Biotech Letter Archives

A Century-Old Contender

For 127 years, the Dow Jones Industrial Average has been a reliable indicator of Wall Street's health. As of late, with the Dow Jones pulling back from its 2023 high, it hints at some of its components being undervalued. To the discerning investor, this presents a compelling investment opportunity.

One company that stands out in this landscape is the healthcare behemoth, Johnson & Johnson (JNJ). Its P/E ratio, at a decade-low of 15, underscores its investment appeal. This becomes particularly significant given that, historically, this number hasn't dipped this low in the past ten years.

A primary concern for potential investors might be the litigation shadowing J&J regarding its now-discontinued talcum-based baby powder.

The company's stock has faced increased scrutiny, with close to 100,000 lawsuits alleging a link between the product and cancer. While J&J has attempted court settlements, bankruptcy judges have halted these efforts twice. This ongoing legal tussle has indeed infused a certain level of unpredictability into the stock's future trajectory.

However, regarding financial stability, J&J's financials are robust.

The company enjoys the highest credit rating (AAA) from Standard & Poor's, an S&P Global division. This accolade reflects immense trust in J&J’s ability to manage its debt efficiently.

One of the pillars of J&J's consistent performance over the last 35 years has been its gradual shift in revenue focus. The company has been directing an increasing share of its net sales towards pharmaceuticals.

These products not only have higher margins but also promise quicker growth than medical devices. But it's worth noting that as the global populace grows older and healthcare accessibility improves, J&J's medical devices still hold significant revenue potential.

The healthcare sector is witnessing a paradigm shift with the incorporation of artificial intelligence (AI). An area where this amalgamation is showing promise is drug discovery.

Johnson & Johnson subsidiary Janssen discovered that AI could make drug discovery 250 times more efficient. In the world of medical research, where vast data sets need meticulous scrutiny, AI's ability to predict potential high-performing compounds can revolutionize the drug approval process.

Traditionally, getting a drug approved can take years and drain resources, sometimes to the tune of nine figures. An optimized drug development process is not just an operational win but a significant cost-saving.

For J&J, this AI-driven efficiency aligns perfectly with its strategic direction. After the recent spin-off of its consumer health business, the company is doubling down on growth initiatives.

While J&J is grappling with the expiration of exclusivity rights for some of its flagship drugs, it has set ambitious targets. By 2025, the pharmaceutical giant aims to generate over $60 billion in sales, a considerable leap from the $52.6 billion revenue of 2022.

Leadership at J&J has also played a role in its long-standing market success. Since its founding in 1886, the company has seen only eight CEOs. This continuity ensures that long-term growth strategies are not only devised but also effectively executed.

Another critical aspect to consider is the inherent defensive nature of the healthcare sector.

Even during economic downturns or stock market volatility, the demand for medical devices, prescription drugs, and healthcare services remains consistent. Being essential services, their consumption isn't optional. This gives J&J an edge as it ensures a predictable cash flow.

While the market is teeming with dividend stocks, few match the reliability of Johnson & Johnson. The company’s consistent performance over 61 years, despite numerous challenges, including recessions, global pandemics, and drastic shifts in the healthcare landscape, stands as a testament to its resilience.

Johnson & Johnson has a rich history and a vast product portfolio spanning areas like oncology, immunology, and infectious diseases. However, past performance doesn't seal the future. What gives J&J its edge is its continuous innovation and its ability to meet the ever-evolving healthcare demands.

With global demographics skewing older and advancements in medicine increasing life expectancy, the demand for healthcare is only going to grow. Companies like J&J, with their extensive product range, are well-positioned to explore these growth avenues.

So, while J&J has its set of challenges, especially legal ones, they're unlikely to impede its long-term growth trajectory. For investors eyeing a blend of stability and growth in an otherwise unpredictable market, Johnson & Johnson stands out as a prime candidate.

