Biotech Letter Archives

A Healthcare Stock That Owns Tomorrow

After decades of watching healthcare stocks, I've learned one immutable truth - demographics always win. And right now, demographics are handing UnitedHealth Group (UNH) the keys to the kingdom.

The numbers tell an impressive story. UnitedHealth just reported Q3 2024 revenue of $100.82 billion, up 9.2% year-over-year. That's a billion dollars above what Wall Street expected, even after weathering a nasty cyberattack on their Change Healthcare unit in February.

Let's put this in perspective. By 2031, America's national health expenditure will hit $7.17 trillion - more than the GDP of Japan and Germany combined. This isn't just another growth story.

Besides, having managed hedge fund money through multiple market cycles, I’d like to think that I know the difference between lucky timing and structural advantage. From the looks of how things are going, UnitedHealth has engineered themselves the latter.

The company's UnitedHealthcare segment tells only part of the story, bringing in $74.85 billion in Q3, up 7.2% from last year.

Their Medicare Advantage enrollment grew from 7.65 million to 7.81 million people, while their U.S. commercial health plans expanded from 27.25 million to 29.73 million members.

Yes, they took a hit on their global numbers after selling their Brazilian business - dropping from 5.48 million to 1.34 million customers. But sometimes the best deals are the ones you don't do.

The real story here is Optum and its aggressive push into value-based care.

While competitors are still figuring out how to merge technology with healthcare delivery, UnitedHealth has already built a fortress. Their $13 billion acquisition of Change Healthcare wasn't just about processing claims - it was about owning the healthcare data highway.

Optum's revenue jumped 12.5% to $63.79 billion, with their pharmacy division surging 18.5% to $34.21 billion. They processed 410 million prescriptions in Q3 alone - that's 30 million more than last year.

What Wall Street is missing is UnitedHealth's positioning for the post-COVID healthcare landscape. They're not just riding the telehealth wave - they're reshaping it.

Their OptumRx digital platform now handles 80% of all prescription transactions, while their virtual care visits have grown tenfold since 2019.

In fact, the regulatory environment plays into their hands.

While smaller players struggle with Medicare Advantage rate adjustments and value-based care requirements, UnitedHealth's scale and technology infrastructure turn these challenges into opportunities.

Their compliance systems and data analytics capabilities give them a moat that gets wider every quarter.

Wall Street expects Q4 revenue between $100.48 billion and $104.14 billion. Their P/S ratio of 1.41x looks rich compared to Humana (HUM) at 0.29x and Elevance Health (ELV) at 0.57x. But in this market, scale and execution command a premium.

Looking ahead, I see UnitedHealth hitting $552 billion in revenue by 2028. The catalysts are clear: aging demographics, rising chronic disease management post-COVID, and the unstoppable march toward value-based care.

Their Q3 non-GAAP EPS of $7.15 beat estimates by 12 cents. By 2028, I expect EPS to reach $44, with their P/E ratio dropping from 22.75x to 12.99x.

Their balance sheet remains rock solid - net debt/EBITDA ratio below 1.5x, with investment-grade ratings from S&P Global (SPGI), Fitch, and Moody's (MCO).

UnitedHealth also keeps growing its dividend by double digits, maintains a predictable business model, and outperforms competitors like CVS Health (CVS) and Humana on ROE.

Admittedly, they slightly lowered their 2024 adjusted EPS guidance, spooking some traders. But in my experience, Wall Street's short-term panic creates long-term opportunities.

So, what’s the play here? I suggest you build a position in UnitedHealth now while the stock has pulled back. Scale in gradually if you're concerned about timing, but don't miss this opportunity.

Remember, in the end, this isn't just about healthcare - it's about owning a piece of America's unstoppable demographic destiny. And that's a trend even a skeptic like me can believe in.

