Biotech Letter - John Thomas - Mad Hedge Fund Trader

Dumpster-Diving in Biotech

AbbVie Inc (ABBV) has transformed into one of the industry leaders in the biotech world, showing off a notable top-line growth and providing competitive dividends ever since its launch as an Abbott Laboratories (ABT) spinoff in 2013.

Despite its growth, AbbVie’s shares fell by a crushing 20% in the past year. This caused the company’s net value to trade at less than eight times forward earnings making it a blue-chip biopharma stock that could be bought for next to nothing!

What could be causing investors to sidestep this leading biotech?

The primary reason is the dwindling sales of AbbVie’s longstanding blockbuster drug, Humira. Despite its dominance in the market today, this arthritis medication is nearing its twilight years and is anticipated to eventually succumb to competition.

The threat to Humira’s dominance in the market is a huge deal for AbbVie particularly because of its heavy dependence on the drug’s revenue. In 2018 alone, the arthritis medication contributed approximately $20 billion to the $32.7 billion annual sales of the entire company.

Humira’s status in the United States is secure until its patent expires in 2023. Unfortunately, the drug doesn’t enjoy similar protection in international markets as biosimilar competition has already challenged its presence in the European Union. This has actually hit AbbVie’s performance as global sales showed a 28% decline in the past year.

Meanwhile, AbbVie’s blood cancer treatment Imbruvica is fighting off aggressive competitors in the market. At the moment though, investors remain optimistic about Imbruvica. The drug has been reported to achieve strong growth rates, generating roughly $4 billion in yearly revenue.

With this performance, Imbruvica is projected to hit a peak of $7 billion in sales. Although the medication is projected to perform well in the hematology space, the growing number of programs geared towards creating a similar treatment remains an ongoing threat to the company.

On a positive note, AbbVie has been active in beefing up its product portfolio. So far, three promising mega blockbusters are anticipated to boost the declining sales of the company, namely, psoriasis drug Skyrizi, uterine fibroids medication Orilissa, and rheumatoid arthritis treatment Rinvoq. All three have been recently approved and are expected to be the new growth products that could keep AbbVie on top of its game.

So far, Skyrizi has only contributed $48 million in sales. However, the psoriasis treatment is expected to reach $5 billion in profits in the coming years. Pitching in to boost AbbVie’s immunology assets is Upadacitinib, a drug that the company hopes to market as the next Humira and has been submitted for priority review. If all goes well, Upadacitinib is projected to rake in as much as $6 billion in peak sales.

While these treatments are pegged as promising additions to AbbVie drug portfolio, the biotech firm took another major step towards the expansion of its product line through its acquisition of Allergan (AGN) earlier this year. Although this move ensures that more products are queued to its pipeline, the deal with the Botox-maker could pose concerns for AbbVie’s balance sheet as the terms include the absorption of Allergan’s long-term debt worth $19.6 billion.

Nonetheless, AbbVie is still an interesting stock for a lot of investors. Perhaps one of the reasons for the lingering interest in the biotech company is its current dividend yield of 6.51% -- an impressive number especially if you consider the fact that AbbVie is still in its growth phase. Since 2017, its dividend showed an increase from $0.64 quarterly to reach $1.07 quarterly in 2019.

Another reason could be its valuation. As of this writing, the stock is trading at $75.83. Taking into account its adjusted earnings per share in 2018 of $7.91 and a P/E ratio of 8.2, this is already a pretty low price for any company that’s not experiencing a decline in revenue but extremely cheap for a company that has the potential to hit a 15% profit growth and 41% increase in adjusted earnings per share.

Overall, AbbVie is really a tempting stock for investors particularly dividend investors due to its high dividend yield and growth rates. However, the decline of Humira sales remains worrisome especially if you consider how dependent the company is on the drug.

Either way, AbbVie stock is really cheap at the moment and from a valuation perspective, there’s no substantial growth estimate priced in the stock to date. Basically, it all boils down to how much trust you want to put on a company with a proven track record but with high debt levels.

