Biotech Letter - John Thomas - Mad Hedge Fund Trader

From Limping To Leaping

The year 2023 in the biotechnology and healthcare world has been a rollercoaster with more dips than peaks.

While Eli Lilly (LLY) and Novo Nordisk (NVO) are hitting the jackpot with their new weight loss drugs, the rest of the healthcare sector is limping behind.

By year's end, the S&P 500 Health Care index had slipped by 0.4% since the start of the year, starkly contrasting the broader S&P 500's robust 24% growth.

That’s not just a minor setback; it's the sector's most significant underperformance in 30 years.

Fast forward to 2024. Conventional wisdom suggests healthcare stocks might lag in an election year. Why? Presidential candidates love to shake things up with healthcare reform promises, usually sending investors into a sell-off frenzy.

But this time around, the air is tinged with an unexpected optimism. After a year of hefty sell-offs, healthcare valuations have become irresistibly low, presenting a fertile ground for investment opportunities.

Plus, there's less regulatory uncertainty now, with major acquisitions like Amgen's (AMGN) of Horizon Therapeutics and Pfizer's (PFE) of Seagen sailing through without a hitch. And let's not forget the anticipated interest rate cuts could be a game-changer for the sector.

Interestingly, the typical election-year healthcare jitters might be less intense in 2024. After all, the likely presidential candidates are familiar faces, and the healthcare changes they've made (or not made) are well known.

Trump’s healthcare impact was minimal, and Biden has already pushed through significant drug pricing reform with the Medicare drug price negotiation program. This program, despite legal hurdles, is moving forward and has been priced into the market's expectations.

In a surprising turn of events, the Biden administration's recent move to potentially invalidate patents of some high-priced drugs didn't send investors running for the hills like it might have in previous years. It seems the fear of drug price regulation may be losing its sting.

Now, let's take a closer look at some of the healthcare sectors that are drawing attention.

Biotech has been in a slump since 2020, but things are starting to look up. The sector's last three-year downturn was in 1992, followed by a significant rebound.

Despite challenges like high capital-raising costs and a deluge of IPOs, biotech is showing signs of life. As these pandemic-era companies mature and produce valuable data, they offer both buying and selling opportunities.

M&A activity in biotech is also on the rise, and if interest rates fall, the sector's prospects look even brighter.

Keep an eye on Vertex Pharmaceuticals (VRTX), which is set to reveal more data on its experimental pain drug, and Amgen, which is awaiting data on its new obesity pill. CRISPR Therapeutics (CRSP) and Intellia Therapeutics (NTLA) should be on your watchlist, too.

Over in MedTech, the hype around GLP-1 weight loss drugs led to a sector-wide selloff.

The iShares Medical Devices ETF took a hit, dropping 13.9% by the end of October, but it started to recover in the last two months of the year. The GLP-1 concerns might continue to cast a shadow, but there's a growing sense that their impact might be more long-term, especially if interest rates fall.

In the pharma world, 2023 was a tale of two halves: Eli Lilly and Novo Nordisk on one side, with their successful weight-loss drugs and the rest trailing behind.

While the S&P 500 Pharmaceuticals index slightly declined, Lilly and Novo surged ahead with 56% and over 45% gains, respectively.

But 2024 might bring new challenges, especially for Lilly, as it rolls out Zepbound, its highly anticipated weight-loss drug.

For Novo, the focus will be on how Ozempic fares under Medicare's new drug pricing negotiations set to take effect in 2027.

The key to success in pharma now is finding companies with innovative drugs that promise revenue acceleration without the looming threat of patent cliffs. Pfizer and Bristol Myers Squibb (BMY), for instance, are under the microscope as they navigate impending patent expirations and strive to reassure investors.

In 2023, the healthcare market was a stock picker's paradise, especially given its complexity. The year ahead promises more of the same. Investors should be on the lookout for opportunities among stocks that underperformed last year but have solid fundamentals.

Despite the unpredictability of election years and the bumpy ride of 2023, the healthcare sector, buoyed by low valuations and potential rate cuts, is gearing up for what could be a significant turnaround this 2024. For savvy investors, this could be an opportunity not to be missed.

