Mad Hedge Biotech and Healthcare Letter
May 30, 2023
Fiat Lux
Featured Trade:
(A MONSTER STOCK ON THE RISE)
(VRTX), (MRNA), (ABBV), (CRSP)
Biotech companies possess an extraordinary power: the ability to soar to great heights with just a handful of successful drugs.
An excellent example of this phenomenon is the remarkable ascent of Moderna (MRNA), a visionary biotech firm that catapulted from a $4 billion valuation to an astounding $52 billion.
The secret behind its meteoric rise? The resounding triumph of its coronavirus vaccine not only sparked hope in the hearts of millions but also propelled its stock price to a staggering 100% surge over the past three years.
But it's not just about a momentary triumph. Some biotech geniuses focus on concocting life-altering remedies for tricky-to-tackle diseases, which demand regular treatment for the long haul.
This is where Vertex Pharmaceuticals (VRTX) truly shines.
Vertex, the biopharmaceutical juggernaut born in 1989, has orchestrated a stunning 636% surge in annual revenue over the past decade. While maintaining such an astronomical growth trajectory might prove challenging, the company’s formidable pipeline harbors the potential to fuel its rise for yet another decade.
The shining star of Vertex’s portfolio these days is none other than Trikafta, a groundbreaking medicine combatting the relentless foe known as cystic fibrosis (CF).
This blockbuster drug singlehandedly generated $7.6 billion in revenue in 2022, constituting the lion's share of the company's overall product revenue, amounting to $8.9 billion.
In fact, in the first quarter of 2023, Trikafta contributed an astounding $2.1 billion to Vertex's $2.3 billion total product revenue.
At present, Vertex's revenue stream flows exclusively from CF medications, with the company projected to rake in $9.5 billion to $9.7 billion for the entire year from these products alone.
Here's another fun fact that further cement Vertex’s dominance in the CF world: other contenders in the cystic fibrosis domain have stumbled and faltered, leaving the landscape desolate with scarce rivals.
AbbVie (ABBV) has thrown in the towel, abandoning its CF program altogether. It's no wonder Vertex's triumphant creation is now in higher demand, hailed as a proven champion in the ring of battle.
However, Vertex is no stranger to the importance of diversifying its revenue streams.
While the company has a standout product, it recognizes the risks of relying solely on its success. That's why Vertex is boldly venturing into various other programs.
Teaming up with CRISPR Therapeutics (CRISP), it recently wrapped up the regulatory submissions for exa-cel, an innovative gene therapy designed to combat both beta-thalassemia and sickle cell disease.
The potential approval of exa-cel could catapult Vertex into a whole new realm of breakthrough treatments.
But that's not all.
Vertex's pipeline boasts a promising therapy called inaxaplin, currently in pivotal studies, which targets APOL1-mediated kidney disease—a condition affecting more patients globally than CF. Furthermore, the company's early-stage clinical testing program holds the potential to cure type 1 diabetes. Vertex also has its sights set on tackling type 1 diabetes, harnessing the power of CRISPR's cutting-edge gene-editing technology known as CRISPR-Cas9.
Evidently, Vertex has aggressively invested in new ways to expand its portfolio. Its first-quarter report showed that the company allocated a staggering $742 million in research and development.
This substantial investment underscores Vertex’s determination to continue launching groundbreaking therapies worldwide.
Vertex also has significant milestones on the horizon, including the completion of a late-stage study for its vanzacaftor triple-drug therapy targeting cystic fibrosis (CF) by the end of 2023.
Additionally, late-stage testing for VX-548, a potential acute pain treatment, is expected to conclude later this year or early 2024.
Although it may take time for these therapies to reach the market, even with positive results, it’s reasonable to believe that their future regulatory approvals seem to be slam-dunks.
Moreover, both therapies hold tremendous revenue potential for Vertex. The vanzacaftor triple-drug therapy has the potential to become the company's most profitable CF treatment, while VX-548 could serve as a blockbuster non-opioid painkiller.
To add to its strengths, Vertex enjoys a strong balance sheet with a substantial cash stockpile of $11.5 billion as of last March. I fully expect Vertex to leverage this financial strength for strategic business development deals and stock buybacks.
With a strong balance sheet, ongoing drug development efforts, and the potential to become a frontrunner in the biotech industry, I believe that Vertex has the potential to become a monster stock over the next decade.