October 15, 2019

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
October 15, 2019
Fiat Lux

Featured Trade:

(CASHING IN ON ECONOMIES OF SCALE WITH CIGNA)
(CI), (ESRX), (AET)

Cashing in on Economies of Scale with Cigna

Biotech Letter

The future of health care will be no doubt driven by massive economies of scale that crush costs and balloon profit margins and there has been no better practitioner of that philosophy than Cigna Corp. (CI)

The company recently reported a robust quarterly blowout. The managed care service provider disclosed that it recorded $4.30 in earnings per share for the second quarter, crushing the Wall Street estimate of $3.74 per share. Total profits were recorded to be $34.4 billion, also topping previous estimates of $33.2 billion.

Among the revenue components of Cigna, pharmacy sales were identified as major pushers as it reached $26.3 billion -- a huge jump from the $750 million recorded during the same period in 2018. This is primarily due to the acquisition of pharmacy benefit manager Express Scripts for $67 billion in December last year. Cigna’s premiums also went up 8.9% year-over-year to reach $9.8 billion. Meanwhile, fees grew 76% to $2.39 billion.

The move to merge with Express Scripts (ESRX) has allowed Cigna to secure long-term growth as the company transformed into a one-stop-shop for clients’ healthcare needs. It can now cater to demands ranging from drug sales up to insurance coverage. Since it brings together both medical services and pharmacy benefits under one roof, Cigna has become a more attractive option for its ability to provide better treatments and lower expenses.

With this deal, Cigna gained a competitive position to become one of the major movers in the healthcare insurance industry. So far, the combined company is projected to generate a minimum free cash flow of $6 billion by 2021.

However, one major obstacle in Cigna’s growth is the uncertainty arising from the current political climate in the United States ahead of the 2020 election. Cigna’s share price almost perfectly inversely tracks with the polling numbers of Elisabeth Warren, who has essentially promised to nationalize the company. The better she does the worse Cigna does, and that has given us our entry point.

At the moment, health insurers remain uncertain of some aspects of their business due to potential regulatory changes that could plunge them into debt.

To address this, Cigna is following the footsteps of fellow healthcare giants like Aetna Inc (AET) which sold its group life and disability unit to Hartford Financial Services Group for $1.45 billion in 2017.

While Cigna hopes that the merger with Express Scripts could help mitigate the effects of future government policy changes, the company is still actively seeking other alternatives.

One of its plans is to sell its group benefits insurance unit, which has an estimated value of $6 billion, to other insurers with an already established division and are looking to scale. The sale could include the life and accidental death as well as dismemberment coverage clusters of Cigna. This move will allow the company to focus more on healthcare.

Given its revenue trajectory in the first half of 2019 though, the company’s outlook indicates a continuing momentum into year-end. In fact, Cigna’s total revenues this year are projected to rise somewhere between $136 and $137 billion compared to the $132.5 and $134.5 billion range predicted earlier. This indicates a 180% increase year-over-year.

Meanwhile, its earnings per share are expected to reach $16.90 compared to the earlier earnings guidance of $16.65, representing a 17% rise year-over-year. The company’s medical clients are estimated to increase by roughly 200,000 as well, achieving 97% to 98% customer retention in its health services sector in 2020.

Cigna’s expansion to establish an international presence is also a promising move towards diversification. In the first quarter of 2019, the company acquired OnePath Life Insurance from the ANZ Bank in New Zealand. This deal allows Cigna to gain access to an existing client base and offer an expanded set of services.

Aside from achieving international operations expansion, this acquisition also reassures Cigna’s investors of the company’s capacity to effectively deploy capital to drive long-term growth.

So far, Cigna has provided strong reasons for it to be a “BUY.” In terms of its growth rate, the company’s revenues showed a CAGR of 11% from the year 2010 up to 2018. However, it rose by 194% in the first half of this year, courtesy of its Express Scripts merger. Its recent acquisitions also demonstrated consistent top-line growth and the ability to effectively distribute its products and services.

Apart from its top-line growth, Cigna has also managed to maintain its bottom-line profitability. This is clear in the annual earnings growth it recorded since 2009 and its efforts to maintain operating profitability via controlled medical care and other operating costs.