October 24, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 24, 2023
Fiat Lux

Featured Trade:

(INNOVATION OVER EXPIRATION)

(ABBV), (ALPMY), (PFE), (BAX)

Innovation Over Expiration

Biotech Letter

In the current investment landscape, with the nearly 5% annualized yield from the 10-year U.S. Treasury bond casting a formidable shadow, making a case for investing in stocks might seem like an uphill battle. Especially so when one considers the sluggish performance of several stocks over the past two years, excluding those in niches like artificial intelligence and weight loss.

Yet, history teaches us a vital lesson: high-quality dividend stocks, especially in the biotech sector, tend to outpace most other asset classes in the long run. While the broader market has seen fluctuations and shifts towards safer options like CDs, dividend magnates in the biotech space, like AbbVie (ABBV), command attention for value and income investors.

Ever since its spin-off from Abbott Laboratories in 2013, AbbVie has carved a niche for itself. The sheer numbers are a testament to this: an eye-catching 270% growth in its dividend payouts over the last decade.

This performance positions it with a current yield of 3.99%, making it one of the most attractive propositions within the biopharma dividend landscape.

Further sweetening the pot is its moderate cash payout ratio of 42%, indicating a strong potential for more generous dividend increases in the foreseeable future.

Still, as with any investment, it's paramount to factor in the challenges ahead. AbbVie's journey with Humira, the anti-inflammatory drug, serves as a case in point.

Commanding a price tag of $50,000 annually, Humira wasn't just another drug in the market; it was a pharmaceutical marvel that earned the accolade of being the highest-grossing drug in history. But the winds of change are inevitable.

AbbVie's U.S. patent protection for Humira has expired, signaling an era where the company has to look beyond this blockbuster drug for its revenue streams.

The spotlight now is on Skyrizi and Rinvoq, AbbVie's next-gen immunology therapies. These drugs have shown commendable performance since their introduction to the market. However, the looming question is whether they can step into Humira's colossal shoes.

While some analysts remain skeptical about Skyrizi and Rinvoq matching up to Humira's performance benchmarks before 2030, AbbVie's internal projections are more bullish, eyeing a turnaround by 2025.

But amidst these contrasting forecasts, there's a silver lining that both skeptics and optimists agree upon: buoyed by its robust cash flows, AbbVie is expected to sustain, if not enhance, its dividends for at least the next decade.

Pivoting slightly and shining a light on its innovative pursuits, AbbVie unveiled promising results for Rinvoq in a mid-stage trial for vitiligo treatment.

For the uninitiated, vitiligo is a condition where individuals experience a loss of skin pigment, affecting varied parts of the body. The potential market for vitiligo treatments is substantial, with current valuations at $410.5 million, projected to burgeon to $625.8 million by 2031.

The increasing number of vitiligo cases globally plays a significant role in this growth trajectory. To put things in perspective, the Global Vitiligo Foundation in 2021 estimated that nearly 70 million people worldwide are affected by this condition, with a sizable fraction being children.

Navigating this emerging and competitive landscape is no small feat. Powerhouses like Astellas Pharma (ALPMY), Pfizer (PFE), and Baxter (BAX) are just a few of the giants that dot this arena. Every move by AbbVie, especially its endeavors with Rinvoq, is more than just corporate strategy; it's a tango in a fiercely competitive ballroom.

Now, coming full circle to the heart of the matter: What does this all mean for an investor with a keen eye on biotech dividends? AbbVie's journey is both a testament to its past prowess and an indicative nod to its future trajectory. While Humira's glory days might be seeing a horizon, the dawn of Skyrizi and Rinvoq offers a fresh chapter filled with both risks and rewards.

For those already holding AbbVie stocks, the prudent strategy might be a blend of patience and perseverance, enjoying the dividends while staying attuned to the market's pulse. Investments, after all, are as much about the art of patience as they are about the science of numbers. Today's challenges could well be the stepping stones to tomorrow's successes. I suggest you wait for a better entry point and buy the dip.

