Mad Hedge Biotech and Healthcare Letter
July 25, 2023
Fiat Lux
Featured Trade:
(THE NEXT INVESTMENT DARLING)
(VRTX), (CRSP)
The pandemic stage lit a blazing spotlight on healthcare and biotech warriors like never before. Some biotech heroes, taking on the gauntlet of grave or lethal ailments, are still setting the market ablaze.
You see, the world's population isn't getting any younger, and diseases aren’t going away. These elements strap an ironclad defense around the healthcare sector - come hell or high water in the economy, the drumbeat of demand won't miss a beat.
One name in the biotechnology and healthcare sector that’s snubbing the bear market's growl with its groundbreaking panaceas is Vertex Pharmaceuticals (VRTX).
Widely considered an underdog in the sector, Vertex has been an overachiever for the past decade, running circles around the market. But guess what? The San Diego champ is also primed to repeat that glorious run over the next ten years.
Vertex has carved out its healthcare niche, nurturing a blossoming franchise in the world of cystic fibrosis treatments. The company's yearly sales are closing in on the dizzying heights of $10 billion.
While other Big Pharma names are staring down the barrel of a patent cliff later this decade, Vertex has shown that it’s playing the long game. Their cystic-fibrosis arsenal is locked and loaded till the mid-2030s at least, and they've got a robust pipeline of drugs chugging along nicely.
Specifically, its blockbuster drug Trikafta won't face the treacherous patent cliff until 2037. With its history of turning the complex task of developing CF therapies into child's play, Vertex has lorded over this territory for over a decade. Adding more feathers to its cap, Vertex is poised to bag fresh non-CF approvals, a move that will spice up its offerings and rev up its growth engine.
Not one to rest on its laurels, Vertex, along with Crispr Therapeutics (CRSP), is on the brink of clinching approval for a gene-editing treatment for red blood cell disorders such as sickle cell disease. The stage is set at this point, and the companies are patiently awaiting the green signal for exa-cel from Uncle Sam and our European friends across the pond.
Exa-cel, the brainchild of Vertex and CRISPR Therapeutics, is a game-changer in gene-editing therapy for rare blood diseases. But this ain't a one-trick pony. Vertex has more rabbits in the hat.
The company's brewing up a storm, geared towards hitting a home run by launching five new products within the next five years. Ambitious? You bet.
As Vertex's cystic fibrosis (CF) business continues to stride forward and the pipeline remains robust, a steady uptick in revenue and earnings is on the cards. The company stands tall, ready to deliver market-beating performances for some time to come.
Sure, the stock is inching closer to its 52-week zenith, but make no mistake - it's still a good catch, even at this high watermark.
Moreover, Vertex is far from being the wallflower at the party. The stock has leaped a whopping 25% this year, outpacing the respectable 18% gain of the S&P 500. The drug giant is the belle of the ball, sporting a market cap north of $90 billion.
Taking a cue from its CF monopoly, Vertex will kick things up a notch, potentially establishing a monopoly in the world of pain relief. The company should get its moment in the spotlight by year's end when clinical trial results for its ground-breaking non-narcotic drug for pain roll out.
Operating under the code-name VX-548, this trailblazer from Vertex intercepts pain signals in the peripheral nerves, outside the central nervous system. The modus operandi is somewhat akin to the topical drug lidocaine, but with a twist.
While lidocaine takes a toll on the heart when ingested, VX-548 sidesteps this issue, making it safe to pop as a pill. Plus, as it doesn't monkey around with the brain, it avoids the slippery slope of opioid addiction. Now, that's what I call a win-win.
Naysayers may voice doubts about the willingness of insurance companies to foot the bill for Vertex's high-priced, newfangled pain drug instead of sticking to the generic opioids or other neurological drugs usually prescribed.
But I don’t buy into the skepticism. There’s a huge possibility that the insurers will. The reason? The mounting political and public relations pressure will essentially force these organizations to back a non-opioid contender, given it can duke it out toe-to-toe in terms of effectiveness.
