Mad Hedge Biotech and Healthcare Letter
June 15, 2023
Fiat Lux
Featured Trade:
(A WINNING GAME PLAN)
(PFE)
Ever tuned into "The Price is Right?" That's not just a television game show entertaining millions across the nation. It's also an unwritten rule in the world of investment.
Buying at the right price sets the average apart from the pros; it's the secret sauce that tips the scales in favor of handsome returns.
Bargain hunting in the stock market is not unlike fishing in a lake brimming with opportunities. Yet, not every catch is worthy.
Some are just slippery eels, deceiving with their alluring glow. But once in a while, you reel in the big ones, the blue whales of opportunities.
In the biotechnology and healthcare world, only a handful of names offer promising opportunities cloaked in bargain price tags, waiting to be embraced for the long haul.
One of them is Pfizer (PFE).
The past year was a blockbuster for Pfizer, all thanks to its sizzling COVID-19 vaccine that not just saved lives but also sent its sales soaring to an enviable $100 billion.
Yet, ironically, investors seem to be catching a cold, given the bearish sentiment surrounding Pfizer lately.
Pfizer’s stock has experienced a bruising blow, slumping by roughly 25% since 2023 started. The stock is precariously hovering around its 52-week low, with its low price-to-earnings multiple under 8, mirroring the market's deep skepticism.
At almost 11.7 times forward earnings, the valuation sits comfortably below the towering S&P 500, the robust healthcare sector, and the buzzing pharmaceutical industry.
So, what's putting the brakes on Pfizer's race?
The pharmaceutical behemoth is grappling with dwindling revenues and profits courtesy of diminishing COVID-19 sales. Patent expiration is another boogeyman looming on the horizon.
Pfizer's top hitters, namely Eliquis, Ibrance, Vyndaqel, Xeljanz, and Xtandi, are on the cusp of losing their patent shield. But Pfizer isn't sitting idle, staring at the cliff.
The company is all set to face this challenge, with acquisitions headlining its battle strategy. Over the past years, Pfizer has added multiple feathers to its cap, including Biohaven Pharmaceuticals, Arena Pharmaceuticals, Global Blood Therapeutics, ReViral, and, most recently, the $43 billion acquisition of biotech Seagen.
Pfizer's eyes are firmly on the oncology prize, and its calculated acquisitions could set it up for a long-term growth trajectory, mitigating the impact of the COVID slump and the upcoming patent crisis.
While 2023 might look bleak for Pfizer's COVID-19 vaccine, Comirnaty, the company is hopeful for a sunny spell in 2025 with the proposed launch of its combo COVID-flu vaccine. In addition, its COVID-19 antiviral therapy, Paxlovid, is expected to make a strong comeback next year.
Admittedly, the patent expiry of key products is a concern, but Pfizer's new product launches up to mid-2024 are predicted to compensate for these losses, promising robust annual revenues by 2030.
The business deals in the pipeline are also projected to bring in an additional $25 billion in annual revenue by 2030.
On top of these, Pfizer's financial health is hardy, thanks to a couple of years of potent free cash flow. As of April 2, it boasted a hefty $20 billion in cash and short-term investments. The financial muscle ensures Pfizer can continue its acquisition spree if needed.
More importantly, Pfizer continues to shower its shareholders with an enticing dividend yield of over 4.1%.
As Pfizer forges ahead on its quest for growth and diversification, now might be the perfect time to hitch a ride, particularly considering its bargain price and a sizeable safety margin for investors.
Pfizer is a hidden gem in the current landscape, with its undervalued shares and a strategy bolstered by a series of strategic acquisitions.
As the acquisitions simmer down, expect a redirection of investment returns towards shareholders, potentially lifting the stock's sentiment and price. Meanwhile, the solid dividend growth will keep investors anchored in a fluctuating FED environment.
Overall, Pfizer presents a captivating prospect for long-term investors looking to reel in the big fish. I suggest you take advantage of the dip.
Mad Hedge Biotech and Healthcare Letter
June 13, 2023
Fiat Lux
Featured Trade:
(BUCKING THE TREND)
(VRTX), (ABBV), (CRSP)
The notion of "Sell in May and go away" hasn't exactly proven true this year in 2023. Surprisingly, the stock market has been experiencing an impressive upward trend, especially in June, and there may still be further potential for growth.