October 19, 2023

Biotech Letter

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

Featured Trade:

(THE UNSUNG HERO OF PHARMA DISTRIBUTION)

(MCK), (CI), (UNH), (PFE), (MRK), (LLY), (NVO), (CAH), (COR)

The Unsung Hero Of Pharma Distribution

Biotech Letter

McKesson (MCK) is the silent behemoth of the U.S. corporate world that's likely slipped under your radar. As the ninth-largest U.S. company by revenue, it doesn’t grab the headlines like some of its pharmaceutical peers. However, with a robust 22% stock gain this year alone, investors might want to sharpen their focus on this quiet achiever.

Now, you might mistake McKesson for a pharmacy benefit manager like Cigna Group's (CI) Express Scripts or UnitedHealth Group’s (UNH) OptumRx. But it doesn't stand shoulder-to-shoulder with pharmaceutical giants such as Pfizer (PFE) or Merck (MRK). Instead, its pivotal role ensures that prescription medications, consumed by a large fraction of Americans, reach their intended destinations.

Their operational model cuts through the noise: acquire medications from manufacturers and deliver them seamlessly to pharmacies. This spans local establishments and major national chains, including stalwarts like Walmart (WMT) and CVS Health (CVS).

Distributing medications is intricate. Not any logistics company can step up to the plate. These drugs, strictly governed by regulations, demand precision in handling and transit. Specific conditions are mandatory to retain their efficacy and, ultimately, their trust with consumers.

Newcomers in the pharmaceutical space, such as Ely Lilly’s (LLY) Mounjaro and Novo Nordisk’s (NVO) Ozempic, are set to further accelerate McKesson's growth trajectory. McKesson's operations, in tandem with Cardinal Health (CAH) and Cencora (COR)—the former AmerisourceBergen—underscore the dominance of this trio in the industry.

Given their consistent performance and notable market share, there's no mistaking their leadership. From an investor's lens, their well-established distribution networks translate to attractive returns.

The narrative enveloping McKesson has matured, particularly in the wake of the pandemic. Pre-COVID-19, the air was thick with concerns – potential drug price regulations, whispers about executive remuneration, and the ever-looming shadow of opioid liabilities.

In recent history, McKesson navigated tumultuous waters. They confronted their role in the opioid saga, culminating in a staggering $7.4 billion settlement spanning two decades. Such a settlement, rooted in claims of McKesson's hand in opioid distribution, marked a challenging chapter in the company's journey. But, like all resilient entities, they emerged with lessons and a sharper focus.

Refocusing on its core competency in drug distribution, the future projections for McKesson radiate optimism. Sales are on track for a 10% rise by fiscal 2024, aiming for the $304 billion mark. On the earnings front, a hike of 4.8% is forecasted, reaching $27.20 a share, followed by a notable ascent to 13.4% in fiscal 2025 – a jump to $30.84 a share.

While profit margins have hovered around the 4.8% range over half a decade, the company's cash flow paints a promising picture. With a robust $5 billion cash flow from the previous fiscal year, the announcement of a $6 billion share repurchase plan indicates a stronger, more liquid financial position.

McKesson’s journey, past and present, casts it as a promising investment, both for its operational prowess and its strategic repurchase blueprint. Examining its financial statements reveals a commendable reduction in net debt over the past triennium.

When McKesson is pitted against the likes of Cardinal and Cencora, optimism for its prospects feels natural. Projections indicate a growth rate between 12-14% in the years on the horizon, potentially crowning it as an industry vanguard. Valued at 15.6 times forward earnings, even if it inches above its five-year mean, the stock's appeal remains intact. Given its robust growth metrics, the stock seems a potential bargain, especially when juxtaposed with fellow S&P 500 members.

And there's more in the mix. With McKesson poised to ride the wave of prescription surges, particularly from premium medications like Ozempic, Wegovy, and Mounjaro, revenue streams seem destined for an upward course. A sentiment echoed by industry comrades, Cardinal and Cencora.

To encapsulate, in the expansive tableau of the pharmaceutical sector, where innovation meets timely delivery, McKesson etches its mark. As the healthcare matrix continues its evolution, especially in a world reshaped by a pandemic, the resilience and growth story of McKesson becomes hard to sidestep for the discerning investor. It's high time investors pivot their gaze towards this under-the-radar giant, poised for more milestones.