December 28, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 28, 2023
Fiat Lux

Featured Trade:

(CLOSING THE YEAR WITH A BANG)

(XBI), (ABBV), (IMGN), (RHHBY), (PFE), (MRK), (AMGN), (VKTX), (TERN)

Closing The Year With A Bang

Biotech Letter

The biotechnology sector, pretty much like a phoenix rising from the ashes of its recent lackluster performance, is experiencing a renaissance as 2023 draws to a close. The recent spree of high-stakes deals has set the stage for what could be a significant rebound, a situation that savvy investors should watch closely.

In a remarkable display of strategic maneuvering, AbbVie (ABBV) has been on an acquisition tear.

Earlier in December, they've recently snapped up Cerevel Therapeutics for an eye-popping $8.7 billion, only a week after announcing their intent to acquire ImmunoGen (IMGN) for a formidable $10.1 billion.

And in this high-stakes game, Roche Holding (RHHBY) isn't playing second fiddle, having declared their acquisition of Carmot Therapeutics for $2.7 billion.

This flurry of activity isn't just a few isolated incidents. It's actually a trend. Of the 18 biotech acquisitions exceeding $1 billion announced this year, a significant one-third have emerged since October. This surge is like a shot in the arm for the sector, suggesting a much-anticipated uptick.

But let's take a step back and consider the broader picture.

The SPDR S&P Biotech ETF (XBI) has shown some muscle in November and December. However, it's still trailing behind this year, down by 3%, while the S&P 500 has surged by 19.5%.

Now, focusing on the XBI, a temperature check for the sector: trading around $80, it's a steep drop from its heyday in the $140 range during late 2020 and early 2021. It's down nearly 50% from its peak in February 2021.

This isn't just a dip; it's a nosedive.

Looking at the turn of events, it’s possible that the AbbVie-ImmunoGen deal is perhaps the precursor to a more consistent pattern of mergers and acquisitions in 2024. It seems that we've hit the floor and the only way now is up, with M&A activities poised to inject some much-needed vitality into the sector.

In previous years, the biotech valuations took a hit, and understandably, companies were hesitant to settle for offers that undervalued them compared to their pandemic-era zeniths. But this year, the tide has turned.

Notably, the cumulative value of biopharma deals at a whopping $128 billion this year, shooting up from $61 billion in 2022.

Key transactions fueling this jump include Pfizer's (PFE) massive $43 billion deal for Seagen and Merck’s (MRK) $10.8 billion acquisition of Prometheus Biosciences.

The shift in the regulatory landscape is also worth noting.

Antitrust regulators, who initially seemed poised to block deals like Amgen's (AMGN) $27.8 billion acquisition of Horizon Therapeutics, have shown more flexibility. This change in stance is likely emboldening companies to pursue larger deals.

Now, let's talk about the financial clout.

Large-cap biopharma companies are projected to have about $199 billion in cash by year-end. There's a noticeable dip in dividends and stock buybacks, hinting at a strategic pivot towards mergers and acquisitions. It could indicate that we can expect Pharma to maintain an aggressive stance on the M&A front.

So, what's in store for the XBI and investors alike?

This uptick in M&A activity is like untying the strings of a tightly held purse, releasing cash back into the sector. It's a magnet for both specialist and generalist investor interest, a potential boon for the XBI.

Predicting the next wave of M&A is basically like reading tea leaves. Yet, this year has shown a marked preference for biotechs specializing in obesity, immunology, and cancer.

A notable example is the speculation around Pfizer eyeing a deal with a biotech firm developing an anti-obesity pill.

The ripple effect? Shares of Viking Therapeutics (VKTX) and Terns Pharmaceuticals (TERN), both in the obesity pill race, have seen their stocks jump 47% and 62.5%, respectively, in December.

Evidently, the biotech sector, once in the doldrums, is now witnessing a renaissance. This resurgence is marked by major deals reshaping the industry landscape, holding significant implications for 2024 and beyond.

For investors, this sector represents a fertile ground for growth and opportunity. Staying informed and nimble is key to capitalizing on these dynamic developments. The biotech sector, it seems, is back in the game, and how!

December 26, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 26, 2023
Fiat Lux

Featured Trade:

(A MARATHON, NOT A SPRINT)

(AMGN), (ABBV), (DNA), (PFE), (RHHBY), (GILD), (NVO)

A Marathon, Not A Sprint

Biotech Letter

Navigating the stock market, where fortunes are made and lost faster than a New York minute, can be as exhilarating as it is nerve-wracking.