October 22, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 22, 2024
Fiat Lux

Featured Trade:

(TICK TALK)

(AAPL), (ABT), (BSX), (MDT), (RMD), (INSP), (DXCM), (PODD)

Tick Talk

Biotech Letter

While waiting two hours to vote at the Incline Village Library this weekend, I counted the number of smartwatches in the line.

Seemed like everyone was checking their heart rates in the cold. One woman's Apple Watch even suggested she sit down after standing too long in the 40-degree weather.

That got me thinking about the billions flowing into medical wearables - and where that money should really be going instead.

Let's start with some sobering numbers about atrial fibrillation (AFib), the crown jewel of smartwatch detection capabilities.

Yes, Apple's (AAPL) 2020 study showed their watches can detect 84% of AFib cases during monitoring sessions. Sounds impressive, until you dig deeper.

Of the 50 million Americans wearing smartwatches, these devices identify only about 5,000 new AFib cases annually - a mere 0.083% of the 6 million Americans affected by the condition.

Plus, the real money tells a different story. The U.S. performs 250,000 ablation procedures yearly, creating a $3.2 billion market growing at 10% annually.

Abbott Laboratories (ABT), Boston Scientific (BSX), and Medtronic (MDT) dominate this space, with combined annual revenues of $12.4 billion from their cardiac rhythm management divisions alone.

Those 5,000 smartwatch-detected cases? They represent just 2% of annual ablation procedures. Not exactly the revolution we've been promised.

The story doesn't improve when we look at sleep apnea detection.

While Apple and Samsung tout their sleep-monitoring capabilities, their watches identify only about 60,000 of the 2 million new sleep apnea cases diagnosed yearly - that's 3% of new diagnoses.

Meanwhile, ResMed (RMD) and Inspire Medical Systems (INSP) generated combined revenues of $4.8 billion last year from sleep apnea treatments.

The smartwatch contribution to their patient pipeline is barely a rounding error.

Still, it’s not like this sector is a complete waste. The global smartwatch market stands at $58 billion and is projected to reach $98 billion by 2027, growing at 10.5% annually. Impressive, until you compare it to the traditional medical device market: $495 billion, reaching $718 billion by 2029.

The cardiac monitoring device segment alone represents $24.5 billion, expanding at 6.9% annually.

More importantly, traditional medical device companies are growing their revenues faster than smartwatch detection is adding to their patient base.

But, like I said, don't write off the sector entirely. The next generation of smartwatches promises some intriguing possibilities.

Continuous blood pressure monitoring could tap into a $23 billion market.

Non-invasive glucose tracking might crack the $28 billion diabetes monitoring space by 2027.

Enhanced sleep diagnostics could open up another $12.8 billion in opportunities.

So what's the smart play here?

Near term, keep your focus on established leaders like Abbott and Medtronic. Their upcoming Q4 earnings reports will tell us more about traditional patient acquisition trends than any smartwatch sales figures.

Watch for FDA clearances too - Abbott's new cardiac mapping system, expected in Q1 2025, could be a game-changer.

Looking out 12-24 months, keep your eye on companies like Dexcom (DXCM) and Insulet (PODD) as glucose monitoring moves mainstream.

ResMed's new sleep diagnostic platforms, launching mid-2025, could redefine how we think about sleep medicine.

Meanwhile, Boston Scientific's push into AI-enhanced cardiac monitoring might just bridge the gap between consumer tech and serious medical devices.

For long-term thinkers, watch for companies developing hybrid solutions that combine traditional devices with consumer tech.

The real breakthrough will come when medical device makers start acquiring wearable technology companies. That's when you'll know the revolution is real.

Remember, following the patient flow matters more than following the hype flow. Just like timing your visit to avoid a two-hour voting line, timing in the market is everything.

And right now, the time is right for medical device stocks, not their flashier smartwatch cousins.

October 17, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 17, 2024
Fiat Lux

Featured Trade:

(NO TEARS HERE)

(JNJ)

No Tears Here

Biotech Letter

If you've been following my adventures in the market jungle for any length of time, you know I've got a nose for opportunity that'd make a bloodhound jealous. Well, folks, that nose is twitching something fierce, and it's pointed straight at Johnson & Johnson (JNJ).

