Biotech Letter - John Thomas - Mad Hedge Fund Trader

French Benefits

I was having dinner with a former Sanofi (SNY) executive last month and he said something that’s been rattling around in my head ever since.

“You know, John,” he told me, swirling his glass, “the smartest thing we ever did was betting on Regeneron (REGN) back in ’07 when everyone thought the world was ending.”

He was talking about their partnership deal struck right in the middle of the financial crisis – November 2007, to be exact – when most companies were slashing budgets and laying off employees.

That handshake agreement has since produced not one but two blockbuster drugs worth tens of billions. Sometimes the best business decisions happen when everyone else is too panicked to think clearly.

Which brings me to why I’ve been quietly adding to my Regeneron position on these dips while everyone else is running for the exits.

The stock’s down 22.5% over the past six months, trading around $560, and frankly, that’s exactly when you want to be paying attention.

My Sanofi contact wasn’t just reminiscing about old times – he was dropping hints about something most Wall Street analysts are completely missing.

The current market fixation on Eylea’s revenue decline tells only half the story. Yes, their eye drug dropped to $1.04 billion in Q1, down 25.6% year-over-year, and the itepekimab trial failure has spooked investors.

But while everyone’s having a collective meltdown over these short-term hiccups, there’s a massive financial shift coming that could fundamentally change Regeneron’s profitability.

The real story revolves around something called the “development balance,” which sounds boring as watching grass grow but is actually financial dynamite.

Back when Regeneron partnered with Sanofi in 2007, the French company essentially gave them an interest-free loan to fund drug development. Regeneron has been paying back its 50% share from future profits ever since, like the world’s most expensive installment plan.

Think of it this way: imagine you and a friend start a restaurant together. Your friend puts up all the money upfront, but you have to pay back half from your share of the profits until the debt is cleared.

That’s exactly what’s happening here, except the restaurant is worth billions and the debt is almost gone.

As for that remaining balance? Just $1.453 billion according to the latest filings.

On top of these, current CFO Chris Fenimore expects it to be completely wiped out by the end of 2026.

What happens in 2027 is financial magic: Regeneron starts keeping its full share of collaboration profits without any deductions. Even if sales stayed flat, which they won’t, this represents a massive jump in free cash flow.

Their anti-inflammatory blockbuster Dupixent just generated 3.48 billion euros in sales, up 22.8% year-over-year.

That translates to $1.18 billion in collaboration revenue for Regeneron in Q1 alone, representing 30% growth. This isn’t some experimental shot in the dark – this is a proven cash machine that’s still accelerating.

But here’s where the math gets exciting, and why that Sanofi executive was grinning into his whiskey.

Right now, Regeneron only keeps a portion of Dupixent profits after servicing that development debt.

Once the $1.453 billion is cleared, they’ll be pocketing significantly more of every dollar Dupixent generates.

Industry projections suggest the drug could hit 29.3 billion euros by 2029, implying double-digit growth rates of 14% to 21% annually.

The pipeline story gets even better when you look at their oncology franchise.

Lynozyfic, their newly approved cancer treatment, showed 70% objective response rates in multiple myeloma, with 45% achieving complete responses.

Those are numbers that get oncologists excited at conferences. Meanwhile, their other cancer drug Libtayo continues growing despite fierce competition, pulling in $285 million quarterly.

What really sealed my conviction was examining the valuation metrics.

The company sports a non-GAAP P/E of just 12.36 times, which is 27.7% below the sector median and 22.9% under their five-year average.

They’re buying back stock aggressively too – $1.05 billion in Q1, up 64.7% year-over-year. Management only does that when they think shares are dirt cheap.

Plus, the average price target is $727.59, implying 31% upside. This company traded above $1,000 during COVID when they were basically a one-trick pony with their antibody treatment.

Today’s business is infinitely stronger, more diversified, and with clearer cash flow visibility.

The risk-reward equation here reminds me of other situations where temporary setbacks created long-term opportunities. Sure, Regeneron faces the usual biotech risks – trial failures, regulatory hurdles, competitive pressures.

But with their balance sheet strength, diversified revenue streams, and that pending financial liberation in 2027, they’re setting up for what could be a significant re-rating.

My Sanofi contact was right about timing. The best opportunities often come disguised as temporary setbacks, when short-term noise drowns out long-term value creation.

Those executives who shook hands in 2007 during a global financial meltdown probably never imagined they were creating a pharmaceutical empire.