Given the market for this, VX-548 stands to amass a revenue jackpot of a whopping $5 billion by 2032.
Sure, the healthcare sector isn't going the way of the dodo anytime soon. But rest on your laurels, and you'll be yesterday's news. It's a dog-eat-dog world out there, and if healthcare companies don't stay ahead of the curve, they risk being left in the dust.
This is where Vertex shines as a leader and innovator in its corner of the healthcare world. Keep an eye on this stock. It has the potential to deliver some handsome returns over the next decade.
Mad Hedge Biotech and Healthcare Letter
July 20, 2023
Fiat Lux
Featured Trade:
(INNOVATION GENIUS OR INVESTORS’ QUAGMIRE?)
(TDOC), (MSFT)
Let's rewind to the inception of Teladoc (TDOC).
In the early 2000s, online medical appointments were as futuristic as a scene out of The Jetsons. Fast forward to today, and Teladoc's business model - a digital clinic where you see the doctor from your laptop - is as commonplace as ordering a latte from your phone.
In theory, it's a genius innovation - cut down the rigmarole of office visits, boost doctor efficiency, and slash overhead costs associated with physical appointments.
Unfortunately, the real world has been a tough nut to crack for Teladoc, with investors getting cold feet over the past few years.
Still, when the risk-averse tide returned in 2023 and investors started making a beeline for stocks that had taken a beating in 2022, Teladoc shareholders were also banking on a swift recovery from the lows.
Indeed, with a market shift towards greener pastures, the stock got a nearly 60% leg-up from its historical lows by early February. It looked like buyers were of the view that, despite some managerial slip-ups, the leader of the telehealth market seemed underpriced given its double-digit growth rates. The expectations also seemed tempered.
Then came another slap of reality with the quarterly reports.
Despite respectable Q4 figures, the outlook was nothing short of a letdown. After a 2022 slump in the telehealth market and Teladoc's 18% growth, one might have hoped for a more robust expansion within a burgeoning industry.
Instead, investors got a projection of lukewarm average increase of just 8.4%, GAAP profitability seemed like a distant dream, and even an EBITDA growth of 22% couldn't make the numbers shine.
The backlash was predictable. After Q1 numbers, the stock rallied before it stumbled again, nearing its all-time lows - even amidst a risk-on climate.
Diminishing growth, elusive profitability, mounting competition – Is this Teladoc's swan song, or can it claw back its glory?
Recent updates show that it seems like Teladoc is leaning on Microsoft (MSFT) for a lifeline.
The company declared an expanded alliance with Microsoft, aiming to harness the latter's state-of-the-art artificial intelligence (AI) technology. This uplifting news is a much-needed antidote for the digital health provider, whose recent journey had more in common with a bear market trudge than a bull run sprint.
The idea is for the telehealth company to basically plug in the Azure OpenAI Service, along with other Microsoft products, directly into its homegrown Teladoc Solo virtual care platform.
The endgame? Cut the red tape for overworked healthcare professionals by automating the grind of clinical documentation – applicable to virtual check-ups and in-person consultations.
That's not all. Teladoc is additionally introducing the "Nuance Dragon Ambient eXperience," or DAX, a sophisticated tool that effortlessly transforms patient-practitioner dialogues into comprehensive, specialty-specific clinical notes, all while sticking to the letter of documentation standards.
As expected, the stock enjoyed an initial sugar rush as investors toasted to the company's pivot towards AI.
For me, though, I have a more measured take on the announcement. While I recognize the positive thrust of the move, I can’t completely agree that this alliance is a game-changer. Let me share some of the reasons behind my reluctance.
In the first part of 2023, Teladoc reported a top-line revenue of $629 million, while carrying a net loss of $69 million. On the surface, the balance between the top and bottom lines seems skewed.
However, taking a step back, Teladoc took a considerable hit last year with a sizeable goodwill impairment charge. But spring 2023 brings a new twist, with an $8.1 million expense for restructuring.
Based on the 10-Q filing, these costs were tied to "kissing goodbye to excess leased office spaces." We might assume this is a one-off, and quite frankly, it's a move I admire for a company currently in the red.