Mad Hedge Biotech and Healthcare Letter
May 25, 2023
Fiat Lux
Featured Trade:
(SLOW AND STEADY GROWTH IN HEALTHCARE)
(ABT), (MDT)
In 2017, Abbott Laboratories (ABT) emerged as one of the prime examples of quality deserving a price.
Back then, Abbott was demonstrating solid organic growth, achieving success with new product approvals, and reaping the rewards of strategic acquisitions.
The company excelled at capital allocation and managed a diverse range of operations, successfully avoiding the conglomerate discount.
During that period, Abbott was also engaged in reshuffling its portfolio. It had recently completed the acquisition of Alere, shortly after sealing the deal for St. Jude Medical, a cardiovascular device manufacturer, in a substantial $30 billion transaction. These moves were partially offset by smaller divestments.
With the impact of the St. Jude deal evident in the 2017 results, Abbott was on track to achieve $28 billion in sales.
The medical device segment, bolstered by the St. Jude Medical acquisition, led the way with $10 billion in revenue.
Additionally, Abbott boasted a $7 billion nutrition business, a $5 billion diagnostics business, and a nearly equal-sized pharmaceutical business, forming a comprehensive and robust enterprise.
In 2022 alone, Abbott raked in $43.7 billion in sales, reaping a net income of $6.9 billion. The company's product offerings span an array of diagnostic tests, surgical tools, medical nutrition products, and even medical devices like glucose monitors.
With consistent demand for these essential goods year after year, Abbott has witnessed slow but steady growth as the healthcare sector expands. Over the past decade, its annual free cash flow (FCF) has averaged a commendable 11.5% growth, culminating in a remarkable $7.8 billion in FCF for 2022.
Now, Abbott is turning its sights into something else.
The company, eager to outpace its rivals in the leadless pacemaker race, is aiming for a groundbreaking achievement: FDA approval for a dual-chamber version of its innovative technology.
While Medtronic (MDT) took the lead in 2016, Abbott is now surging ahead and recently submitted its trial results to the FDA for approval.
Unlike traditional pacemakers, Abbott’s miniaturized leadless versions are implanted directly into the heart, emitting electrical pulses to maintain a steady rhythm.
Abbott's Aveir DR system, smaller than a AAA battery, is placed using a minimally invasive, catheter-based procedure.
What makes Abbott's technology truly unique is its dual-chamber approach. While existing leadless pacemakers are single-chambered, Abbott's Aveir DR system utilizes two pacemakers implanted in the right ventricle and right atrium. These pacemakers work harmoniously through Abbott's wireless implant-to-implant (i2i) technology, delivering synchronized stimulation beat by beat to the heart's specific sections.
Abbott's Aveir DR system has showcased remarkable success in the study, meeting all safety and efficacy endpoints.
With over 98% successful implants and a complication-free threshold reached after three months, the system has proven its safety.
On the efficacy front, more than 97% of participants achieved atrioventricular synchrony within the study period, indicating normal functioning of both upper and lower heart chambers.
Even as participants changed postures and walking speeds, the system maintained a synchrony rate of around 95%, ensuring consistent performance during everyday activities.
Abbott's relentless pursuit of a dual-chamber leadless pacemaker sets it apart in the industry, pushing the boundaries of cardiac technology and paving the way for an exciting future in pacemaker advancements.
Overall, Abbott stands out as a rock-solid investment, and part of its appeal lies in the indispensability of its products to many customers.
Think about it—without Abbott's stents, operating rooms would grind to a halt. That's the kind of recurring revenue that instills confidence in its stability and longevity.
Moreover, Abbott has built a reputation for consistently rewarding its shareholders.
Considering the company's robust growth in free cash flow, it's reasonable to expect that Abbott will continue its upward trajectory. This, coupled with its steady earnings growth, positions it as an exceptional long-term stock for any investor's portfolio.
Mad Hedge Biotech and Healthcare Letter
May 23, 2023
Fiat Lux
Featured Trade:
(HUNTING FOR OPPORTUNITIES IN HEALTHCARE STOCKS)
(LLY), (NVO), (VTRS), (OGN), (MRK), (TEVA), (GI), (CNC), (PFE), (GILD), (AMGN)
I've been riveted by the healthcare sector's most extravagant stocks lately.