October 10, 2019

Biotech Letter

Mad Hedge Biotech & Health Care Letter
October 10, 2019
Fiat Lux

Featured Trade:

(THE GREAT PLAY IN ANIMAL HEALTH CARE)
(ZTS)

The Great Play in Animal Health Care

Biotech Letter

When I first heard about this industry, I thought it was a joke. I was wrong. The harsh truth is that many animals in the US get better health care than at least half of the humans. Animal health care is in fact a gigantic and hugely profitable business.

Recession or not, the animal healthcare industry seems to thrive as people continue to go to great lengths to provide the best options for their furry friends.

Unfortunately, the undeniable effects of economic downturns have forced not only ranchers and farmers to downsize their operations but domestic pet owners to cut their budgets for their beloved animal companions. Despite the threat of the next market crash, a number of investors believe that Zoetis (ZTS) is a good stock to hold.

The $48 billion global animal health company develops, sells, and distributes pet medications for ticks, allergies, and fleas. Zoetis also manufactures vaccines along with animal feed additives, veterinary diagnostics, and even anti-infectives. Aside from treatments for your plain vanilla cats and dogs, the animal health leader also offers products for poultry, horses, cattle, pigs, and fish.

The latest news to bolster the confidence of Zoetis investors is the highly anticipated regulatory approval of oral canine drug Simparica Trio. This chewable tablet for dogs is currently under review not only in the United States but also in Japan, Brazil, Canada, and Australia. Once approved, this drug will be marketed as an all-in-one treatment for heartworm disease, ticks, and internal parasites.

If approved, Simparica Trio is expected to become the next blockbuster product of the company by 2020. Sales of the drug is estimated to reach $1.36 billion in 2022, with $1.14 of incremental earnings per share.

With Zoetis’ move to focus on high-margin animal items, it’s no question that the Pfizer spinoff will remain on top of the game even with the recession. In fact, the company derived 41% of its 2018 total revenue from items for cats and dogs alone compared to the 31% competitor Eli Lilly spinoff Elanco (ELAN) raked that year for similar products.

In terms of total revenue, Zoetis reported $5.8 billion for last year’s work while Elanco raked in $3.1 billion. That allowed Zoetis to convert 24% of profits into income during the said period. Zoetis’ blockbuster items, such as Simparica, Clavamox, and ProHeat, also didn’t disappoint this year.

However, there’s no such thing as a risk-free investment.

One reason for Zoetis’ consistent reports of high margins is the fact that veterinarians remain the main distribution channel for animal products. While its 24% net margins obviously provide an adequate elbow room, the company could be pressured if owners decide to purchase from third-party channels like retail stores or online shops.

Taking into account the 2019 revenue guidance from the company that indicates at least 5% of year-over-year growth, Zoetis’ dominance in the market appears to remain firmly on solid ground.

Throughout the years, the leader in animal healthcare has consistently grown its revenue and maintained a solid gross margin. It has stayed ahead of the pack by snapping up value-creating acquisitions and developing new products.

A good example of Zoetis’ ability to spot promising mergers is its $2 billion acquisition of veterinary diagnostics firm Abaxis (ABAX) in July 2018. This deal is estimated to deliver at least $200 million in revenues this year, indicating its massive contribution to the $270 million year-over-year growth in the company’s profits in the first half of 2019.

Another exciting acquisition is nutrition solutions developer Platinum Performance, a deal which is expected to be wrapped up by the third quarter of 2019. While this deal is not anticipated to provide a major financial impact to Zoetis’ performance this year, it’s expected to give the company’s equine and pet care portfolio a substantial boost in the years to come.

Zoetis has been hailed as one of the most promising companies in the animal healthcare industry today. Since its IPO in 2013, the shares of this Pfizer (PFE) spinoff has reached a total return of 242% -- lightyears ahead of the 137% total return of the S&P 500 within the same period.

Buy Zoetis on the dip.

October 8, 2019

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
October 8, 2019
Fiat Lux

Featured Trade:

(GET ON THE CELGENE BANDWAGON),
(CELG), (BMY), (GSK), (AMGN), (RHHBY), (ROG), (GMAB), (MOR)

Get on the Celgene Bandwagon

Biotech Letter

If you’re looking for a biotech stock that just relentlessly grinds up every day, Celgene Corporation (CELG) has to be at the top of your list, one of the most dominant players in the industry today.