And when you're hunting for that quick win, that short-term stock buy that'll make your year, you realize you're playing a game where even the big guns like Warren Buffett don't always have the magic crystal ball.

But let's pivot a bit. What about when you're not sweating under a cash crunch — when you can afford to play the long game?

That's when you shift your sights to those long-term compounders, the kind that churn out robust returns on capital like a well-oiled machine. Here, initial valuations play second fiddle to the long-term prospects.

This is where Amgen (AMGN) struts onto the stage. It's not just any old player in the biotechnology and healthcare arena; it's a front-runner with a knack for keeping its coffers brimming and its profitability soaring.

In terms of therapeutic innovation, Amgen is a leader in the fields of oncology, inflammation, neurology, and pulmonary diseases. Their biosimilar practice is also on the rise, churning out replicas of blockbuster drugs like AbbVie’s (ABBV) Humira and Genentech’s (DNA) Herceptin.

Essentially, investing in Amgen is like finding a gold mine in your backyard – and then realizing there's oil under there, too.

Now, let's talk numbers because that's where the rubber meets the road. Amgen's moat-worthy drug franchises make it as solid as a rock for those seeking stability in their cash flows, especially when economic clouds are gathering.

And in the healthcare segment, it's akin to building your house on a rock – it withstands economic storms.

Amgen is known for its industry-leading profitability, flashing its A+ grade like a badge of honor. Their 11% return on total capital and a jaw-dropping 134% return on equity? That's not just good; it's like winning the financial Olympics.

Over the last decade, Amgen's total return of 218% didn't just outdo the S&P 500; it left peers like Pfizer (PFE), Roche (RHHBY), and Gilead (GILD) in the dust. Sure, AbbVie is still ahead, but that's mostly thanks to their Humira magic.

Fast forward to the present, and Amgen's showing no signs of slowing down.

Their total revenue shot up by 4% YoY to $6.9 billion in the third quarter, courtesy of a surge in volumes across their star products. We're talking double-digit growth in BLINCYTO, EVENITY, Repatha, and Nplate. This is like watching a relay race where every runner is Usain Bolt.

Peeking into the future, Amgen's pipeline is a treasure trove of potential.

The company has six first-in-class oncology assets and three FDA Breakthrough Therapy designations. Mirroring Novo Nordisk's (NVO) success with Ozempic, Amgen’s wrapped up Phase 2 studies for their obesity contender, Maridebart cafraglutide.

But here's where it gets even more interesting. Amgen's leap into multi-specific drugs, particularly with tumor treatment AMG 193, is like stepping into a sci-fi novel – it's groundbreaking, it's futuristic, and it just might revolutionize drug delivery.

Let's not forget the FDA's priority review of tarlatamab for small-cell lung cancer. This isn't just good news; it's a potential game-changer, a sign that Amgen might just be first across the finish line in this high-stakes race.

Of course, the recent acquisition of Horizon Therapeutics adds another feather to Amgen's cap, expanding its rare disease portfolio. The incoming drugs from this deal, including Tavneos, Tepezza, KRYSTEXXA, and UPLIZNA, are in the early stages of their lifecycle, making them ripe for growth.

However, every silver lining has a cloud. The integration of Horizon Therapeutics carries its own set of risks, and Amgen's legacy drugs like Enbrel and Otezla face the ticking clock of declining sales.

We also can’t gloss over the elephant in the room – Amgen's ballooning long-term debt, expected to hit a whopping $65 billion by year-end. The recent downgrade of Amgen's credit rating to BBB is like a cautious tap on the shoulder, a reminder to tread carefully.

But don't let that dampen your spirits. Amgen's 3.3% dividend yield is as solid as it comes, with management showing a vote of confidence with a 5.6% raise for the upcoming Q1 2024 payout.

The company's history of rewarding shareholders through share buybacks – a 19% reduction in share count over five years is nothing to scoff at either.

So, where does that leave Amgen's valuation? At a current price of $275 and a forward PE of 14.8, it's not exactly a bargain basement, but it's far from sky-high. It's in that sweet spot where quality meets value.