Just look at Eli Lilly (LLY), with its jaw-dropping market value of $412 billion, making it the richest pure-play biopharma company ever. And right on its heels is Novo Nordisk (NVO), boasting a market value of $377 billion. It's enough to make your head spin.
But if you're on the hunt for value, these sky-high prices might leave you feeling a bit queasy. That's why I embarked on a mission to uncover some hidden gems in the healthcare sector.
Now, don't get me wrong. These stocks may be cheap for a reason, and it's crucial to exercise caution. When it comes to investment opportunities, it's essential to separate the diamonds in the rough from the fool's gold.
Enter Viatris (VTRS), a rising star in the generic drug manufacturing arena that has caught the attention of savvy investors seeking long-term holdings. But is it the real deal, or just another flash in the pan?
Viatris shows potential with solid revenue from branded generics like Lipitor, Viagra, and EpiPens. These household-name medicines have a lasting market demand. Plus, its generous 5.2% dividend yield surpasses the market average.
But here's the catch: Viatris is currently undervalued and has yet to prove its growth potential. Its stock price took a hit, and sales in the core generic and branded segments dipped. However, there's hope in the pipeline.
With a range of injectable generic medicines awaiting approval, Viatris could be at the forefront of the market.
By 2027, these programs could yield over $1 billion in annual revenue. While not a game-changer for the company's overall revenue, it sets the stage for future earnings growth.
At this stage, I don’t see Viatris as a slam-dunk investment. However, monitoring their strategic plan to reduce debt, improve efficiency, and drive growth is prudent. It's a work-in-progress worth monitoring for future opportunities.
Another company that caught my attention is Organon (OGN), a recent spinout from Merck (MRK) that focuses on women's health and biosimilars. This hidden gem trades at an attractive valuation of just 4.8 times earnings.
Organon & Co. is a pioneering developer and provider of prescription therapies and medical devices catering to contraception and fertility needs.
The female contraceptive market is projected to experience robust growth, with a compound annual growth rate (CAGR) of 8.5% from 2022 to 2027. Notably, Organon is among the top 5 major corporations addressing the demands in this market segment.
But that's not all.
Organon boasts a diverse portfolio that extends beyond women's health. They also offer biosimilar immunology products, two oncology treatments, hypertension therapies, respiratory solutions, dermatology products, non-opioid pain management pills, and cures for male pattern hair loss.
On its first day of official existence, June 3, 2021, Organon's management proudly announced a lineup of over 60 drug products to enhance female health, along with Merck's (MRK) former biosimilars portfolio.
The biosimilars market is projected to soar to $44.7 billion by 2026, showing an impressive CAGR of 23.5%.
As expected, the biosimilars arena has become a bustling hub with both established and emerging companies eagerly entering the space. For instance, Teva Pharmaceutical Industries Limited (TEVA) has high hopes for its biosimilar drug targeting arthritis treatment, expecting it to boost Teva's revenue significantly.
Organon has already witnessed promising revenue growth from its biosimilar drugs, with a remarkable 17% increase amounting to $116 million.
Several drug sales have experienced a surge of over 30% in the United States, Canada, and Brazil. Moreover, Organon's brands have shown strong performance in China and the Asia Pacific/Japan region.
Investing in women's health is not only a wise choice; it's a strategic move that can yield significant rewards for individual investors and portfolios. With Organon's innovative solutions, broad product portfolio, and forward-thinking approach, it stands out as a compelling opportunity in the market.
Now, let's take a look at some intriguing names that have found their way onto the list.
We have health insurance behemoth Cigna Group (GI), trading at a mere 9.9 times earnings, alongside the health insurer Centene (CNC) at 10.3 times earnings. Not to mention the presence of renowned drugmakers Pfizer (PFE), Gilead Sciences (GILD), and Amgen (AMGN) gracing this list of bargain stocks.
These seemingly cheap healthcare stocks warrant close attention for the savvy investor seeking hidden gems. Sure, the term "cheap" can sometimes be misleading, but within these underappreciated names lies the potential for hidden value waiting to be discovered.
Mad Hedge Biotech and Healthcare Letter
May 18, 2023
Fiat Lux
Featured Trade:
(INVESTMENT OPPORTUNITIES AMIDST UNCERTAINTY)
(SYK), (MDT)
As this bear market lingers, my attention keeps gravitating toward healthcare and insurance stocks.