Now, I know what you're thinking: "John, J&J? Aren't they as exciting as watching paint dry?" Before you dismiss this company, let me tell you—this isn't your grandma's Band-Aid shop anymore.

First off, let's talk about their pharmaceutical arm. It's not just flexing; it's practically bench-pressing the competition with one hand tied behind its back. I'm talking about a lineup that includes immunology juggernauts like Stelara and Tremfya, and cancer-fighting dynamos such as Darzalex and Erleada.

But here's the kicker—they've got over 40 late-stage clinical trials cooking. That's no mere pipeline; it's a veritable gusher of potential blockbusters.

The surprises from J&J don't end there. They recently spun off their consumer health unit faster than you can say "No more tears." Why? To zero in on their real money-makers: pharmaceuticals and medical devices. It's like watching a prizefighter shed weight before a title bout—leaner, meaner, and ready to deliver a knockout punch to the market.

Speaking of punches, J&J has been on an acquisition spree that'd make a Silicon Valley startup blush. On October 9th, they snatched up V-Wave for a cool $1.7 billion, adding to their previous grabs of Abiomed ($16.6 billion in 2022) and Shockwave Medical ($13.1 billion in 2024). And if you think they're splurging just for the heck of it, think again. This triple play gives J&J a solid foothold in the $60 billion cardiovascular device market, which is growing at a heart-racing 8% annually.

So, what does V-Wave bring to a giant like J&J? It's not just another cog in the medical machine. V-Wave is developing innovative treatment options for heart failure patients. Their device has already snagged the FDA's breakthrough device designation in 2019 and Europe's CE mark in 2020. For J&J, this means they can hit the ground running, spreading V-Wave's Ventura Interatrial Shunt across the globe faster than you can say "cardiovascular revolution."

As for their Q3 results? Let's just say J&J didn't settle for merely meeting expectations—they exceeded them. We're looking at a 5.4% adjusted operational revenue growth, with their cardiovascular business shooting up 26.5% year-over-year.

Now, I'm no fortune teller—if I were, I'd be writing this from my private island—but I'd bet my favorite Bloomberg terminal that their cardiovascular business is going to keep pumping life into J&J's MedTech segment. With more folks lining up for cardiovascular procedures than a Black Friday sale, J&J is poised to ride this wave like a pro surfer at Pipeline.

Of course, it's not all sunshine and rainbows. Their China business is facing more headwinds than a kite in a hurricane, thanks to an anti-corruption campaign that's thrown a monkey wrench into their marketing machine.

But hey, this is J&J we're talking about—a company that's been around since Grover Cleveland was in the White House. They've seen tougher times than this and come out swinging.

So, what's the bottom line? I'm slapping a "Buy" rating on this stock, with a fair value of $195 per share. For those of you looking for a stock that combines the stability of a mountain with the growth potential of a tech startup, J&J might just be your golden ticket.

Now, if you'll excuse me, I've got a sudden urge to go check my own blood pressure after all this excitement.

P.S. If J&J ever decides to venture into stem cell therapy for aging knees, you can bet I'll be first in line. These well-worn joints have a few more mountains to climb!

October 15, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 15, 2024
Fiat Lux

Featured Trade:

(THE BRIGHT SIDE OF A DARK DIAGNOSIS)

(ILMN), (TMO), (A), (QGEN), (GH), (PFE)

The Bright Side Of A Dark Diagnosis

Biotech Letter

Let's face it. Cancer is still kicking our collective butts.

Despite all the fancy lab coats and high-tech gadgets, cancer remains the second-leading cause of death in the U.S. It's like that annoying party guest who just won't leave, no matter how many hints you drop.

This year alone, more than 2 million Americans are expected to hear those dreaded words: "You have cancer." And sadly, over 600,000 of our fellow citizens will lose their battle with this relentless foe in 2024.