But that’s exactly what happened, and based on the fundamentals I’m seeing, the best chapters of this story are still being written. I suggest you buy the dip.

July 29, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 29, 2025
Fiat Lux

Featured Trade:

(THE GENE EDITING TOLLBOOTH)

(VRTX)

The Gene Editing Tollbooth

Biotech Letter

Did you know that the first successful gene therapy was approved by the FDA just 33 years ago, back in 1990?

While most of us were arguing about whether compact discs would replace cassette tapes, some wild-eyed scientists were literally rewriting human DNA. Talk about thinking ahead.

Fast forward to today, and we’ve got Vertex Pharmaceuticals (VRTX) turning what seemed like pure fantasy into a $125 billion market cap reality.

Sometimes I wonder if those 1990 pioneers are sitting somewhere with a knowing smile, watching their “impossible” science create generational wealth.

Now, here’s the thing about Vertex that keeps me coming back like a moth to a particularly profitable flame.

This isn’t your garden-variety biotech gamble where you’re crossing your fingers and hoping some experimental drug doesn’t kill lab mice. No, sir, Vertex has built themselves what I like to call the “Warren Buffett Special” of pharmaceutical franchises with their cystic fibrosis treatments.

We’re talking about $2.77 billion in quarterly revenue as of Q1 2025, up 3% year-over-year, which might not sound like fireworks until you realize this cash machine has patent protection through 2037.

That’s the kind of predictable income stream that makes retirement planners weep with joy.

The company is guiding toward $11.85 to $12 billion for full-year 2025 revenue, representing about 8% growth at the midpoint.

Sure, 8% won’t get you invited to any Silicon Valley dinner parties, but when you’re dealing with life-or-death medications for a clearly defined patient population, steady and reliable beats flashy and unpredictable every single time.

It’s like owning a toll road, except instead of collecting quarters from commuters, you’re collecting billions from people who literally can’t live without your product.

But here’s where things get deliciously interesting, and why I think most investors are missing the real story.

While everyone’s busy calculating CF revenue growth rates, Vertex has been quietly assembling what could be the medical equivalent of the Manhattan Project. Their gene editing therapy, called Casgev, just posted some absolutely bonkers long-term data that honestly makes me question whether we’re witnessing the dawn of a new era in human health.

Get this: 95.6% of sickle cell disease patients were completely free from painful crises for at least 12 months after treatment.

Now, if you’ve never experienced or watched someone go through a sickle cell crisis, imagine the worst pain you’ve ever felt, multiply it by 10, and then imagine living with the constant fear that it could happen again any day.

These folks typically end up in emergency rooms multiple times per year, racking up medical bills faster than a teenager with a new credit card. Casgevy essentially takes that nightmare and erases it…potentially forever.

Here’s the part that makes my inner accountant both excited and slightly nauseous: the treatment costs over $2 million per patient. That’s right, two million with six zeros.

It sounds absolutely insane until you realize that the average sickle cell patient with recurrent crises costs the healthcare system about $67,000 annually.

Simple math tells us that’s roughly 30 years of medical expenses paid upfront for what appears to be a permanent cure.

Vertex expects about $85 million in gene therapy revenue for 2025, which sounds modest until you consider they’re essentially building the assembly line for the future of medicine.

Their CEO recently mentioned having about 90 patients who’ve started cell collection, with potentially 270 more in the pipeline. At $2 million a pop, even modest adoption rates start looking like serious money.

What really gets my blood pumping, though, is the pipeline behind the pipeline.

Their Type 1 diabetes therapy, zimislecel, showed that 10 out of 12 patients ditched their daily insulin shots entirely by month 12, with an average 92% reduction in insulin requirements.

Consider that there are roughly 1.25 million Americans with Type 1 diabetes, and suddenly, we’re not talking about niche markets anymore. We’re talking about potentially obsoleting an entire category of chronic disease management.

The company’s sitting pretty financially too, with strong cash reserves, minimal debt, and the kind of free cash flow that funds continued moonshots.

Their recent $4.9 billion acquisition of Alpine Immune Sciences shows they’re not content to rest on their CF laurels but are actively hunting for the next breakthrough.

But the real question isn’t whether Vertex can keep printing money from their existing franchise. It’s whether they can pull off the ultimate corporate transformation from a one-trick pony into a gene therapy juggernaut.

Given their track record of turning Nobel Prize-winning science into blockbuster businesses, combined with their financial firepower and expanding pipeline, I’d say the odds are pretty favorable. I suggest you buy the dip.