Allow me to share one of my favorite examples that embody both profitability and consistent expansion, all while enjoying a significant competitive edge.
In the biotechnology and healthcare sector, Vertex Pharmaceuticals (VRTX 1.94%) fits the description perfectly.
This company stands out as the undisputed leader in the market for cystic fibrosis treatments, offering a unique portfolio of drugs that specifically target the underlying cause of this genetic condition.
These groundbreaking medications, known as CFTR modulators, have successfully been introduced to the market, with Vertex Pharmaceuticals spearheading the way by bringing forth four of them.
Vertex has been continuously making remarkable progress in the field of cystic fibrosis (CF) treatment.
A notable achievement is the expanded approval of their drug, Kalydeco, by the U.S. Food and Drug Administration. It can now be used to treat CF patients as young as one-month-old, marking a groundbreaking milestone as the first CFTR modulator ever approved for this age group.
Kalydeco has also been a significant revenue generator for Vertex, ranking as their second highest-earning drug with an impressive $553 million generated over 12 months.
But there's more to Vertex's success.
Their flagship medication, Trikafta, takes the lead as their best-selling drug, raking in a staggering $7.7 billion in revenue in 2022 alone.
Recently, Trikafta received approval to treat children as young as two years old with specific mutations, providing relief to nearly 1,000 more individuals in the cystic fibrosis patient community.
The long-lasting patent protection of Trikafta, with approximately 14 years remaining before expiration, holds great significance for Vertex Pharmaceuticals. With a relatively modest patient population of 88,000, the company has ample opportunities for further growth.
The robust revenue and profits of Vertex's CF franchise speak to their success in this area. Additionally, AbbVie's (ABBV) decision to discontinue its CF program further solidifies Vertex's monopoly in the cystic fibrosis field, strengthening its position for continued success.
While capitalizing on the expanding market for cystic fibrosis treatments, Vertex Pharmaceuticals also targets underserved areas to drive long-term growth.
One promising drug candidate in their pipeline is VX-548, a non-opioid medication designed to address acute pain conditions, which is nearing commercialization.
Moreover, Vertex has a highly promising candidate in its pipeline that goes beyond cystic fibrosis.
Collaborating with CRISPR Therapeutics (CRSP), the company eagerly awaits regulatory approvals for exa-cel, an innovative treatment for sickle cell disease and transfusion-dependent beta-thalassemia, in both the United States and Europe.
Exa-cel represents just the tip of the iceberg when it comes to Vertex's upcoming arsenal of new drugs.
The company holds great optimism for VX-548, a cutting-edge non-opioid therapy targeting acute pain, as well as its triple-drug combination for cystic fibrosis, which features vanzacaftor.
Both treatments are undergoing Phase III trials, with expectations for completion in late 2023 or early 2024.
Additionally, Vertex is conducting a pivotal trial for inaxaplin, a potential treatment for APOL1-mediated kidney disease that impacts a larger patient population than cystic fibrosis.
Needless to say, Vertex has been experiencing an exceptional streak, consistently outperforming the market over the past year. The best part is that its potential to generate significant returns extends well into the next decade.
While Vertex possesses a variety of potential approvals for treating cystic fibrosis, some of which may materialize before 2028, its CF-related revenue is expected to grow substantially even without factoring in those additional approvals.
Analysts anticipate a solid annual increase of 8.2% in the company's overall revenue over the next five years. Although this growth rate is commendable for a biotech industry heavyweight, it falls short of Vertex's impressive 38% annual growth achieved in the previous five years.
From my perspective, the projected 8.2% growth appears rather conservative.
This sentiment is particularly amplified when considering the imminent potential approval of exa-cel, an innovative gene-editing therapy targeting sickle cell disease (SCD) and beta-thalassemia (TDT).
After all, the initial market value of exa-cel could soar to a staggering $64 billion, and given the life-altering impact it offers, a price tag of approximately $2 million per treatment is justifiable.
