Biotech Letter - John Thomas - Mad Hedge Fund Trader

A Discounted Phoenix Set to Rise

The rollercoaster ride that is the equity market never fails to excite, surprise, and occasionally bemuse us. There's an erratic heartbeat in how it functions - illogical at times, downright whimsical at others. The upshot? Sometimes, great companies find themselves in the bargain bin of Wall Street – perfect for investors who love a good discount.

This is where Bristol Myers Squibb (BMY) comes in.

In the rear-view mirror of the past year, Bristol Myers Squibb hasn't exactly been the star of the stock market show. Its financial pulse has been somewhat weak, with lethargic revenue growth and, at times, flatlining completely. A big part of this has been the loss of patent exclusivity on a once superstar medication last year, causing its top line to struggle.

Flash forward to BMY dropping its Q2 2023 financial report, and the question is whether the company met the Street's expectations. Well, not exactly.

Let's dive into the numbers. The Q2 2023 revenue was a hefty $11.23 billion, albeit a 0.97% dip from the previous quarter and a 5.6% drop year-over-year. Non-GAAP net earnings clocked in at $3.7 billion or $1.75 per share, a quarter less than my earlier prediction.

The culprit? A steeper decline in Revlimid's sales than expected. The blockbuster sales were $1,468 million, a sizable 41.3% YoY drop, thanks to generics flooding the market and lower net selling prices in Europe.

Cue the traders and investors giving a thumbs down to the financials, sending the stock price spiraling down by 4.2% in just two days.

Over half a year, BMY's share price shrank by a whopping 16%, even with a bunch of positive clinical trial results and a flurry of medicine approvals.

Meanwhile, the bigwigs of the global cardiovascular and oncology drug market, Johnson & Johnson (JNJ), GSK (GSK), and Merck (MRK), have been doing a victory lap.

Still, there’s a silver lining here.

Bristol Myers is currently strutting around with a forward price-to-earnings (P/E) ratio of just 8. If you stack that against the pharmaceutical industry's average of 15.3, our friend Bristol Myers looks appealing. This is especially true when you consider the company is far from down for the count and has quite a few tricks up its sleeve to stage a solid comeback.

Projected revenue for Bristol-Myers Squibb for Q3 2023 lands somewhere in the ballpark of $10.8 billion to $11.92 billion, which, sure, marks a 4.5% dip from Q2 expectations. But hold onto your hats because Bristol-Myers Squibb's revenue is projected to comfortably clear the bar and pull in a cool $11.35 billion.

The heroes of this victory? Groundbreaking drugs like Yervoy and Opdualag have become hotter than a two-dollar pistol in the medical world.

We're talking about a Q2 2023 sales total of $154 million for Opdualag alone, up a jaw-dropping 165.6% from Q2 2022. And let's not forget this medical marvel only debuted in March 2022 and has been selling like hotcakes thanks to its performance in clinical trials.

What's more, Bristol Myers Squibb has been as busy as a bee, adding nine innovative medicines to its repertoire over the last three years. These new kids on the block are set to step up to the plate and replace older, soon-to-be patent-less drugs. They're also expected to drive sales growth into the stratosphere for the foreseeable future.

Bristol Myers Squibb is expected to report continuous growth, thanks to its proven clinical trials and potential to expand its labels. The company is already rolling up its sleeves to test the safety and efficacy of Camzyos for conditions like non-obstructive hypertrophic cardiomyopathy and heart failure with preserved ejection fraction (HFpEF).

As we look towards the horizon of 2025, Bristol Myers forecasts an impressive revenue of $10 billion to $13 billion from its freshest batch of products. Considering it pulled in $2 billion last year from these drugs, that's not too shabby. But don't think it’s resting on its laurels. The company is already testing over 50 clinical compounds across a smorgasbord of trials.

Let's also pay attention to Bristol Myers' attractive dividend profile.

The company currently offers a yield of 3.5%, dwarfing the S&P 500's average of 1.5%. Plus, it has bumped its payouts by 43% over the last five years.

With a cash payout ratio of around 42%, there's much room for this trend to continue into the foreseeable future.

Despite recent stumbles on the revenue and stock value front, BMY is no slouch. Its unyielding character and unwavering commitment to ploughing funds into fresh offerings signal a robust comeback on the horizon.

So, in the immortal words of an old Wall Street sage, it’s time to "Buy low, sell high,” and BMY is looking like quite a bargain right now.