But let’s flip the script a bit and talk about operating expenses.
While the company managed to cut back on Sales and Technology and Development, they seemed to have thrown caution to the wind, with General and Administrative costs up by 9% and Advertising and Marketing expenses skyrocketing by 32%.
I’m not talking about an occasional splurge here. The 2022 report shows a 50% annual increase in Advertising and Marketing costs. This figure is critical, as it gives us a peek into the company's customer acquisition costs. More money spent on marketing translates to longer customer retention needed to turn a profit.
To provide you with a sense, for every dollar Teladoc made in Q1 2023, 28 cents went to marketing, a noticeable bump from 24 cents per dollar in Q1 2022.
Now, Teladoc hints at some seasonality in their operations, with the first and last quarters typically reflecting weaker operating income as the pace of new customer acquisitions and revenue growth lags behind marketing expenses. But let's not let this divert our attention from the discrepancy between revenue growth and marketing costs.
As an investor, you'd obviously want to know how well the company is retaining its customers with these rising acquisition costs.
Here's the deal: Teladoc's customer churn rate isn't increasing, but it's not dropping either. As for the customer retention rates, the company’s executives describe the figures as "stable."
Notably, the company already casts a wide net, claiming that "over 80 million individuals in the U.S. have access to one or more of our products and services." If that's true, Teladoc already has its hooks in nearly a quarter of the U.S. population.
So, the million-dollar question for investors: If Teladoc can't turn a profit with this massive reach, then when will it?
In the digital healthcare universe, Teladoc once promised to be a shooting star. Yet, amidst stalled growth, daunting losses, and controversial investments, it appears more like a black hole absorbing investor optimism.
The recent alliance with Microsoft injects a ray of hope, aiming to automate and optimize operations through AI. But the questions remain: Is this the life-saving maneuver that rights Teladoc's trajectory, or just a brief flash in the pan?
As investors, we're left to wonder, in the dance of innovation and investment, will Teladoc waltz or wobble? Only time will play the music.
Mad Hedge Biotech and Healthcare Letter
July 18, 2023
Fiat Lux
Featured Trade:
(BIG PHARMA, BIGGER OPPORTUNITIES)
(AMGN), (HZNP), (BMY), (GILD), (PFE)
The irresistible charm of pharma companies often boils down to their potential pot of gold at the end of the rainbow: the groundbreaking drugs they're tirelessly laboring to introduce. But let's not be reckless.
As appetizing as these stocks may be, they carry a hefty price tag. Moreover, the road to drug development is fraught with unexpected potholes that can leave a nasty dent in the stock's value.
Alternatively, you could pivot to buying a cluster of the more affordable ones.
After all, embracing the tried-and-true philosophy of "a penny saved is a penny earned" can be a winning strategy across diverse sectors, and pharma stocks are no exception.
Here are some options you can explore.
Hovering at $222, Amgen (AMGN) carries a price-to-earnings ratio slightly shy of 12. The firm is grappling with the challenge of a potential few-billion-dollar-a-year dip in sales for some of its drugs while making ambitious strides to enhance its annual revenue of $27 billion.
So far, the most notable beacon of hope for Amgen is its experimental obesity treatments, AMG133 and AMG786, positioned in a market that has the potential to skyrocket beyond a whopping $30 billion annually.
Meanwhile, in a bold move, Amgen has proposed a $27 billion acquisition of Horizon Therapeutics (HZNP).
This strategic takeover could directly bolster Amgen's earnings per share (EPS) by more than $5, significantly enhancing the firm's current annual EPS of $18.
Amgen remains resilient despite facing hurdles from the Federal Trade Commission, which has launched legal proceedings to halt the transaction. The company is not just fixated on Horizon; it has the bandwidth to explore other potential acquisitions or augment its stock buyback program.
Another stock to consider is Bristol Myers Squibb (BMY). Priced at a humble $63, it’s trading at a modest valuation, barely touching eight times its earnings.