Honestly, I'm hard-pressed to find anything negative to say about Vertex. This prominent biotech company is constantly delivering positive news and making significant strides on all fronts. I recommend you buy the dip.
Mad Hedge Biotech and Healthcare Letter
June 8, 2023
Fiat Lux
Featured Trade:
(THE AI INFUSION)
(MDT), (NVDA), (GEHC), (LLY)
Curious about the true potential of AI to drive earnings growth in the healthcare industry?
Let me paint you a picture of how AI's transformative power is set to revolutionize medical products and services. Imagine cutting-edge devices that can detect diseases at their earliest stages, leading to increased adoption by healthcare facilities.
And what does that mean for the companies behind these remarkable tools? More revenue, of course.
It is no surprise that experts predict exponential growth for AI in the healthcare market. This sector is projected to skyrocket at a compound annual growth rate of 47%, reaching a staggering $100 billion by 2030.
One company that has embraced this inevitable shift is Medtronic (MDT), a leading player in the medical device industry.
With a robust portfolio of innovative products, Medtronic has witnessed steady revenue growth over the years.
In fact, in its most recent fiscal year, the company invested a whopping $2.7 billion, equivalent to 8.6% of its sales, in research and development (R&D) to fund over 200 clinical trials. These trials cover a wide range of medical conditions, from diabetes management to a host of other ailments.
Thanks to its extensive product lineup, this Ireland-based medical device giant impacts the lives of approximately 76 million patients annually.
In recent times, however, Medtronic has faced a significant challenge: a lack of substantial growth. Hence, the company has taken decisive measures to address this issue by streamlining its operations and making strategic acquisitions to unlock future revenue potential.
This is undoubtedly encouraging news. But there's an additional factor that has everyone buzzing with excitement these days: artificial intelligence (AI).
Thus far, Medtronic has successfully implemented AI across its diverse platforms, revolutionizing how it caters to patients, from delivering precise insulin dosages to individuals using their continuous glucose monitoring systems to refining the outcomes of intricate spinal surgeries.
The company's endeavors in the field of AI have even garnered accolades.
Actually, Medtronic's groundbreaking AccuRhythm AI algorithm technology recently secured the prestigious "best new monitoring solution" award from MedTech Breakthrough. This remarkable innovation significantly enhances the quality of data derived from cardiac monitors, benefiting individuals with abnormal heart rhythms.
Moreover, Medtronic recently forged a partnership with NVIDIA (NVDA).
This collaboration aims to enhance the capabilities of Medtronic's GI Genius endoscopy tool, which already employs AI to detect pre-cancerous tissue.
By enabling third-party developers to train and test AI models that could eventually be integrated into the GI Genius, this strategic alliance holds immense potential for future advancements in the field.
Recognizing the transformative impact of AI, Medtronic envisions it as a pivotal element in the future of healthcare. The company considers AI to be the linchpin of personalized medicine, and this belief holds considerable merit.
Evidently, AI's remarkable capacity to predict and anticipate medical issues or outcomes on an individualized basis aligns seamlessly with the very essence of personalized medicine.
Naturally, Medtronic isn't the sole player in this groundbreaking realm of investment.
Take, for instance, GE Healthcare (GEHC), which recently obtained approval for its revolutionary deep-learning technology aimed at enhancing PET/CT scan images. Major pharmaceutical giants like Eli Lilly (LLY) have also joined forces with AI technology companies to expedite their drug-discovery endeavors.
When you consider the extensive integration of AI within Medtronic's operations, though, the company emerges as a frontrunner in this field. Its AI initiatives have already contributed to notable growth in specific sectors.
Just look at its gastrointestinal (GI) business, which experienced a remarkable 16% increase in the latest quarter, thanks to the strong adoption of the innovative GI Genius technology. Additionally, Medtronic's neuroscience division, encompassing its spine surgery products, witnessed a respectable 6% growth.
This success story doesn't end there.
With its recent dividend increase marking the 46th consecutive year of such a move, Medtronic is on the verge of achieving Dividend King status.
What's even more enticing is the current valuation of Medtronic's stock, trading at a modest 16 times forward-earnings estimates. This presents a compelling opportunity for investors, considering the company's significant advantages.