August 3, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
August 3, 2023
Fiat Lux

Featured Trade:

(A FUTURE-PROOF INVESTMENT)
(UNH), (CI), (HUM), (CNC)

A Future-Proof Investment

Biotech Letter

With a staggering market cap of $472 billion and a network reaching scores of policyholders, UnitedHealth Group (UNH) is an undisputed titan in the health insurance industry.

To put this into perspective, its competitors such as Cigna (CI), Humana (HUM), and Centene (CNC) have market caps of $86.42 billion, $56.64 billion, and $36.32 billion, respectively.

However, the past year witnessed a slight dip in UnitedHealth’s share price by 2%, which noticeably lags the broader market's return of 17%.

This raises a question: Is UnitedHealth’s investment appeal dwindling, or is it merely in a brief pause?

One can't discuss the health insurance sector without addressing the brewing storm of growth in its forecast. This sector is expected to welcome a turbocharged surge fuelled by an escalating burden of maladies and an expanding aging population worldwide.

The global landscape is witnessing a steep rise in various chronic afflictions - from cardiovascular and respiratory conditions to neurological disorders, cancer, musculoskeletal diseases, and diabetes. With the world population growing savvier about the financial cushioning health insurance provides, we're staring at a potential boom in this sector.

Take a gander at the numbers: The global health insurance industry was valued at a hefty USD 2.17 trillion in 2022.

Fast forward to 2032, and we're talking about a market swelling to an eye-watering USD 4.37 trillion. And with a projected CAGR of 7.3% from 2023 to 2032, we can safely say the health insurance express isn't slowing down anytime soon.

With this backdrop, let's dive into the compelling aspects of investing in UnitedHealth.

First, let's delve into the favorable aspects of investing in UnitedHealth. The core rationale is simple: healthcare is perennial. As long as human beings exist, healthcare will always be needed.

In the United States, individuals or their employers inevitably need to secure health insurance on a monthly basis. The constant evolution and improvement of healthcare services create a fertile ground for potentially substantial earnings in both the insurance and healthcare delivery sectors.

UnitedHealth, a veritable powerhouse, operates two key divisions - one specializing in health insurance and prescription coverage, and the other focused on healthcare provision. This dual-pronged approach has the potential to create sustained shareholder value.

Finding a flaw in this favorable proposition is challenging, particularly when examining the figures.

The company amassed an impressive $93 billion in revenue in the second quarter of 2023 alone, making it one of the world's largest corporations. It outperformed analysts' predictions of $91 billion, and the earnings per share of $6.14 surpassed Wall Street estimates of $5.99.

Although the company's medical care ratio did increase from 81.5% to 83.2% as expected, this was offset by a robust revenue growth that outpaced the rise in medical and operational costs.

UnitedHealth provides insurance to over 51 million individuals, with an addition of over a million new policyholders in 2023. UnitedHealth's scale allows it to keep costs low, forming a formidable entry barrier for new market contenders.

Moreover, its quarterly revenue experienced a notable 63% increase over the past five years, hinting at significant growth potential. This suggests that UnitedHealth's future growth prospects remain robust.

Straight from the company itself, UnitedHealth anticipates growing its earnings per share (EPS) between 13% and 16% annually. Moreover, the company has shown consistent dividend growth, with an annual increase of 10% since 2010.

This indicates a company that excels in operating its business model over time, suggesting potential stability and growth in both share price and dividends.

One key strategy of UnitedHealth is its diverse portfolio, developed over the years through strategic acquisitions like home health company LHC Group and analytics firm Change Healthcare. This diversity has allowed the company to maintain a growth rate exceeding 10% over the last five years.

UnitedHealth's most significant growth driver remains its premiums, but the company also saw an additional $2 billion in revenue from services and $1.2 billion from product sales last quarter.

Although it faces potential increases in medical costs, the company's diversified portfolio helps it maintain strong profit growth, with adjusted earnings per share rising 10% to $6.14 year-on-year.

Despite the overall positive outlook, it's worth noting that UnitedHealth's shares have decreased by about 4% this year. While the stock is trading at 23 times trailing earnings, slightly below the healthcare industry average of 25, the company's consistent growth could justify a higher valuation.

Overall, UnitedHealth remains a promising investment in the long run despite some short-term volatility, as it offers a blend of stability and growth. It may well be a stock worth considering for those looking for a long-term hold in the healthcare sector. I suggest you buy the dip.