Before you start thinking I'm all doom and gloom, let me flip the script for you. Where there's a problem, there's opportunity. And in this case, we're talking about a massive opportunity to put your investment dollars to work.

Back in 2020, America shelled out a whopping $200 billion on cancer treatments. By 2030, that number is projected to skyrocket to over $245 billion. That's a growth trajectory that’s worth our attention, don’t you think?

So, let's dive into the world of cancer-fighting stocks. There are some heavy hitters in this space that deserve your attention.

First up, we've got Illumina (ILMN), the gene-sequencing giant. These folks are like the Sherlock Holmes of the genetic world, helping researchers crack the cancer code.

With over 21,600 of their systems installed worldwide, Illumina is the go-to company for anyone looking to dive deep into our genetic makeup.

But here's the thing - Illumina isn't just about cancer. Their tech is used in everything from studying infectious diseases to figuring out if your unborn baby is likely to be the next Einstein.

And while they're tight-lipped about their exact market share, word on the street is they're still the big fish in the gene-sequencing pond.

In fact, let me throw some numbers at you. Illumina holds a whopping 80% market share among the seven main pure-play next-generation sequencing companies.

Even if we toss in some non-pure-play heavyweights like Thermo Fisher Scientific (TMO), Agilent Technologies (A), and Qiagen (QGEN), Illumina's still sitting pretty with roughly two-thirds of the global market.

And get this - despite the industry facing some macro headwinds, Illumina's market share has held steady over the past couple of years. Talk about staying power.

Speaking of big fish, Illumina recently spun off Grail (GRAL), but they've still got their fingers in that pie with a 14.5% stake.

Grail is all about liquid biopsy products – fancy talk for finding cancer through a simple blood test. It's a promising field, but Illumina's not the only player in town.

Enter the new kids on the block: Element Biosciences and Ultima Genomics. Backed by venture capital and hungry for a piece of the action, these upstarts are shaking things up. Element's focusing on accuracy, while Ultima's all about high-volume, low-cost sequencing.

While we're on the topic of liquid biopsies, let's talk about Guardant Health (GH). These folks are the pioneers in finding tiny bits of tumor DNA floating around in your blood. Their Guardant360 product was the first FDA-approved liquid biopsy for all advanced solid tumors. That's like hitting a home run in your first major league at-bat.

But Guardant Health isn't resting on its laurels. They've got a whole suite of products, from tissue biopsies to tests that can tell if your cancer treatment is working. And get this – they're looking at a $30 billion annual market just in cancer treatment selection and recurrence monitoring.

But it doesn't end there. Early-stage cancer detection could add another $50 billion to that pot in the U.S. alone.

As if that wasn't enough, Guardant Health just got FDA approval for their Shield blood test for colorectal cancer screening in July 2024. Next stop? Lung cancer. These folks are aiming to create a test that can catch multiple cancers early.

And let's not forget the big boys. Pfizer (PFE), the pharmaceutical giant, is throwing its considerable weight into the cancer fight.

They've already got three blockbuster cancer drugs – Ibrance, Xtandi, and Inlyta – each raking in over a billion dollars a year. And that's just the tip of the iceberg. Pfizer's got about 40 more cancer programs in clinical testing.

Still, Pfizer isn't just relying on its own lab coats. They're not afraid to open up their wallet either. In 2021, they snatched up Trillium Therapeutics to beef up their blood cancer portfolio. And in 2023, they added Seagen to their collection, giving them a leg up in antibody-drug conjugates for cancer treatment.

Now, I know what you're thinking. "But what if the cancer market dries up?" (As if!) Well, Pfizer's got that covered too. They're big players in the vaccine market, with their new respiratory syncytial virus vaccine, Abrysvo, looking set to bring in some serious cash.

So there you have it. The war on cancer is far from over, but these companies are leading the charge. And while they're fighting to save lives, they might just help fatten up your portfolio too. I suggest you add these names to your watchlist and buy the dip.