For one, even if overall growth may not be skyrocketing at the moment, Medtronic continues to generate impressive billion-dollar earnings. On top of that, and perhaps most intriguingly, Medtronic has positioned itself at the forefront of a potentially game-changing new market.
Taking all of this into account, there has never been a better time to consider investing in Medtronic. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
June 6, 2023
Fiat Lux
Featured Trade:
(SCRUBBING AWAY DOUBTS)
(STE), (JNJ), (MMM), (BAX), (BSX)
Warren Buffett has showcased his value-based financial philosophy through his notable investment in Wrigley's gum.
This strategic move allowed him to secure a consistent and dependable cash flow by acquiring a company that produces an evergreen product with high demand and straightforward production processes. It's a testament to Buffett's ability to identify enduring value in the market.
Similarly, in the healthcare sector, there are notable names that align with this philosophy.
Take Steris (STE), a Dublin-based company specializing in sterilization. In the world of healthcare, nothing can replace the importance of a pristine operating room, and Steris plays a critical role in ensuring the cleanliness and safety of these environments.
While our personal use of disinfectant products might have changed over the years, hospitals remain hyper-vigilant in their disinfection protocols.
Steris is a trusted provider, as hospitals understand the significance of maintaining sterile conditions to combat antibiotic-resistant superbugs and ensure successful surgeries. The company's focus on sterilization and related products positions it as a preferred choice among healthcare providers.
Some argue that Steris stock is on the pricier side, trading at 22.3 times 12-month forward earnings compared to the S&P 500 index's 18.3 times. However, the value it offers makes the price reasonable.
As hospital procedures return to pre-Covid levels and supply chains normalize, Steris stands to benefit significantly. Additionally, a substantial portion of its revenue comes from recurring sources, as hospitals consistently require sterilization chemicals and disinfectants.
Despite being a stable company, Steris has recently taken investors on a thrilling rollercoaster ride.
In February, its stock faced a setback when it lowered its full-year revenue guidance. However, the drop was mainly due to ongoing supply-chain challenges, not internal issues or client withdrawal.
The company's resilience became evident in mid-May when Steris delivered impressive fiscal fourth-quarter results. Surpassing expectations both in terms of top- and bottom-line figures, it also provided a conservative yet appealing forecast for fiscal 2024.
Interestingly, despite these positive developments, the stock has dipped around 5% since the May earnings surge. Meanwhile, for fiscal 2024, Steris is projected to achieve earnings per share of $8.66, representing over a 5% year-over-year increase, with revenue expected to climb by more than 7% to $5.33 billion.
These figures would set new record highs for the company, which has consistently achieved double-digit compound annual growth rates over the past five years.
One contributing factor to Steris' success is its ability to maintain stable pricing.
Unlike other healthcare companies that experience negative pricing trends, Steris has the advantage of commanding higher prices due to the unique nature of its sterilization services, which aren't typically targeted for cost-cutting measures.
In fact, Steris has already increased prices by 3.3% in the previous quarter to keep pace with inflation.
Furthermore, Steris' recent acquisition of Cantel Medical has significantly bolstered its operations in the dental industry.
With Cantel's valuable assets, Steris has expanded its expertise in a growing market fueled by technological advancements.
Notably, the company boasts an impressive number of patents, totaling over 2,346 in 2022, highlighting its commitment to innovation.
Although it’s not as exciting as other segments, fierce competition unfolds among industry giants vying for prominence in this vital sector.
Think of the juggernauts like 3M (MMM), Baxter International (BAX), and Boston Scientific (BSX), each flexing their innovative muscles to claim a larger slice of this healthcare pie.
Curiously, despite being the largest player in the U.S. medical sterilization and services market, Steris maintains a modest market capitalization of only $20 billion. This is considerably smaller than healthcare giants like Johnson & Johnson (JNJ).
This aspect, combined with the possibility of being a takeover target, albeit not currently under discussion, serves as additional support for the stock.
Overall, Steris has found a stable position in the market by establishing itself as a provider of essential cleaning products in hospitals and research labs.
Once these relationships are established, Steris continues to generate sales through ongoing demand for its trusted solutions. In times of market volatility, Steris is a reliable investment, offering a safe haven for investors navigating uncertain waters.