Thanks to its $74 billion merger with Bristol-Myers Squibb (BMY), the combined companies are expected to push out Amgen in the top spot by 2020. Perhaps a positive indicator that things are looking up is the 50.9% rise in Celgene stock this year.

While the deal with Bristol has been predictably riddled with setbacks and delays, the sale of blockbuster arthritis drug Otezla to Amgen last month over antitrust concerns has finally pushed the merger forward.

While waiting for the merger with (BMY) to be finalized by the end of 2019, Celgene has been busy coming up with ways to attract more investors.

One of the exciting efforts of the biotech giant is its recent collaboration with Immatics Biotechnologies. Celgene joins GlaxoSmithKline (GSK) in the T-cell treatment market. With these two behemoths providing resources for this field, researchers are hopeful that a breakthrough drug will be discovered soon.

This partnership with Immatics saw Celgene shell out $75 million to gain access to three of the smaller firm’s anti-cancer adoptive cell therapies. With Immatics’ focus on T-cell treatments, the collaboration with Immatics will provide Celgene a wider pool of candidates for their solid tumor programs.

Aside from the $75 million upfront payment, Immatics will also receive $505 million in milestone payments for every licensed drug if Celgene decides to exercise the option. That means Celgene will have the opportunity to pay for the full or partial rights on selected assets developed from the T-cell therapies.

Ideally, Immatics would earn over $1.5 billion from the collaboration plus tiered royalties on net profits. As for Celgene, the biotech company will share the rewards with Bristol-Myers.

This collaboration marks the biggest upfront payment received by Immatics since its creation in 2000. The company, which is a spinoff of Germany’s University of Tübingen, adds Celgene to its growing number of partners including Amgen (AMGN), Roche Holding Ltd.(RHHBY), Genussscheine (ROG), Genmab (GMAB), and Morphosys (MOR).

The Munich company’s work on adoptive cell treatments and bispecific antibodies also generated interest from the cancer center of the University of Texas.

Since its creation, Immatics has managed to raise $220 million in venture capital plus roughly $130 million in non-dilutive funding. The Celgene deal puts the company’s total capital at $420 million.

So far, Celgene has reported three quarters of consistently accelerating earnings per share increase and a quarter of notable sales growth. However, the Bristol-Myers deal has yet to be completed. More importantly, some blockbuster products face uncertain futures due to rival copycats.

One major factor contributing to the doubts surrounding the company’s future is the recent sale of Otezla. Since this drug has been Celgene’s major moneymaker for years, it remains to be seen how the company will cope with its loss.

Aside from Otezla, another Celgene blockbuster facing pressure is blood cancer treatment Revlimid. While the multiple myeloma drug reported an 11.4% jump in its second quarter sales this year, the company has yet to fully safeguard it from the patent challenges aiming to end its reign in the market.

While the effects of the Immatics collaboration and the recent developments on the Bristol-Myers merger have yet to concretely manifest themselves, Celgene is expected to display strength when the next earnings release of 2019 draws nearer.

In the third quarter report, the company is projected to post an earnings per share of $2.73. This would indicate a 19.21% year-over-year increase. Meanwhile, its earnings per share for the full year of 2019 is expected to rise by over 23% to reach $10.91. As for its revenue, Celgene is estimated to earn $17.44 billion this year, marking a 14.11% rise from 2018.

In terms of its merger with Bristol-Myers, the two pharmaceutical giants are anticipated to have a combined total of 10 drugs already in the late-stage testing phase and six drugs ready to be released soon.

Additionally, the companies disclosed that they have roughly 50 drugs slated for early and mid-stage testing. Among those, 21 are reported to be focused on oncology treatments.

Buy Celgene on the next 5% dip in the shares. It seems to be on a tear.

October 3, 2019

Biotech Letter

Mad Hedge Biotech & Health Care Letter
October 3, 2019
Fiat Lux

Featured Trade:

(GETTING ON BOARD THE GENE-EDITING REVOLUTION),
(CRSP), (VRTX)

Getting on Board the Gene-Editing Revolution

Biotech Letter

I love buying straw hats during snowstorms, Christmas ornaments in January, and the latest outdoor equipment in October when the best quality gear is for sale at incredible discounts.