October 17, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 17, 2023
Fiat Lux

Featured Trade:

(AN EXCELLENT BLUEPRINT FOR SUCCESS)

(AMGN), (ABBV), (BMY)

An Excellent Blueprint For Success

Biotech Letter

Dividends, the consistent source of passive income, have long anchored many investment portfolios. For stock market investors, particularly those with an eye on the biotechnology and healthcare sector, dividends offer both stability and potential growth.

However, the landscape of dividends is not without its pitfalls. A significant concern for investors is when a company decides to cut or suspend these payouts. So, how can one navigate this challenge? The key is to pinpoint corporations that not only offer dividends but are also poised for sustained growth.

This brings us to a prime example: Amgen (AMGN).

Amgen, in recent times, has grappled with challenges that are not uncommon in the pharmaceutical world. The competitive landscape has chipped away at the market share of some of its flagship drugs, leading to a stagnation in revenue growth.

New therapies, like the asthma treatment Tezspire, have received approval but have yet to be the sales catalysts the company might have hoped for. However, it's crucial to understand that in the pharmaceutical industry, stagnation is not a death sentence but a call to innovate and adapt.

Recognizing the need for strategic growth, Amgen unveiled its plans to acquire Horizon Therapeutics for $28.3 billion in cash.

Horizon, specializing in rare autoimmune diseases, offers a rich pipeline of over 20 programs and an array of approved products. This move is not just an expansion; it's a strategic enhancement of Amgen's portfolio.

After some initial regulatory challenges, the acquisition was sealed on October 6, 2023, at $116.50 per share in cash, amounting to an equity value of $27.8 billion.

Now, let's delve into the numbers. Horizon reported a revenue of $3.6 billion for the year ending June 30, 2023, and an operating income of $513 million. When we juxtapose these figures against Amgen's performance, projections suggest that Horizon could amplify Amgen's annual revenue by a notable 12% to 14%.

As of October 9, 2023, Amgen's equity value stood at approximately $143 billion, translating to an equity value to an annual revenue ratio of 5.3x. In comparison, Horizon's ratio is 7.9x.

For the discerning investor, these figures hint at Amgen's belief in Horizon's potential to be a significant revenue generator.

But Amgen's story doesn't end with Horizon. The company's resilience is evident in its global strategies.

The inclusion of Repatha on China’s National Reimbursement Drug List as of January 1, 2022, bore fruit, with sales jumping from $388 million in the first quarter of this year to $424 million by the second quarter.

Even drugs like Enbrel and XGEVA, which faced concerns about increased competition, have shown promising sales trajectories. By the second quarter of 2023, Amgen's total product sales touched $6,683 million, a 14% leap from the previous quarter.

With a global footprint and encouraging data for drugs like Tarlatamab and LUMAKRAS, Amgen's revenue projections of $26.6 billion to $27.4 billion for 2023 seem well within reach.

Diversification is another feather in Amgen's cap. Beyond acquisitions, the company is nurturing a robust pipeline with numerous programs in development.

Venturing into the biosimilar market, Amgen is crafting alternatives to blockbuster drugs to compete with the more expensive options offered by the likes of Bristol Myers Squibb (BMY) and AbbVie (ABBV). In an era where affordable healthcare is not just a demand but a necessity, this strategy could further cement Amgen's position in the market.

In the intricate world of biotech investing, adaptability is the rhythm, and forward-thinking is the step. Challenges, while inevitable, are also opportunities in disguise. Strategic decisions, exemplified by Amgen's acquisition of Horizon, can chart the path for sustained growth.

For investors, the numbers are compelling. A dividend growth of 61% over five years, a competitive yield of 3.26%, and a forward P/E ratio of 14.3 paint a picture of stability and promise.

Ultimately, Amgen's journey in the biotech sector underscores the significance of adaptability, innovation, and strategic growth. In an industry marked by rapid changes and high stakes, the company emerges as a symbol of resilience.