The market trembles at the potential stagnation—or worse, reduction—of its annual EPS, currently soaring just above $8. This anxiety is fuelled by the projected multi-billion dollar decline in sales for several drugs as the sands of time run out on their patents. These drugs, after all, form a substantial portion of this year's anticipated revenue of $46.6 billion.
However, it's not all gloom and doom. Bristol Myers Squibb has not one, not two, but a whopping eight new drugs jostling their way through clinical trials. One to keep an eye on is milvexian, a stroke prevention formula that shows immense promise.
These innovative concoctions could eventually inject a stunning $30 billion into the company's annual revenue stream, with the stock potentially reaching an ambitious price target of $85, projecting a handsome upside of 32%.
Gilead Sciences (GILD) is one more stock to take into consideration. Trading at an enticing 11 times earnings, it’s a steal at $76.
Yes, some of its products are on the downhill, but here's the game-changer: Trodelvy, an innovative cancer treatment.
Anticipated to triple revenues, this treatment’s sales is projected to surge from a humble $1 billion this year to a staggering $2.7 billion by 2028.
This suggests an upward trajectory for Gilead's sales, hurtling from just shy of $27 billion this year to well over $30 billion by 2028. The earnings per share (EPS) is poised to see an annual gain of about 6%, potentially reaching nearly $9 by then.
There’s also Pfizer (PFE), priced at a modest $36 and trading just shy of 11 times earnings.
As the dark cloud of Covid-19 gradually disperses, the pharmaceutical titan projects a significant contraction in its annual vaccine sales - halving it down to nearly $14 billion this year, contributing to the overall $67.8 billion income.
But don't be too hasty to dismiss Pfizer's prospects. Its innovation pipeline is teeming with promising solutions like its groundbreaking meningitis therapy. Moreover, it's poised to breathe fresh life into its vaccine division by fusing a flu and Covid vaccine.
Come 2026, the company anticipates its vaccines will arm over 130 million Americans, a notable surge from this year's 79 million recipients of the Covid vaccine alone.
You may find a less treacherous path by adopting a strategic approach of integrating more economically priced pharma stocks into your portfolio.
These stocks may grapple with dwindling sales from established drugs and the relentless onslaught of generic brands.
Nevertheless, they also harbor promising new entrants that, if successful, could spark a significant rally.
All things considered, the companies mentioned above are not mere “cheap” stocks but intriguing opportunities laced with robust potential. I suggest you take advantage of the dip.
Mad Hedge Biotech and Healthcare Letter
July 13, 2023
Fiat Lux
Featured Trade:
(A ROCKY ROAD TO REDEMPTION)
(BIIB), (ESALY)
In an era marked by dynamic biotech developments, Biogen (BIIB) had once emerged as an industry powerhouse, the fruitful labor of its innovative multiple sclerosis drugs catapulting revenues into the stratosphere.
Unfortunately, time revealed a looming issue as the company's marquee products confronted diminishing exclusivity: stagnation.
Confronted by the precipice of change, Biogen made a strategic pivot toward the complex world of Alzheimer's disease. In partnership with the Japanese pharmaceutical giant Eisai (ESALY), they trailblazed the development of Leqembi, a game-changer that recently bagged the much-coveted traditional approval from the U.S. Food and Drug Administration (FDA).
The stamp of approval from federal authorities signifies a significant advancement towards broadening the drug's reach. Earlier in the year, the Centers for Medicare and Medicaid Services pledged to shoulder a considerable portion of the cost of Leqembi, contingent on the FDA's full authorization.
This commitment brings relief to aging American beneficiaries of Medicare, lightening the load of the drug's yearly $26,500 bill.
Armed with the FDA's endorsement and CMS agreeing to shoulder most of the expenses, there is anticipation that thousands, if not tens of thousands, of Alzheimer's patients across the US will be prescribed either lecanamab or donanemab in the imminent years.
But a question remains: Will this approval be sufficient to invigorate BIIB, a stock that has languished in the doldrums for the past decade?
