechnology sector, Amgen, which was founded by my UCLA college biochemistry professor, would be remiss to skip on the coronavirus race. If I’d only stuck with him a little longer, I would be filthy rich by now.

In April, the company announced its collaboration with Adaptive Biotechnologies (ADPT) to develop antibodies to be used for COVID-19 treatment.

While the biotechnology giant isn’t the first to jump into the fray, it has an undeniable ace up its sleeve: Amgen is known as one of the leaders in the development of antibody-based treatments. This alone makes it a strong contender.

Outside its coronavirus work, Amgen has an extensive list of prospects in its pipeline along with a number of workhorse drugs.

However, not everything is as smooth sailing as investors would hope.

Previous blockbusters, rheumatoid arthritis drug Enbrel and chemotherapy medication Neulasta, which comprised 40% of Amgen’s product sales in the first quarter of 2019, failed to move the needle during the same period in 2020. Actually, Neulasta suffered a devastating 40% drop in sales.

Other top performers like multiple myeloma treatment Xgeva and anemia drug Aranesp are having trouble as well, eking out a measly 2% in sales gains in the said period.

As for anemia injection Epogen, the bestselling drug dropped by 29%. Even the sales of hyperparathyroidism medication Cinacalcet slid by 42%.

Overall, this doesn’t sound like an auspicious beginning for Amgen this 2020.

Nonetheless, the company’s robust growth in other areas made up for the laggards.

In fact, Amgen’s total product sales increased by 12%, jumping from $5.3 billion in the first quarter of 2019 to almost $5.9 billion in the same period in 2020.

For instance, sales of osteoporosis treatment Prolia jumped by 10%, pushing the drug in the second spot among the top 10 products in Amgen’s portfolio.

Meanwhile, cholesterol drug Repatha continues to impress, showing off a 62% increase in revenue from $141 million to $229 million.

Even the newer multiple myeloma treatment Kryprolis went up by 19%, while metastatic colorectal cancer injection Vectibix registered a 19% sales gain. Sales for cancer medication Blincyto also went up by 36% year over year to hit $94 million.

Another drug surging forward is kidney treatment Parsabiv, which reported a 39% increase in sales. Newcomer postmenopausal osteoporosis drug Evenity, which was launched in the US market just last year, recorded a respectable $100 million in sales.

In terms of developments that actually pushed the needle for Amgen, the first thing that comes to mind is definitely the acquisition of psoriasis and psoriatic arthritis medication Otezla.

This blockbuster drug, which the company bought for $13.4 billion in cash from the recently acquired Celgene Corporation (CELGN), raked in $479 million in revenues for the first quarter of 2020 alone.

Amgen executives estimate a low double-digit year-over-year sales increase for Otezla up until 2024.

Another exciting development for Amgen is its deal with BeiGene (BGNE), in which the biotechnology pioneer acquired a 20.5% stake in the Chinese company.

Part of this deal is BeiGene’s efforts to commercialize select drugs from Amgen’s oncology lineup to target the expansive Chinese market.

On top of this, the two companies are slated to develop 20 new cancer drugs as well. So far, AMG 510 and tezepelumab are eyed to be launched by 2021.

Amgen is also gearing up to ride the wave of biosimilars, which has a market estimated to surpass $69 billion in the next five years. Due to its lower costs, biosimilars are projected to save consumers roughly $160 billion during the same period.

Perhaps this lucrative opportunity is what made Amgen realize that if they can’t beat them, they might as well join them. That is, the company has already worked towards becoming a major player in the biosimilar space.

In fact, Amgen has started with this plan in 2017 courtesy of the company’s first-ever approved cancer-fighting biosimilar: Mvasi.

So far, Amgen has 10 biosimilars in its current pipeline. Four of which already received FDA approval.

Looking at Amgen’s financial records, it’s safe to say that the company has a strong financial position.

It offers a yield of approximately 2.8% and a payout ratio of over 47%. The dividend coverage ratio is roughly 212%, ensuring a safe dividend and a 5-year growth rate of almost 19%.

Amgen’s profit margin is recorded to be at least 23% in 9 of the recent 10 fiscal years, with growth expected since 1 in 5 cancer patients in the United States uses Amgen medication.

The company’s free cash flow in the first quarter of 2020 rose to $2 billion from the $1.7 billion reported during the same period in 2019.

These quarterly results along with its multitude of growth prospects are proof to Amgen’s capacity to navigate through the decline in other product offerings. The biotechnology company’s numbers in the first quarter of this year demonstrate there’s a good chance it will break through resistance because of its solid sales momentum.

This makes Amgen attractive to long-term biotechnology and healthcare investors. With its strong record, promising pipeline, and decent dividend, the company will be able to sustain its status as a good buy.

May 28, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
May 28, 2020
Fiat Lux

Featured Trade:

(ASTRAZENECA’S WASHINGTON FREEBIE)
(AZN), (MRK), (PFE), (JNJ)

AstraZeneca’s Washington Freebie

Biotech Letter

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.

May 26, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
May 26, 2020
Fiat Lux

Featured Trade:

(WHY SORRENTO THERAPEUTICS WENT NUTS)
(SRNE), (REGN), (LLY)

Why Sorrento Therapeutics Went Nuts

Biotech Letter

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.

May 21, 2020

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
May 21, 2020
Fiat Lux

Featured Trade:

(THERE IS STILL MORE BANG PER BUCK WITH ZOETIS)
(ZTS)

There is Still More Bang Per Buck with Zoetis

Biotech Letter

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.

May 19, 2020

Biotech Letter

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)