October 10, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 10, 2024
Fiat Lux

Featured Trade:

(BUYING TIME)

(MRK), (JNJ)

Buying Time

Biotech Letter

If you've been watching Merck (MRK) lately, you might think the pharmaceutical giant has caught a nasty case of the market flu. After years of being the biotech golden child, Merck's stock has been sliding down the charts faster than a greased pig at a county fair.

But before you start writing eulogies for this pharma powerhouse, let's dig into the nitty-gritty and see if there's still some fight left in this old dog.

First, let's talk about Keytruda. This cancer-fighting wonder drug is Merck's bread and butter, bringing in a whopping $7.3 billion in Q2 2024 alone. That's a 16% year-over-year jump, beating expectations by $100 million.

But here's the rub: Keytruda now accounts for nearly half of Merck's total revenue. It's like having a star quarterback who scores all your touchdowns - great until he sprains an ankle.

And boy, has Keytruda stubbed its toe lately. The FDA's advisory committee gave a thumbs down to expanding its use in certain stomach cancer patients.

Then there's the Phase 3 trial flop in colorectal cancer and two other discontinued trials. It's enough to make even the most bullish investor reach for the Tums.

With Keytruda showing signs of vulnerability, Merck's bigwigs have clearly decided it's time to spread their bets. They're not about to let their golden goose turn into a sitting duck. So, they’ve gone on a buying spree.

EyeBio, Elanco's Aqua business, Harpoon Therapeutics, CN201 - the list goes on. On paper, it looks smart. Diversify the portfolio, reduce the Keytruda dependency.

But Wall Street's not impressed, especially after Merck slashed its 2024 profit outlook by $1.05 per share to pay for this shopping spree.

Now, you might be wondering if Merck's lost its marbles with all this spending. Is Merck just throwing money around like a drunken sailor, or is this the kind of long-term thinking that separates the biotech wheat from the chaff? Only time will tell, but I've got a hunch these moves might pay off down the road.

Speaking of long-term thinking, Merck's not just acquiring companies left and right. They're also working on extending Keytruda's reign with a subcutaneous version that could push its patent protection into the late 2030s.

But they know better than to put all their eggs in one basket, even if it's a golden one.

That's where Merck's latest blockbuster deal comes in. They've just inked a $1.9 billion agreement with Mestag Therapeutics, a bold move into the world of inflammatory diseases. It's like Merck's discovered a new chess piece on the biotech board, and they're betting it could be a game-changer.

I know Mestag isn't exactly a household name, but these Cambridge, England-based whiz kids are doing some fascinating work with fibroblasts.

For those of you who forgot their biology lessons, fibroblasts are connective tissue cells that play a bigger role in inflammation and tumors than we once thought.

So why is Merck so excited about these little cellular workhorses?

Well, Merck's betting big that Mestag's Reversing Activated Fibroblast Technology (RAFT) platform could be the next big thing in inflammatory disease treatment. The deal gives Merck the option to license therapies against a "prespecified number of potential targets."

Mestag's got three preclinical programs in the pipeline. The frontrunner is MST-0300, a FAP-LTBR agonist designed to "supercharge" antitumor immunity.

Following close behind is M402, a stromal checkpoint agonist antibody aimed at dampening myeloid-driven biology in inflammatory disease.

Notably, Merck isn't the only big fish swimming in Mestag's pond. Johnson & Johnson's (JNJ) Janssen unit also signed its own two-target collaboration back in 2021.

With all these moves, you might be wondering if Merck's still a safe bet or if it's gone off the deep end.

Look, Merck's got more challenges than a one-armed juggler at the moment. But here's the thing: its current stock price is sitting at a level that's bounced back before.

With a solid 2.8% dividend yield that's been growing for 13 straight years, Merck might just be the kind of steady Eddie that value investors dream about.

Sure, there are risks. Keytruda's dominance is both a blessing and a curse. Also, those pricey acquisitions need to pay off. And who knows what Medicare will do next on drug pricing.