Leqembi has been projected to become a blockbuster in a few years, with its total sales expected to exceed $12 billion from 2023 to 2028. Although Biogen and Eisai will be splitting the profits, Leqembi's potential as a significant asset for Biogen cannot be overlooked.
The imperative to treat Alzheimer's disease is grave, considering the current 6 million Americans living with the condition, a figure which could potentially burgeon to 13 million by 2050.
Disturbingly, this affliction claims more elderly lives than breast and prostate cancer combined.
In relation to this, the worldwide Alzheimer's therapeutics market is estimated to record a compound annual growth rate of 16.2% stretching into 2030, when it is anticipated to hit a worth of around $15.6 billion.
Eisai had earlier projected that Leqembi's peak sales could rake in a lucrative $7.3 billion by 2030. Meanwhile, experts believe the figure would be closer to $13 billion.
So, why didn't Biogen's shares experience a bounce on the back of this news?
They actually dipped by 3.5% in the trading session, and overall, the stock has remained relatively stable this 2023.
The answer lies in what happened last autumn when Biogen saw a nearly 40% surge in a single day when it announced Leqembi's successful achievement of clinical trial objectives. Given the positive data, investors largely anticipated an approval, suggesting that this recent positive update was already baked into the stock price.
What then about the future revenues?
Considering that Biogen isn’t exactly launching an “everyday pill,” there might be issues to resolve first.
Before commencing the treatment, patients would require PET scans or lumbar punctures for a confirmed diagnosis. Following this, Leqembi is to be administered at infusion centers -- a process that could potentially face capacity issues. These factors imply that rolling out Leqembi and getting all potential patients on the treatment might be a gradual process.
Biogen also anticipates that this year, the costs associated with bringing Leqembi to the market will eclipse the revenue it generates. As such, this novel product poses a short-term challenge and will likely dampen growth in 2023.
Should you then put money in Biogen stocks?
Answering this query isn't straightforward as it hinges on your risk appetite. It's possible that hurdles such as infusion center inadequacies can be overcome -- Biogen's vast experience places them in a strong position to address these.
However, the crux of the matter revolves around whether the medical community and patients will embrace the treatment, a point of uncertainty and risk.
For the thrill-seeking investor who embraces unpredictability, Biogen could offer an appealing opportunity at the moment.
If their new drug, Leqembi, attains success, the long-term potential for the stock's rise is significant.
For the more reserved investor, though, waiting for clearer signs of acceptance from doctors and patients might be a safer play. As for me, I suggest waiting and buying the dip.
Mad Hedge Biotech and Healthcare Letter
July 11, 2023
Fiat Lux
Featured Trade:
(A CALCULATED GAMBLE)
(PFE), (CRBU), (AAPL), (NTLA), (CRSP)
There has been a lot of chin-wagging about whether we're on a collision course with a recession or on the upswing. I get it. It's as confusing as figuring out why Warren Buffet didn't invest in Apple (AAPL) sooner.
Still, there are stocks that, recession or not, will let you sleep like a baby. In the biotechnology and healthcare sector, Pfizer (PFE) stands out as one of those stocks. In bear markets, it fares well because, well, let's face it, health trumps wealth every time.
Now, you might look at Pfizer's recent earnings and think it's taken a bit of a tumble. No growth in revenue or EPS in the first quarter of 2023? That’s definitely worrisome. But hold your horses. Let's peel back the layers a bit to see the full picture.
Pfizer has been raking in the dough from its COVID-19 potions, especially its vaccine Comirnaty and therapy Paxlovid. With the COVID gold rush subsiding, the company reported a 29% dip in revenue in Q1, clocking in at $18.3 billion.
Remember, context is key. Strip out the COVID-19 products, and revenue has actually nudged up 5% YoY.
It’s the same story with the company's forecast.
Revenues are predicted to be between $67 billion and $71 billion, a drop of 29% to 33%. But subtract the COVID dollars and cents, and Pfizer's set to grow between 7% to 9%.
What's Pfizer doing with its COVID-19 windfall? It's not buying beachfront properties, that's for sure.