Why, you ask? Well, let me break it down for you into three compelling points that make them enticing options for investors, especially when the market isn't at its finest.
First, there's the allure of steady demand. You see, healthcare insurance isn't just a luxury or a fleeting trend—it's a necessity. No matter the economic landscape, people will always require healthcare services, ensuring a consistent demand. And when it comes to investing, stability, and predictability are music to my ears. I mean, who doesn't appreciate a good dose of stability and predictability?
Second is the potential for growth. As the American population continues to age and healthcare costs skyrocket, the need for reliable healthcare insurance providers becomes more pronounced. It's like witnessing a golden opportunity for growth unfold right before our eyes. While I typically lean towards income-focused investments, the idea of capitalizing on an industry that has growth potential when others are merely treading water? Well, that's quite appealing, isn't it?
Third is its resilience to economic downturns. This one's a game-changer. When the economy takes a nosedive, people tighten their belts and cut back on discretionary spending. However, healthcare is an area where they're reluctant to compromise. It takes precedence. So, even in the face of economic turmoil, healthcare insurance providers remain steadfast. They possess an inherent ability to weather the storm and come out stronger. And let me tell you, that's the kind of resilience that can truly make a difference in your investment portfolio.
A promising contender in my search for long-term healthcare stocks is Stryker Corporation (SYK).
With a market capitalization of $113 billion, it ranks second globally, just behind Medtronic (MDT). Established in 1941, Stryker is a leading technology company specializing in the development and production of medical devices and equipment. Operating across multiple healthcare niches, Stryker holds a prominent position as one of the world's largest medical technology firms, focusing on three niches.
One is orthopedics, where the company focuses on the creation of devices for joint replacement, trauma care, spinal repair, and complementary surgical instruments.
Another is the MedSurg segment, which specializes in the development and manufacturing of medical and surgical equipment, encompassing endoscopic and imaging systems, as well as powered surgical tools.
The last is its Neurotechnology and Spine segment, which provides an array of cutting-edge neurosurgical and spinal devices, including advanced implants, instruments, and biologics.
The aging population, with its accompanying surge in healthcare demand, presents a goldmine of opportunities for Stryker. With a comprehensive array of medical and surgical solutions, Stryker is well-equipped to cater to the evolving needs of this expanding demographic.
As the elderly population increases and their healthcare requirements surge, Stryker stands poised to capitalize on this significant market shift. Moreover, the company is at the forefront of innovation in the field of orthopedics.
Recognizing the growing number of hip and knee replacement surgeries performed on an aging population, Stryker made a game-changing move in 2013 by acquiring the Mako robotic-arm-assisted surgery system.
The Mako system is a remarkable combination of cutting-edge technology and surgical expertise. Picture a robotic arm seamlessly integrated into the surgical process, guided by a skilled surgeon and a sophisticated computer system.
What sets the Mako system apart is its ability to achieve remarkable precision. By meticulously placing the implant with pinpoint accuracy, the system ensures better alignment, enhanced stability, and improved overall joint function.
But Stryker's efforts to innovate don’t end with the Mako system.
Their dedication to advancing medical technology is evident in their other divisions as well. In the field of endoscopy, Stryker has developed advanced visualization systems that enhance the accuracy and efficiency of minimally invasive surgeries. These systems provide surgeons with a clear and detailed view of the surgical site, empowering them to perform procedures with greater precision and effectiveness.
Stryker's initiatives in research and development also continue to yield impressive results.
Just last September 2022, they introduced the Q Guidance System, a groundbreaking navigation software designed to aid surgeons in surgical planning and execution. With the FDA's approval for usage in pediatric patients aged 13 and above, this software elevates the standards of computer-assisted surgeries. By simplifying preoperative planning, navigation, and execution, the Q Guidance System takes surgical precision to new heights.
And that's not all.
The company also aims to address bone fractures. Their recent launch of the Gamma4 System demonstrates their dedication to helping orthopedic surgeons treat both stable and unstable fractures effectively.
It's clear that Stryker is pushing the boundaries of medical technology.
But more impressively, these launches were just the tip of the iceberg when it comes to the flurry of exciting product releases that have been making waves over the past year, contributing to a remarkable 13.2% surge in Stryker's organic net sales for the quarter.