Just as Warren Buffett sought enduring value in his investments, Steris represents a company with a strong foundation in a critical sector. If you also want a slice of the pie, I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
June 1, 2023
Fiat Lux
Featured Trade:
(A PRESCRIPTION FOR LONG-TERM GROWTH)
(JNJ), (LLY), (NVO), (AZN), (KVUE)
If you share Warren Buffett's investment philosophy of favoring enduring companies that deliver long-term performance and passive income to investors, then you'll find yourself drawn to a compelling opportunity that aligns with his principles.
Now, an opportunity presents itself for fans of Buffett's approach.
Johnson & Johnson (JNJ), a favorite of Buffett's, has recently experienced a decline of approximately 13.38% in its share price since the start of 2023, performing noticeably worse than its primary competitors in the healthcare sector, including Eli Lilly (LLY), Novo Nordisk (NVO), and AstraZeneca (AZN).
However, despite this short-term setback, the long-term outlook for Johnson & Johnson remains exceedingly promising.
Actually, J&J has reached a significant turning point as it undertakes a transformative step. The renowned pharmaceutical giant is embarking on a spin-off of its consumer health business into a distinct entity known as Kenvue (KVUE).
While consumer health products like Tylenol painkillers and Band-Aid bandages have become familiar household names, they represent a relatively small portion of J&J's revenue compared to its pharmaceuticals and medtech divisions.
By separating the consumer health business, J&J can strategically focus on bolstering its revenue growth. This move allows the company to prioritize its pharmaceuticals and medtech segments, which have shown robust performance and hold greater potential for expansion.
Consumer health, while essential in everyday life, has experienced slower growth compared to the other two sectors.
In the pharmaceutical arena, J&J boasts an impressive pipeline with over 100 candidates in development.
With the combined strength of its existing blockbusters and promising new products, J&J anticipates a substantial surge in pharmaceutical revenue.
The company aims to elevate its pharmaceutical revenue from the current $52 billion to approximately $60 billion in the coming years, demonstrating a proactive approach to driving growth.
Simultaneously, J&J is actively pursuing opportunities to enhance its medtech division. It recently completed the acquisition of Abiomed, a specialist in heart pumps.
This strategic move now positions J&J with 12 robust medtech platforms, each generating annual sales exceeding $1 billion. Such acquisitions signify J&J's commitment to expanding its medtech portfolio and staying at the forefront of innovation in this vital sector.
Evidently, J&J's decision to spin off its consumer health business into Kenvue reflects a well-informed strategy to optimize revenue growth. With a renewed focus on pharmaceuticals and medtech, supported by a robust pipeline, blockbuster products, and strategic acquisitions, J&J is poised to propel its business to new heights in the evolving healthcare landscape.
Moreover, investors will undoubtedly appreciate Johnson & Johnson (J&J) for its remarkable status as a Dividend King, marking an uninterrupted streak of more than 50 years of dividend increases.
With the stock experiencing an 11% decline this year, a prime opportunity arises to seize passive income and capitalize on the promising growth potential that lies ahead.
Overall, J&J exhibits unwavering financial stability, consistently generating revenue, profits, and free cash flow. This financial resilience is a crucial determinant for sustainable dividend increases over the long term.
Furthermore, the company's impressive AAA rating stands as a testament to its robust balance sheet, reinforcing its ability to weather potential economic downturns, even if the forecasted recession materializes before year-end.
While J&J has faced legal battles in recent years concerning opioids and talc-based baby powder, these challenges will ultimately run their course. The company has proven its resilience time and again, triumphing over adversities throughout its extensive history.
As a Dividend King, the pharmaceutical giant is currently celebrating its 60th consecutive year of dividend increases—a rare accomplishment in the corporate landscape. Presently, the company's dividend yield of 3.03% surpasses that of the S&P 500 at 1.66%.
Although the cash payout ratio of 73% may seem substantial, J&J possesses the necessary tools to sustain its long-standing approach of gradual and steady dividend growth. Investors can find solace in the security of J&J’s payouts, allowing for a good night's sleep as they navigate the markets.