July 24, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 24, 2025
Fiat Lux

Featured Trade:

(THE PHARMA CATFISH THAT’S ACTUALLY A CATCH)

(BMY), (PFE), (BNTX)

The Pharma Catfish That’s Actually A Catch

Biotech Letter

You know that friend who always looks terrible in photos but somehow appears stunning in person? Bristol Myers Squibb (BMY) is basically the investment equivalent of that phenomenon.

On paper, this pharmaceutical giant looks like it’s heading for a cliff – literally called the “patent cliff” in industry parlance – but dig a little deeper and you’ll find a company that’s been playing an elaborate shell game with Wall Street analysts.

What most investors are overlooking in BMY’s situation is worth a second glance. Everyone’s fixated on the looming patent expirations, particularly the crown jewel Eliquis losing protection in 2026-2028.

But here’s the thing most folks don’t realize: BMY only keeps half of Eliquis revenue anyway thanks to their partnership with Pfizer (PFE).

So when that $13.3 billion revenue stream starts drying up, only about $6.9 billion actually hits BMY’s bottom line. The other half was never really theirs to begin with. It just flows straight to Pfizer like water through a sieve.

This is classic pharmaceutical accounting sleight of hand, and it explains why BMY’s stock has been treated like yesterday’s newspaper despite some genuinely encouraging fundamentals.

The market is pricing in the full Eliquis hit when the reality is considerably more manageable. It’s like worrying about losing a $100 bill when you’ve only got $50 at risk.

But the real story gets more interesting when you look at what’s been dragging down BMY’s earnings for years.

Those massive acquisition charges from the 2019 Celgene deal have been acting like a boat anchor on reported profits. We’re talking $8.9 to $9.6 billion annually in amortization expenses. That’s not small change, even for a company BMY’s size.

Starting this year, those charges are dropping to around $3.5 billion, essentially giving the company an earnings boost of about $2.60 per share without selling a single additional pill.

Think of it this way: if you bought a house and had to write off the purchase price over several years, your personal “earnings” would look terrible during that period, even if your actual cash flow was perfectly healthy.

That’s essentially what’s been happening to BMY, except instead of a house, they bought an entire pharmaceutical company and have been accounting for it in the most conservative way possible.

The cash flow story is where things get genuinely compelling, assuming you can stomach the inherent risks of pharmaceutical investing.

BMY is generating north of $13 billion in operating cash flow annually, and after covering dividends and capital expenditures, they’ve got over $6 billion in free cash flow to play with.

That’s real money that can fund acquisitions, buybacks, or debt reduction – exactly what you want to see when a company is navigating a patent cliff.

Speaking of acquisitions, BMY just inked a deal with BioNTech (BNTX) that could cost them over $11 billion if everything goes perfectly, but represents the kind of bet pharmaceutical companies need to make to stay relevant.

It’s expensive, risky, and exactly the type of move that separates the survivors from the casualties in this industry.

Now, before you start thinking this is some kind of sure thing, let me inject a healthy dose of reality.

Pharmaceutical investing is inherently speculative, regardless of how solid the financials look today. Drug development is expensive, time-consuming, and fails more often than it succeeds.

BMY’s pipeline includes promising candidates like Camzyos, Opdualag, and Cobenfy, but “promising” in pharma terms often translates to “expensive disappointment” in investor terms.

The company also faces ongoing legal challenges, including a nasty lawsuit related to their Celgene acquisition that could cost them billions if it goes badly.

Patent challenges, regulatory setbacks, and competitive pressures are constant threats that can torpedo even the most carefully laid plans.

Moreover, BMY is essentially betting their future on their ability to replace mature products with new blockbusters at precisely the right time. It’s like being a chef who needs to have the perfect soufflé ready just as the previous course is being cleared – technically possible, but requiring flawless execution when stakes are highest.

So while BMY trades at reasonable multiples and generates solid cash flow, remember that in pharmaceuticals, yesterday’s miracle drug becomes tomorrow’s generic commodity faster than you can say “patent expiration.”

The question is whether Bristol Myers is actually that rare friend who just takes terrible photos, or if what you see on paper is exactly what you get in real life.

Like any good photographer will tell you, sometimes you need to adjust your lens to see what’s really there.

If you’re already holding BMY, this might be the perfect time to take a fresh look and not at the same tired headlines everyone’s been circulating, but at the actual cash flow and improving earnings underneath all that accounting noise.