For investors with an eye on biotechnology and healthcare, Amgen offers not just dividends but a vision of sustained growth and stability, making it an investment worth considering. I suggest you buy the dip.

October 12, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 12, 2023
Fiat Lux

Featured Trade:

(BARKING UP THE RIGHT STOCK)
(ZTS), (MRK)

Barking Up The Right Stock

Biotech Letter

When I search for investment opportunities, it's rare for an old article to capture my attention. Yet, an article from The Wall Street Journal in January titled "Americans Can't Stop Pampering Their Pets - Companies Want In" has lingered in my thoughts. While the sentiment of treating pets as family isn't new, the financial implications of this trend are profound.

The global animal healthcare market, a sector once overlooked, has now burgeoned into a significant investment avenue. Recent data reveals the global animal healthcare market size was worth $40.21 billion in 2022.

Astoundingly, it's projected to soar to $84.98 billion by 2030, growing at a CAGR of 9.81%. This growth isn't just a fluke; it's propelled by rising animal health expenditure, increasing prevalence of diseases in animals, concerns over zoonoses, and strategic initiatives by industry giants.

A case in point: In January 2023, Merck (MRK) inaugurated a state-of-the-art manufacturing facility in Boxmeer, Netherlands, specifically for companion animal vaccines, responding to surging global demand.

But what's driving this demand? The answer lies in our plates and our living rooms.

On one hand, there's a rising global appetite for animal protein. While plant-based diets are gaining traction, the majority still lean towards animal-derived sources like eggs, meat, and milk. On the other hand, the human-animal bond has never been stronger, especially with pets. This bond translates to a willingness to spend on their well-being, ensuring they receive the best care possible.

Enter companies like Zoetis Inc. (ZTS). As the world's premier provider of animal medicines, vaccines, and diagnostic products, Zoetis stands at the forefront of this booming market.

With an impressive portfolio boasting over 300 product lines, including 15 blockbuster drugs, Zoetis has strategically positioned itself in two pivotal markets: companion animals (our beloved cats and dogs) and livestock (primarily cattle). Their dominance isn't just regional; they lead in North America, Latin America, and Asia.

To provide a snapshot of their market prowess, Zoetis recently highlighted that pet expenditure remains unaffected even in economic downturns, where household budgets shrink by 20%.

This resilience proves the anti-cyclical nature of the animal health sector, especially the companion animal segment. Concurrently, the livestock market is set to flourish, driven by a global population surge.

By 2050, with 2 billion more mouths to feed, the demand for healthcare products for livestock will inevitably skyrocket.

Notably, Zoetis isn't just riding the wave; they're steering it. Their growth strategy is clear: sustain a 3-point premium over market growth in the long term. This ambition is backed by a robust product portfolio, continuous innovation, and a keen understanding of market dynamics. Their focus isn't just on current market leaders like parasiticides but also on potential future heavyweights in areas like atopic dermatitis, cardiovascular diseases, chronic kidney diseases, and oncology.

So, what does this mean for investors?

Zoetis' financial trajectory is promising. Their revenue forecast for this year stands between $8.575 billion and $8.725 billion, marking a 6% to 8% rise.

Their earnings per share is also set to climb, with projections between $5.03 and $5.14, up from $4.49 in 2022.

Moreover, their consistent dividend hikes, with a recent 15% increase to $0.38, signal a company that's not only growing but also rewarding its shareholders.

Overall, with its blend of resilience and growth, the animal healthcare market presents a compelling investment opportunity. Zoetis, with their strategic vision, robust product portfolio, and financial strength, is poised to lead this sector. For investors eyeing long-term growth coupled with stability, adding this company to your portfolio is undoubtedly a prudent move. I recommend you buy the dip.

October 10, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 10, 2023
Fiat Lux

Featured Trade:

(FROM MEMORY LAPSES TO MARKET LEAPS)

(BIIB), (ESAIY), (SAGE)