Thanks to strategic acquisitions in Stryker's medsurg and neurotechnology divisions, net sales experienced an additional boost of 1.3%. However, let's not forget the mischievous foreign currency translation, which played the spoilsport, causing a 3.8% decline. Blame it on the company's extensive global presence and the disproportionately robust U.S. dollar.
Sure, Stryker's current dividend yield of 1.1% might not have income investors doing cartwheels when compared to the S&P 500's 1.6% yield. But hold your horses, because that's not where this company truly shines.
Stryker has practically tripled its quarterly dividend per share, going from a humble $0.265 in 2013 to a robust $0.75 this year, making it a bona fide dividend growth stock.
And here's the cherry on top: with a dividend payout ratio expected to hover just below 30% in 2023, Stryker has plenty of room to stretch its dividend muscles further.
This low payout ratio allows the company to allocate capital towards strategic acquisitions, debt reduction, and share repurchases. In other words, it's a recipe for fueling future adjusted diluted EPS growth.
Peering into the crystal ball, the future looks bright for Stryker over the next five years. Stryker knows how to keep the growth engine revving by channeling their efforts into research and development. By continuously fine-tuning their existing products, they ensure steady progress, even if it doesn't set the world on fire due to the more laid-back pace of their markets.
Mad Hedge Biotech and Healthcare Letter
May 16, 2023
Fiat Lux
Featured Trade:
(FROM PANDEMIC HERO TO UNDERRATED STOCK STAR)
(PFE), (BNTX), (JNJ), (LLY), (MRK), (ABBV), (BMY), (AMGN), (GILD)
For investors grappling with the classic dilemma of whether to jump into the stock market or wait for a market dip, here’s a compelling solution: healthcare stocks.
These stocks offer the best of both worlds, combining elements of both defensive and growth investments, providing a potential way out of this conundrum.
The defensive nature of healthcare stocks was vividly displayed in 2022, when the Health Care Select Sector SPDR exchange-traded fund (XLV) only saw a minimal decline of 2.1%, significantly outperforming the broader market's 18% slump.
This resilience stems from a simple truth: regardless of economic conditions, people will always require medical care and medications. As a result, healthcare companies tend to experience less volatility in terms of revenue and earnings compared to the overall market.
However, this year has been a different story. Technology and communication services shares have taken the lead, causing healthcare stocks to dip by 2.3%. Meanwhile, the S&P 500 has surged by 8.4% as investors view healthcare as a defensive sector.
Nonetheless, don't overlook the significant growth potential in this sector. In fact, healthcare has consistently delivered an average annual earnings growth rate of 12% since the mid-1980s, surpassing even the tech sector.
This impressive growth has been driven by factors such as aging populations in developed countries, the rising affluence of consumers in emerging markets, and groundbreaking advancements in the treatment of previously incurable conditions.
Interestingly, the recent decline in healthcare stocks has made their valuations more attractive. Currently, healthcare trades at a 5% discount compared to the broader S&P 500, whereas historically it has commanded a premium of around 11%.
Considering this, it's evident that the fundamental outlook for healthcare remains promising, making it an enticing opportunity for investors.
In the realm of defensive downside protection combined with compelling long-term growth prospects, a few notable companies shine brightly.
One standout is Pfizer (PFE), the pharmaceutical titan that truly hit it out of the park during the tumultuous COVID-19 pandemic.
Not only did it swiftly develop and commercialize its highly successful vaccine in collaboration with BioNTech (BNTX), but it also demonstrated an innovative approach that can be leveraged for future drug and vaccine advancements.
The COVID-19 vaccine proved to be an extraordinary cash cow for Pfizer, catapulting their revenue in 2021 and 2022 to double the figures of the previous two years.
Meanwhile, their free cash flow nearly tripled, presenting the company with abundant financial opportunities.
When we examine Pfizer in comparison to its US Big Pharma counterparts like Johnson & Johnson (JNJ), Eli Lilly (LLY), Merck & Co (MRK), AbbVie (ABBV), Bristol Myers Squibb (BMY), Amgen (AMGN), and Gilead Sciences (GILD), though, it becomes evident that this stock is appearing significantly undervalued across various metrics.
A fascinating observation emerges when we consider that Pfizer's revenue in 2022 was 3.5 times higher than that of Eli Lilly, yet Pfizer's market capitalization is $150 billion lower than Lilly's.