Instead, it has a staggering 101 programs in the pipeline, including 38 in phase 3 trials. This year, the company also had four new approvals, from new uses for Paxlovid and Prevnar 20 to a vaccine for older folks and a nasal spray for migraines.
But the market's jittery about the predicted revenue drop, causing the stock to tumble 21% this year. That just makes it a bargain.
Pfizer's trading at less than 8 times earnings makes it the frugal shopper's dream.
To sweeten the pot, Pfizer's upped its quarterly dividend by 2.5% to $0.41 a pop. That gives a yield of about 4%, twice the average of the S&P 500. More impressively, it's been doing this for 14 consecutive years.
However, Pfizer's not resting on its laurels.
Its latest move? A 7% stake in Caribou Biosciences (CRBU), a firm that's pushing the boundaries of gene-editing tech and cell therapies for cancer. It's like investing in a tech startup but with a biological twist.
Caribou's stock has taken a wild ride since it went public in 2021, peaking at over $30 and dipping to a recent low of $4. After Pfizer's buy-in, it jumped 46% to $5.94. A small stake of $25 million, but it's a clear sign that gene editing is back in the spotlight.
Moreover, Caribou's no one-trick pony.
It's testing treatments based on the Nobel Prize-winning CRISPR technology. This precision tool allows doctors to zero in on problematic DNA and tweak it. The potential for treatments for cancer and genetic disorders is mind-boggling.
Caribou currently has a pair of potential game-changers simmering in the preliminary stages.
First up is their experimental treatment, CB-010, aiming a direct hit at blood cancer lymphoma. This therapy manipulates immune cells to lock onto the cancer.
Picture them as bounty hunters of the body, genetically tweaked to bring down the cancerous bad guys.
To date, we've got a trio of these CAR-T therapies courtesy of other pharmaceutical giants in the game, but they all work on modifying the patient's immune cells. Unfortunately, not every patient’s cells are ripe for the CAR-T transformation.
This is where Caribou switches things up.
The biotech’s CAR-T therapy is akin to a supermarket for immune cells – off-the-shelf and ready for action. Through some nifty gene editing, immune cells from healthy volunteers are modified and packed for delivery.
In theory, these should pack more punch. And it seems they do, judging by Caribou's initial guinea pigs – six lymphoma patients who saw their cancer vanish without a trace after a rendezvous with Caribou's CAR-T.
Obviously, they’re not promising an everlasting disappearance, but a couple of these folks kept their cancer at bay for at least a year.
While Caribou isn't alone in the off-the-shelf CAR-T quest, they've put up a stellar performance so far against the likes of Intellia Therapeutics (NTLA) and CRISPR Therapeutics (CRSP).
Caribou’s pipeline also features another off-the-shelf CAR-T contender battling the blood disorder known as multiple myeloma. This therapy, dubbed CB-011, is what specifically caught Pfizer's eye. Basically, Pfizer’s investment has earned it the right to haggle for a license if another suitor comes courting for Caribou's star player.
But Caribou's act doesn't end here.
It has a growing ensemble featuring CB-012, a CAR-T cell therapy focused on recurrent or stubborn acute myeloid leukemia, and CB-020, another CAR-T variant for various stubborn tumors.
Pre-Pfizer deal, Caribou boasted a cash reservoir of $291 million, promising smooth sailing until around 2025.
Caribou promises an action-packed second half of 2023, with an update on CB-010's phase 1 trial safety and efficacy, a dose-escalation report for CB-011's phase 1 trial, and a new drug application for CB-012 targeting relapsed/refractory acute myeloid myeloma.
As with all biotechs in the clinical stage, though, it's a bit of a gamble. With some key milestones expected later this year, investors are watching with bated breath to see if the company can deliver.
If the dice roll the right way, Caribou could be a jackpot for Pfizer – and for savvy investors.
So if you're looking for a stock that has the potential to thrive despite market uncertainties, with a dash of excitement and a sprinkle of future possibilities, Pfizer could be your ticket.
Not only is it a reliable dividend payer, but its recent ventures show it's also not afraid to swing for the fences.