For long-term investors who value stability and growth, consider adding Amgen to your portfolio playbook.

December 21, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 21, 2023
Fiat Lux

Featured Trade:

(UNLEASHING THE UNDERDOGS)

(NVS), (LLY), (PNT), (RYZB), (MRK), (ABBV)

Unleashing The Underdogs

Biotech Letter

Grab your notebooks because class is in session, and today's topic is radiopharmaceuticals.

Yes, you heard it right - radiopharmaceuticals. It’s not your everyday cocktail party topic, but it's certainly the buzzword in the biotech investing world. And let me tell you, the numbers are sizzling.

Venture capital deals in this sector have shot up by an eye-watering 550% to $408 million this year. Back in 2017, this figure was a mere $63 million. Talk about going from zero to hero.

The global market for these radioactive wonders zoomed past $5.2 billion in 2022 and is now racing towards an estimated $13.67 billion by 2032. That's a CAGR of 10.2% for the statisticians among us.

So, what's cooking in the radiopharmaceutical kitchen? Well, a lot, apparently.

Leading the pack are the heavyweights – Novartis (NVS) and Eli Lilly (LLY). Novartis has thrown its hat into the ring, making radiopharmaceuticals a showstopper in its oncology lineup. With stars like Lutathera and Pluvicto, they're not just playing; they're here to dominate.

As for Eli Lilly, they're playing catch-up but with style. They laid down a cool $1.4 billion for Point Biopharma Global — a biotech gem focusing on radioligand therapies. Notably, Point investors are playing hardball, waiting for a Phase 3 reveal.

Meanwhile, Eli Lilly's also buddied up with Mariana Oncology and its $175 million Series B – these guys are eyeing small cell lung cancer with a glint in their eye.

So, what does this mean for the investor universe? Well, in a nutshell, it's party time. Early-stage companies, especially those with their lab coats on in discovery and preclinical stages, are like magnets to investors right now.

There’s POINT Biopharma, which hails from Indianapolis, that went public on Nasdaq as of July 1, 2021. Remember the ticker symbol “PNT”? That's them, and they currently have roughly $1.33 billion in market cap.

Another promising option is Mallinckrodt Pharmaceuticals. These folks are into everything from specialty pharmaceuticals to, you guessed it, radiopharmaceuticals—an American-Irish charm, if I may say so.

Abdera Therapeutics, a Canadian startup (eh!), is also in the running. This company is all about precision radiotherapeutics. They're eyeing small-cell lung cancer, and they've got the funds to back it up.

And then there’s ARTBIO, with an impressive $90 million Series A six months post-launch.

There’s also RayzeBio (RYZB), which is based in sunny California. They're not just turning heads; they're opening wallets. This company raised a whopping $160 million in Series D last year and then sprinted towards a dazzling $311 million IPO just last September.

Between 2018 and 2023, US-based radiopharmaceutical companies attracted a hefty $1.2 billion in venture financing. The peak? A cool $262 million in 2021. And guess what? Most of this dough was for preclinical and discovery shenanigans.

But let's not forget the hurdles, particularly the supply challenges and overwhelming demand. Yet, despite these hiccups, the sector remains hotter than a summer in the Sahara.

Prior to this, ADCs (Antibody Drug Conjugates) dominated the conversation.

We witnessed Merck (MRK) confidently investing $4 billion in Daiichi Sankyo for their ADC prospects. Lilly was busy forming a cozy partnership with Mablink Bioscience. And let's not forget AbbVie (ABBV), which generously splurged $10.1 billion on ImmunoGen's Elahere.

To this day, ADCs are still the talk of the town. But here's the thing: radiotherapeutics might be the underdog next to ADCs, but they're catching up. Fast.

This sector is bubbling with potential, simmering with innovation. For investors and pharma bigwigs, radiopharmaceuticals are more than just a fad. They're the future.

So, what's the takeaway? Radiotherapeutics might not be grabbing the spotlight like ADCs, but they’re like that quiet kid in class who ends up acing the test.

Mark my words. This is one space in oncology that's set to make some serious noise in the coming years.