August 1, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
August 1, 2023
Fiat Lux

Featured Trade:

(CHASING THE TRILLION-DOLLAR DREAM)
(LLY), (NVO), (AMGN), (PFE)

Chasing the Trillion-Dollar Dream

Biotech Letter

Mark my words. The healthcare sector is on the cusp of a seismic shift. By 2033, I expect to see the dawn of a trillion-dollar enterprise. Now, you might think I've lost my marbles, but hear me out.

The prime contender for this prestigious title? Eli Lilly (LLY).

Now, Lilly is comfortably lounging at a market cap of $425 billion, a massive figure, yes, but still less than half of our $1 trillion target. Lilly's stock would need to scale up by a staggering 135% to breach the trillion-dollar threshold.

Daunting, right?

But if you break it down to an annual growth rate over a 10-year span, we're looking at a relatively modest compound rate of around 8.9%. With Lilly's recent track record and brimming product pipeline, this growth trajectory doesn't seem so far-fetched.

A closer look at Lilly's pharmaceutical lineup reveals a host of innovative treatments. Lilly's recent contributions to diabetes care - Mounjaro, Jardiance, and Trulicity - represent significant strides.

Adding to the fray are Taltz, a cutting-edge psoriasis solution, and Verzenio, a life-saving breast cancer drug. A peek into Lilly's late-stage pipeline reveals potential blockbusters in the making, like lebrikizumab for atopic dermatitis, mirikizumab for immunology, and donanemab for the relentless battle against Alzheimer's.

Then, there's the $1.9 billion acquisition of Versanis Bio, positioning Lilly at the precipice of the weight-loss market.

Lilly stands out with its robust line-up in the race for weight loss solutions. Mounjaro, initially a diabetes drug, has demonstrated potential as a weight-loss aid in clinical trials, with participants on the highest dosage shedding up to 22.5% of their body weight over 72 weeks.

Yet, the sector is intensely competitive, with giants such as Novo Nordisk (NVO), Amgen (AMGN), and Pfizer (PFE) on the battlefield. While Lilly's recent acquisitions present strong prospects, forecasting revenue growth over the next decade remains an intricate puzzle.

Notably, weight-loss solutions form a crucial part of Lilly's growth plan and could contribute more than 60% of the company's annual revenue by the mid-2030s.

Meanwhile, Lilly is developing potential breakthroughs in Alzheimer's treatment, with donanemab showing promise in clinical trials. This treatment has a mechanism that targets amyloid plaque, often found in the brains of Alzheimer's patients.

If approved, sales could reach a projected $3.9 billion by 2027.

Despite these promising avenues, caution is warranted. Lilly's stock is trading at 51.75 times its forward-looking earnings estimates. While the prospects for Alzheimer's and weight management treatments show promise, their success is far from guaranteed.

Historically successful drugs like Humalog and Alimta have seen their sales decline by 25% and 83%, respectively, as they lose exclusivity and face competition from lower-cost alternatives.

A company's value is often tied to its latest blockbuster in the pharmaceutical sector. Patent protection typically lasts 25 years from the date of discovery, with about half this time spent on testing. This leaves a limited window for profitability.

Investing in Lilly or any other pharma stock based on earnings expectations over 50 times isn’t always a guaranteed win. The firm’s upcoming offerings could indeed be significant earners, but they must offset foreseeable losses from other areas.

For instance, Trulicity, Lilly's top-selling treatment, generated nearly $2 billion in sales during the first quarter of 2023. However, Trulicity's revenue may be cannibalized by Lilly's own Mounjaro, with looming patent expirations set to intensify the pressure from 2027.

With robust profit margins exceeding 20%, the ascent of Eli Lilly to a trillion-dollar valuation is not only a bold prediction but also a captivating journey to monitor.

While this forecast appears to be grounded in solid reasoning and well-articulated facts, the reality of this industry is inherently marked by uncertainty and continuous change. Without the caveat of patent expiration, Lilly would be an unequivocal strong buy.

But given this reality, investors might be wiser to monitor Lilly first, rather than rush into a commitment. I suggest patiently waiting and buying the dip.

lilly

July 27, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 27, 2023
Fiat Lux

Featured Trade:

(INVESTING IN NECESSITIES)
(KVUE), (JNJ), (HLN), (GSK), (KO)

Investing in Necessities

Biotech Letter

Everyone knows that Warren Buffett was schooled by the one and only Benjamin Graham. His game was easy-peasy early on — he hunted for dirt-cheap companies in relation to their assets, snagged them, and played the waiting game until the market woke up and realized their true worth. This was the good old 'cigar butt' investing.