Such a bargain is to be had right now with CRISPR Therapeutics (CRSP), which has been at the forefront of the gene-editing revolution from day one. And I actually know how this works.

After decades of false starts and controversial experiments, genetic treatments are now starting to paint a credible and promising picture of their benefits. With the first-ever gene therapy treatment receiving approval in 2017 and the first RNA interference (RNAi)-based drug getting the greenlight in 2018, the biotech world appears to be ready for the next big thing: CRISPR gene editing.

Crispr technology has the potential to offer a cure for diseases such as multiple sclerosis and even cancer. Apart from its healthcare benefits, this technology can also be utilized in the agriculture industry. A possible application of it is to synthesize chemicals including fuels and plastics. Crispr can be used to store data as well.

Well, that’s what the investors in this revolutionary technology are hoping to accomplish anyway -- so much so that the market cap of pioneering company CRISPR Therapeutics (CRSP) has soared to an incredible $2.7 billion.

Although CRISPR Therapeutics has been experiencing an upward trajectory in 2019, shareholders of this stock since its inception in 2013 have been through quite a rollercoaster ride as the company’s first drug candidate only managed to enter clinical trials this year.

While cash burn is obviously a legitimate fear, CRISPR Therapeutics actually has a massive mound of cash pile. Hence, the future (or the next five years, at least) of this red-hot growth stock won’t be a problem for the company as long-term prospects look promising.

One of the most aggressive supporters of CRISPR Therapeutics is Vertex Pharmaceuticals (VRTX), which recently splurged $175 million in an upfront cash payment to fund the development of the biotech company’s study on a gene-editing therapy called CTX001.

This method is designed to help patients suffering from rare genetic blood disorders beta-thalassemia and sickle cell disease. Aside from these blood diseases, Vertex expanded the collaboration to also cover muscle disorders commonly known as Duchenne muscular dystrophy and myotonic dystrophy type 1. Earlier in 2019, the FDA granted a Fast Track designation for CTX001.

Despite minimal information on CRISPR’s pipeline, a lot can be deduced from the behavior of its investors alone. Looking at the roster of the company’s largest shareholders, it’s quite noticeable that a whopping 42% belongs to institutional investors.

Since institutions tend to prefer more established companies compared to smaller ones, the presence of these investors in CRISPR signifies a positive outlook for the stock. A quick caveat though -- the downside of this is for the stock to turn into a “crowded trade” due to the number of institutions that own it. That makes its share price sensitive to the biotech market and to the on-again, off-again IPO market.

Meanwhile, insider ownership for CRISPR Therapeutics amounts to $51 million -- a fact that could signify the earning potential of this stock and the promising future it holds. Some shareholders would consider this as a real positive sign as the heavy presence of the board members in the share registry ensures that their interests align with that of the shareholders.

So, what’s the bottom line here? While CRISPR’s shares at one point jumped by an astounding 72% this year, there’s no indication that the stock is slowing down anytime soon. That is if no clinical setback hinders the company’s forward march. Given the potential of the technology and its healthy cash pile ready to fund its future endeavors, this development biotech is anticipated to be worth tens of billions in terms of future revenues.

The global clamor to embrace revolutionary medical treatments is something we can’t ignore, particularly due to the northward rise of the biotech sector. With CRISPR Therapeutics promising that the initial clinical trials are only there to whet investors’ appetites, it’s exciting to be part of a technology that could actually change the landscape of the medical profession.

Buy CRISPR Therapeutics on the dip. Now is a great place to start scaling in with a one-third position.

October 1, 2019

Biotech Letter

Mad Hedge Biotech & Healthcare Letter
October 1, 2019
Fiat Lux

Featured Trade:

(THE PLAYERS GUIDE TO BIOTECH INVESTING)
(AMGN), (PFE), (NOVN), (ABBV), (ABT),
(AGN), (ROG), (GSK), (CELG), (JNJ), (BMY)