But if you've got the stomach for some short-term turbulence, Merck could be poised for a comeback. It's got a strong foundation, a pipeline full of potential, and enough cash to weather the storm. I suggest you buy the dip.

The Little RNA That Could

Biotech Letter

Two scientists walk into a bar. One says, "I've got a funny story about a worm." The other replies, "Hold my Nobel Prize."

This isn't just a setup for a punchline - it's actually a key part of a recent groundbreaking discovery that's just earned Victor Ambros from UMass Chan Medical School and Gary Ruvkun from Harvard Medical School the 2024 Nobel Prize in Physiology or Medicine.

In a nutshell, these two have just been crowned the rock stars of RNA research for 2024 for uncovering the secrets of microRNA. It's like they've found the Rosetta Stone of gene regulation, and boy, is it a game-changer.

Now, you might be thinking, "John, haven't we been down this RNA road before?" And you'd be right. Just last year, the Nobel folks were gushing over mRNA vaccines. But this year's prize? It's a whole different ballgame.

For years, we thought we had gene regulation all figured out. Genes make mRNA, mRNA makes proteins, and proteins run the show. Simple, right? Well, Ambros and Ruvkun just blew that notion out of the water.

Their breakthrough came from an unlikely source - a tiny worm called C. elegans. This little nematode might not look like much, but it's been the workhorse of biology for decades.

Ambros and Ruvkun were puzzling over some mutant worms that couldn't get their growth spurts right. One type was growing too big, the other too small.

After years of head-scratching and late nights in the lab, they stumbled upon something extraordinary. They found that a gene called lin-4 wasn't making a protein at all.

Instead, it was cranking out a small piece of RNA that could stick to another gene's mRNA and shut it down. This was microRNA, and it was about to turn the world of molecular biology on its head.

At first, everyone thought this was just some quirky worm thing. But seven years later, Ruvkun's team found another microRNA that showed up not just in worms but in everything from fruit flies to humans.

Suddenly, microRNA wasn't just a biological oddity - it was a universal regulator of genes.

Fast forward to today, and we now know that humans have over 1,000 different microRNAs. These tiny molecules are pulling the strings on virtually every gene in our bodies. It's like discovering a whole new layer of cellular bureaucracy we never knew existed.

Now, you might be wondering, "That's all well and good, but what's it got to do with making money?" Well, let me tell you, this discovery has set off a gold rush in the biotech world.

Companies are scrambling to turn this basic science into cold, hard cash.

Take Regulus Therapeutics (RGLS), for instance. They're working on a treatment for polycystic kidney disease that targets microRNA-21. It's early days, but the potential is enormous.

Then there's Alnylam Pharmaceuticals (ALNY). These folks have already brought RNA-based therapies to market.

Their drug, ONPATTRO, is treating a rare disease called hereditary transthyretin-mediated amyloidosis. It's proof that RNA-targeted treatments aren't just pie in the sky - they're real, and they're here.

Big Pharma is getting in on the action, too. Roche (RHHBY) bought up a company called Santaris Pharma back in 2014, snagging some nifty technology for developing microRNA therapies.

Novartis (NVS) and AstraZeneca (AZN) are also dipping their toes in the microRNA waters. And let's not forget about Qiagen (QGEN). They're not developing therapies, but they're selling the picks and shovels for this gold rush - tools for microRNA research and diagnostics.

Now, I'm not saying you should go all-in on microRNA stocks tomorrow. This is cutting-edge science, and the road from the lab bench to the pharmacy shelf is long and treacherous. But for those of you with an appetite for risk and a long-term view, this could be the next big thing in biotech.

So the next time someone corners you at a party with a story about microscopic organisms, maybe don't rush to the bar just yet. Remember, Ambros and Ruvkun weren't trying to create the next blockbuster drug. They were just curious about some weird-looking worms. Who would have thought their discovery could end up revolutionizing medicine?