For those still browsing the portfolio, consider starting with a small position while you watch how their pipeline development plays out.

After all, in pharmaceuticals, one successful clinical trial can turn yesterday’s wallflower into tomorrow’s cover model faster than you can say “FDA approval.”

July 22, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 22, 2025
Fiat Lux

Featured Trade:

(WHEN HEALTHCARE’S HEAVYWEIGHT TAKES A HAYMAKER)
(UNH)

When Healthcare’s Heavyweight Takes A Haymaker

Biotech Letter

You’ve spent decades building a sensible portfolio, weathered the dot-com crash, survived 2008, and now you’re eyeing healthcare stocks like UnitedHealth (UNH) because, well, people always need healthcare, right?

Then suddenly this $300 billion giant hits a pothole so hard it rattles every healthcare investment from here to Boca Raton. Welcome to the new reality, where even the companies we thought were recession-proof are showing cracks.

Let me tell you what’s really happening here, because the financial press is dancing around the elephant in the Medicare examination room.

UnitedHealth just had what we investment veterans might recognize as a “come to Jesus” moment in Q1, missing every meaningful metric while pulling their full-year guidance faster than you’d cancel a timeshare presentation.

Their Medicare Advantage business, which covers 26 million Americans, is hemorrhaging money, and now the Justice Department is investigating their billing practices.

Now, if you’re thinking “this is just one company’s problem,” let me share something I learned watching Enron, WorldCom, and a dozen other “isolated incidents” over the years: when the biggest player in an industry starts sweating, everybody else catches a cold. And in healthcare, that cold can turn into pneumonia real quick.

Here’s what should worry anyone with healthcare exposure in their portfolio. Medicare Advantage isn’t some side business for UNH – it’s their crown jewel, covering the exact demographic that drives healthcare spending.

When they admit they can’t predict costs anymore, they’re essentially saying the whole reimbursement model is broken. Remember, these are the folks who decide whether your doctor’s recommended treatment gets covered or whether you’re fighting appeals for six months.

The numbers paint a picture any seasoned investor would recognize. Adjusted earnings missed by nine cents, revenue came in $2 billion light, and management basically threw up their hands and said “we don’t know what’s next.”

I’ve been investing long enough to know that when a company with a century of actuarial data can’t forecast their business, it’s time to pay attention.

What really caught my eye was the insider buying – over $30 million worth, including $25 million from the new CEO. Now, that’s either supreme confidence or the most expensive vote of confidence since Lee Iacocca bought Chrysler stock.

In my experience, when executives are putting their own money where their corporate mouth is, they usually know something the market doesn’t. The question is whether they’re right this time.

But here’s the part that should concern anyone approaching or in retirement: Dr. Mehmet Oz is now running Medicare, and the agency just announced more aggressive auditing of the entire Medicare Advantage program.

Translation? The days of easy approvals and generous reimbursements are ending. If you’re counting on Medicare Advantage for your healthcare coverage, or if you own stocks that depend on Medicare payments, this affects you directly.

The valuation story is equally telling. UNH is trading at 13.7 times forward earnings, down from its historical premium of over 20 times. That’s like seeing IBM (IBM) trade at startup multiples – something fundamental has shifted.

The market is essentially saying “we don’t trust this business model anymore,” and when the market loses faith in healthcare’s biggest player, it usually spreads to the smaller ones.

Let me connect this to something all of us interested in this sector should understand: drug pricing.

UNH’s Optum division is one of the largest pharmacy benefit managers in the country. When PBMs come under political pressure (and they are), drug pricing negotiations get nasty. That affects everything from your monthly prescriptions to the pharmaceutical stocks in your portfolio.

The political winds are shifting, too. Trump initially targeted PBMs before the Senate stepped in, but the fact that these reforms made it into legislation tells us this isn’t going away.

For those of us who remember when healthcare was a defensive investment, this is a wake-up call that even defensive sectors can become political footballs.

My advice after four decades of watching markets? Start thinking about healthcare investments like you would utilities in a deregulation cycle: the old rules don’t apply anymore.

Look for companies with diverse revenue streams, not just Medicare exposure. Pay attention to balance sheets, because if reimbursement gets squeezed, only the financially strong will survive.

Watch UNH’s July 29 earnings like you’d watch the Fed chairman’s testimony. If they can’t provide clarity on cost control, expect volatility across the entire healthcare sector.