It took Charlie Munger, Buffett's partner-in-crime, to shake things up. Munger nudged Buffett to eye high-quality companies with a thick competitive buffer that could weather long stretches of time.

Now with Johnson & Johnson's (JNJ) recent spinoff of Kenvue (KVUE), it seems the investment gods have dished up just the kind of opportunity Munger and Buffett would drool over.

JNJ is rolling out a red carpet, enticing its investors to trade their shares for most of its stake in Kenvue, the consumer division it made public in May.

If you're invested in JNJ, consider looking into this proposition. We're talking about a potential $35 billion transaction. Actually, JNJ is practically dangling a carrot, offering its holders $107 in Kenvue stock for every $100 in JNJ stock, capped, of course.

Basically, the JNJ deal lets holders swap all, some, or zip of their shares for Kenvue. It's a limited-time offer, expiring on August 18, with the price nailed down between August 14 to 16.

Interestingly, the Big Pharma company opted to play the game of 'voluntary exchange offer,' or 'split-off' in Wall Street jargon. A bit more elusive than your garden-variety spinoff, but trust me, it has its charm.

Why, you ask? This method tends to tighten the share count, beefing up the earnings per share.

And here's the sweetener: split-offs usually come with perks. The parent company tends to sprinkle a little discount magic for investors who decide to trade their old shares for the shiny new spinoff ones.

So, what could investors expect from Kenvue?

When it comes to its financial muscle, Kenvue's flexing a robust $20 billion in equity. The balance sheet displays a formidable $35 billion in assets squaring off against a $15 billion debt.

The first quarter has set the pace, projecting an annual revenue run rate of a cool $15.2 billion, and the operating cash flow isn't too shabby either, clocking in at $3.2 billion.

Kenvue's market valuation stands around 18 times its forecasted earnings for 2023, yielding a sweet 3.4%. That's a smidge more than J&J's yield of 2.8%.

Sure, Kenvue may not be sprinting in the high-growth lane — with earnings growth likely to pace in the mid-single digits post-2023 — but it holds a rock-solid portfolio of consumer health brands we've all grown to trust. Bonus? It trades at a discount compared to its closest peer, Haleon (HLN), GlaxoSmithKline’s (GSK) spinoff company.

Kenvue boasts a roster of brand-name products that people can't live without, and this constant demand spells nothing but growth. This spinoff is the proud holder of household names like Tylenol, Listerine, and Band-Aid.

In essence, Kenvue comes off as a Warren Buffett-type business that's up for grabs at a seemingly bargain price.

Consider for a moment why Buffett is so cozy with his long-standing stake in Coca-Cola (KO). Coke quenches the world's thirst with its myriad beverages, winning over brand loyalty and securing repeat purchases like it's a walk in the park.

My investment angle on Kenvue draws a parallel here, with a twist: Kenvue's products are absolute necessities, not just something you treat yourself to. That fact alone makes it even more appealing to me.

The company also disclosed a promising earnings range of $1.26 to $1.31 per share, with sales growth itching to hit a respectable 5%. The cherry on top? They're starting a quarterly dividend at 20 cents a share.

Now, you might be wary of growth prospects stagnating – let's face it, there's a limit to how many Band-Aids and Tylenol a household will need, right?

But here's where the plot thickens: the fine folks over at healthcare firm IQVIA (IQV) made quite the compelling argument that the over-the-counter drug market is expected to grow by a hearty 6.1% until 2025.

With a product lineup that's nothing short of a hit with consumers, a sturdy financial standing, and a rosy outlook for growth in the market it caters to, Kenvue is shaping up to be quite the catch for investors.

Of course, there are possible risks, such as a looming recession prompting even the most brand-loyal customers to opt for generic alternatives or management falling short on growth plans. That said, these potential drawbacks are dwarfed by the massive upsides of investing in Kenvue.

I think it's about time you give Kenvue some serious thought.

July 25, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 25, 2023
Fiat Lux

Featured Trade:

(THE NEXT INVESTMENT DARLING)
(VRTX), (CRSP)

The Next Investment Darling

Biotech Letter

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.

July 20, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 20, 2023
Fiat Lux

Featured Trade:

(INNOVATION GENIUS OR INVESTORS’ QUAGMIRE?)
(TDOC), (MSFT)