December 19, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 19, 2023
Fiat Lux

Featured Trade:

(HIDDEN IN PLAIN SIGHT)

(VRTX), (CRSP), (NVDA), (GOOGL), (AMZN), (AAPL), (META), (MSFT), (TSLA)

Hidden In Plain Sight

Biotech Letter

In the high-pressure game of stock market investments, where volatility is the norm and certainty a luxury, the Nasdaq Composite’s 36% uptick this year is nothing short of remarkable.

The credit largely goes to the “Magnificent Seven” – a septet of tech behemoths comprising Nvidia (NVDA), Alphabet (GOOGL), Amazon (AMZN), Apple (AAPL), Meta Platforms (META), Microsoft (MSFT), and Tesla (TSLA). These giants have not just captured the market’s imagination; they've powered its ascent.

However, while these tech titans have been capturing the spotlight, there's been a different kind of giant, hidden in plain sight, quietly making significant strides in a sector just as crucial as technology – biotechnology and healthcare.

This is where Vertex Pharmaceuticals (VRTX) emerges, a standout performer in the industry, demonstrating that groundbreaking innovation and solid investment opportunities aren't exclusive to the tech world.

The tech sector's rebound this year, following a tumultuous 2022, wasn't just luck. It was a confluence of a resilient economy and consumer spending that stayed robust.

This buoyancy proved a boon for the Magnificent Seven, whose fortunes often mirror economic trends. Apple's case is illustrative. Its iPhones, a blend of luxury and necessity, see fluctuating demand based on economic health.

But Vertex operates on a different plane.

Vertex specializes in life-saving drugs for cystic fibrosis (CF). This isn't a market swayed by economic tides. CF patients depend on the company’s drugs, literally, for survival.

What's more, Vertex is the only game in town for these medications. This unique position grants Vertex significant pricing power, ensuring stable financial performance, come rain or shine.

Now, let’s zoom in on Trikafta, Vertex’s CF superstar.

This is not just another drug; it’s a lifeline, a revenue juggernaut with 13 years of patent protection left.

While rivals scramble to find footholds in CF therapy, Vertex is already eyeing the next big thing: a once-daily treatment, promising more convenience than Trikafta’s twice-daily regimen.

In short, Vertex isn’t just leading the CF market; it's redefining it.

Vertex's ambition doesn't end with CF. The company is making bold strides in pain management with VX-548, a potential opioid alternative. This pill is a beacon of hope in a field littered with failed attempts at non-opioid pain solutions. The recent Phase 2 study results? Encouraging. The study revealed significant pain reduction in patients with chronic neuropathic pain.

But there's more. Vertex is also pioneering gene-editing therapies. Its latest triumph is Casgevy, developed with CRISPR Therapeutics (CRSP).

This treatment, a potential cure for sickle cell disease (SCD) and transfusion-dependent beta-thalassemia (TDT), recently received UK approval. It’s a complex treatment, not a simple pill. This complexity translates to both a high price and a shield against generic competition. With an initial target market of 32,000 patients, Vertex is looking at a potential goldmine.

Contrast this with the struggles of smaller gene-editing firms. Vertex stands out with its deep pockets and negotiation expertise. It's not just about developing groundbreaking therapies; it's about successfully bringing them to market. As it has shown over the years, Vertex’s prowess in this arena is unrivaled.

Of course, biotech is a realm of high risks and high rewards.

Vertex is no stranger to setbacks. Remember October 2020? The company saw its shares plummet by over 15% in a day after discontinuing a promising program. But it's the rebound that tells the story. Since then, Vertex’s shares have soared, making that drop a mere blip in its upward trajectory.

In the pantheon of biotech, Vertex Pharmaceuticals is a rare breed. It's a company that has not only conquered the CF domain but is also making significant inroads in pain management and gene editing. The financials are solid, the pipeline robust, and the market potential vast. Its collaboration with CRISPR Therapeutics on Casgevy is just one example of its strategic foresight.

So while the Magnificent Seven continue to dominate headlines, Vertex Pharmaceuticals emerges as a compelling, if quieter, story. It’s a narrative of a company not content with leading just one market but expanding its prowess into new, uncharted territories. I suggest you buy the dip.

December 14, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 14, 2023
Fiat Lux

Featured Trade:

(EDITING YOUR PORTFOLIO)

(CRSP), (VRTX), (BLUE), (BEAM), (CRBU), (EDIT), (NTLA), (PRME), (VERV), (LLY), (REGN)