And if they touch that dividend, something I doubt but can’t rule out, it’ll signal that even healthcare’s strongest players are circling the wagons.

The bottom line? This isn’t just about one company’s rough quarter. It’s about recognizing when the fundamentals of an entire investment thesis are shifting. Healthcare will always be essential – that hasn’t changed – but the way we deal with it might need some fine-tuning.

After all, in biotech and healthcare investing, it’s not about avoiding the doctor – it’s about making sure you’re seeing the right specialist.

July 17, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 17, 2025
Fiat Lux

Featured Trade:

(BIOTECH’S GRAY FOX)

(AMGN), (ABBV), (PFE), (REGN)

Biotech’s Gray Fox

Biotech Letter

Every investor has a stock they own, not for the adrenaline rush but for the steady hand it provides. Years ago, that meant a ladder of Treasuries and a bottle of Tums. Today, it might just be Amgen (AMGN).

You won’t find it trending on Reddit or being whispered about in hedge fund chatrooms. It’s not running on AI hype or meme magic.

Instead, what you will find is a dependable biotech veteran with a strong dividend, a rock-solid balance sheet, and a quietly impressive pipeline that’s starting to show some real muscle.

After a modest pullback, Amgen looks more attractive than it has in some time.

At first glance, it looks like a mature drugmaker doing what mature drugmakers do: collect royalty checks, keep the dividend stable, and try not to screw up.

But the story under the surface is getting more interesting. There’s real optionality here, and the market isn’t fully pricing it in.

And after a 12% dip from the highs, you’re getting paid to look closer.

Let’s start with Horizon Therapeutics. The acquisition caught some flak. Analysts grumbled about the price tag. Regulators kicked the tires.

But here we are, and Horizon’s drugs, Tepezza and Krystexxa, are settling in just fine.

Amgen didn’t buy hype. It bought cash flows. And given the early returns, it may have paid less than it looks.

Then there’s biosimilars. For years, they were treated like biotech’s version of knockoff handbags: low prestige, thin margins, more trouble than they’re worth. But Amgen saw the long game.

With Amjevita now in the US market gunning for Humira, it’s not about prestige, it’s about volume and execution. This has now stopped being a side hustle but a new and sustainable business line.

The pipeline, meanwhile, is quietly moving.

Tarlatamab for small cell lung cancer isn’t just a science experiment. It’s a T-cell engager with real data and serious upside. Olpasiran in cardiovascular disease? A potential blockbuster in the making.

These aren’t blue-sky R&D. These are real stuff with clear paths to approval. And it doesn’t hurt that Amgen knows how to get drugs through the FDA without a parade of surprises.

Now, put Amgen next to the usual suspects.

AbbVie (ABBV) still leans heavily on Skyrizi and Rinvoq to patch the Humira hole, and the market’s still waiting for proof.

Pfizer (PFE) is wandering through the COVID hangover, unsure of what it wants to be when it grows up.

Amgen, by contrast, is paying a 3.4% yield, raising that payout annually, and generating $11 billion in free cash flow. It’s not a turnaround story. It’s a continuation of competence.

And here’s the kicker. Despite all this, the stock has pulled back. Not because of a missed quarter or bad data, but because biotech fell out of favor.

No headlines. No blowups. Just a valuation gap waiting for someone to notice.

That kind of disconnect reminds me of a trade I made years ago in Regeneron (REGN). The market had written it off. Too mature, too slow, too quiet.

But under the surface, the pipeline was humming. Optionality was there – you just had to know where to look. That position ended up outperforming expectations by miles, not because I caught lightning in a bottle, but because the market mispriced quiet competence.

Amgen sits in that same zone today. It’s not a party stock. It doesn’t need to be. It’s the kind of name you own because you like getting paid while management does its job.

It’s not a moonshot, but it’s not priced like one either. And if even half of the pipeline delivers, this stock could quietly rerate before most people notice what changed.

If you believe that real value still matters in a market crowded with noise, Amgen is worth your time. It’s yielding, compounding, and positioning itself for another chapter of relevance. No gimmicks, no theatrics, just serious business in a space that rewards it.

And if that sounds too boring for some, well, they can keep chasing the next shiny thing. I’ll take a company that pays me to wait…especially when there’s something worth waiting for.

July 15, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 15, 2025
Fiat Lux

Featured Trade:

(THE BRITISH ARE COMING (BACK))

(GSK), (PFE), (GILD), (SGIOY), (SNY), (HLN)