Furthermore, Pfizer surpassed Merck and AbbVie in revenue by nearly 2 times while achieving a substantially higher profit margin.
Still, Pfizer's market capitalization of $220 billion is nearly $50 billion lower than AbbVie's and approximately $70 billion lower than Merck's.
These comparisons suggest that Pfizer's stock price is curiously undervalued, presenting an opportunity for growth. However, the market has arrived at a different conclusion.
The rationale behind this perspective lies in the belief that the additional revenues generated by Pfizer through Paxlovid and Comirnaty due to the COVID-19 pandemic are not expected to be a permanent fixture.
As fewer individuals receive COVID vaccinations and require antiviral treatments, the demand for these products is predicted to decrease significantly. Consequently, this perceived compromise in Pfizer's growth trajectory has influenced its valuation in the market.
Moreover, several moneymaking drugs are set to lose patent exclusivity, which again underlines why analysts and the market are reluctant to buy the company's stock.
Rather than opting for a special dividend or engaging in additional stock buybacks, Pfizer's management embarked on an impressive acquisition spree, replenishing the company's drug development pipeline.
Pfizer has been making major moves in the pharmaceutical industry since mid-2021.
In a series of high-profile acquisitions, the company has added some promising drug candidates to its already impressive portfolio. In fact, Pfizer is aiming to generate $20 billion in revenues from its product pipeline by 2030, while adding another $25 billion to the top line through business development.
Some of the notable deals completed by Pfizer include the $2.3 billion acquisition of Trillium Therapeutics, which brought in two CD-47 targeting blood cancer drug candidates.
The company also acquired Arena Pharmaceuticals for $7 billion, gaining access to its late-stage autoimmune candidate Etrasimod.
It then completed an $11.6 billion deal for Biohaven and its lead candidate Nurtec, which is indicated for migraine treatment.
Global Blood Therapeutics was acquired for $5.4 billion, adding the commercial-stage drug Oxbryta to Pfizer's portfolio, which is indicated for sickle cell disease.
Pfizer acquired Reviral for $525 million and gained access to its antiviral therapeutics targeting the respiratory syncytial virus.
In March, Pfizer made another bold move by announcing its intention to acquire Seagen for $43 billion. Seagen is a pioneer in the antibody-drug conjugate space, with a portfolio that includes ADCETRIS, TIVDAK, and PADCEV. These drugs earned $839 million, $451 million, and $63 million, respectively, in 2022.
Despite all these acquisitions and the ambitious revenue targets set by Pfizer, some analysts have expressed doubts about the company's ability to achieve its goals.
This is because Pfizer does not currently have any "mega-blockbuster" drugs in its portfolio, which are drugs that generate more than $15 billion in annual sales.
For instance, Merck's Keytruda and Lilly's Tirzepatide are both expected to generate more than $25 billion in annual sales, while AbbVie's Humira has generated more than $15 billion in annual sales for many years.
Nonetheless, Pfizer remains optimistic and is determined to reach its revenue targets by 2030.
Aside from the splashy acquisitions, Pfizer has exciting prospects on the horizon, promising accelerated revenue growth from its non-COVID products in the latter half of this year. The company is gearing up for a series of key product launches that are set to make waves in the market.
One notable launch is Cibinqo, a breakthrough treatment for eczema. With its approval in January, Pfizer anticipates peak sales of approximately $3 billion.
Later in the year, the company has high hopes for Ritlecitinib, a potential therapy for alopecia, as well as Zavzpret, a migraine therapy that gained approval in March. These innovative products are poised to capture significant market share.
Pfizer's portfolio expansion doesn't stop there.
It has set its sights set on Elranatamab, a promising blood cancer therapy projected to reach peak annual sales of $4 billion.
Additionally, the company plans to introduce a new RSV vaccine and pursue label expansions for Xtandi and Braftovi.
Let's also not forget the potential approval for Etrasimod, a blockbuster-in-waiting that could revolutionize the industry.
Overall, Pfizer emerges as a compelling investment opportunity, presenting a unique blend of defensive strength and promising growth potential, while its valuation remains attractive and aligned with historical levels. While it may require a measure of patience, it's crucial to recognize that this stock won't stay affordable forever. I suggest you buy the dip.
