Biotech Letter - John Thomas - Mad Hedge Fund Trader

The Rise, Fall, and Imminent Resurgence

The investing world is a roller coaster where investors' enthusiasm can experience sharp rises and precipitous drops.

One classic case study is CRISPR Therapeutics (CRSP), whose stock is currently hovering around $61 per share, a far cry from its zenith of $220.20 back on January 15, 2021.

But don't write off this biotech player yet; it's poised for a resurgence, and here's why.

The company is in the final stages of commercializing its pioneering gene therapy, exa-cel. This novel treatment, developed in collaboration with Vertex Pharmaceuticals (VRTX), aims to redefine the treatment landscape for patients battling transfusion-dependent beta-thalassemia (TDT) and sickle cell disease (SCD).

With approval requests already lodged with regulatory bodies, the company could be on the cusp of a financial windfall by Q2 2024, sending its stock skyward.

Shining a spotlight on this exa-cel opportunity, it's important to understand that current treatment options for blood disorders are far from ideal, involving blood transfusions and frequent hospital stays. Both physicians and patients are likely ready for a less disruptive alternative.

Exa-cel could be a game-changer for CRISPR, obviating the need for lifelong blood transfusions for certain SCD and TDT patients.

The Institute for Clinical and Economic Review (ICER) recently suggested that the therapy could fetch a staggering $1.9 million per treatment. Meanwhile, the treatment is projected to reach global sales of $1.7 billion by 2028, propelling it into the blockbuster category.

Even with Vertex claiming a majority 60% share of profits, the opportunity remains substantial for CRISPR.

CRISPR and Vertex are primed to address the needs of the most critically ill patients, estimated to be around 32,000 in the U.S. and Europe.

The real charm, however, lies in CRISPR's potential for sustainable long-term growth.

The approval of exa-cel doesn't just promise immediate benefits but also unlocks the potential of the company's pipeline, acting as a proof of concept for CRISPR's gene-editing methodology.

Fast-forward a decade, and the company might boast a portfolio of blockbuster therapies.

Among these potential stars is CTX310, set to enter clinical trials soon. CTX310 is one of the company's few in-vivo therapies, delivering therapeutic genes, gene modulators, and gene-editing tools directly into patient cells.

CTX310 targets angiopoietin-related protein 3 (ANGPTL3) to mitigate the risk of cardiovascular disease, a prevalent concern linked to high rates of coronary artery disease.

In contrast to the relative rarity of SCD and TDT, coronary artery disease is the most common heart disease in the U.S., claiming 375,476 lives in 2021, according to the Centers for Disease Control and Prevention.

Another contender in the pipeline is CTX110, currently under testing for B-cell cancers, including B-cell lymphomas, acute lymphoblastic leukemia (ALL), and chronic lymphocytic leukemia (CLL).

The drug showed promising results in a phase 1 trial to treat large B-cell lymphoma, reporting an objective response rate of 67% and a complete response rate of 41% in patients with significant prior treatment.

The future looks promising for CRISPR's quartet of chimeric T-cell (CAR-T) therapies -- CTX119, CTX130, CTX112, and CTX131 -- being developed as cancer therapies. These therapies target specific proteins to suppress tumors or provoke an immune response.

Contrasting the typical clinical-stage biotech company, CRISPR, thanks to collaborative revenue, is in a healthier financial position.

As of Q1, CRISPR had $1.89 billion in cash reserves, ample to fund operations for the next three years. With potential exa-cel approval, these funds could further fuel research and development.

While it's hard to predict precisely where CRISPR will stand in a decade, its roadmap sets it apart from most clinical-stage biotech firms. The company has already demonstrated its ability to advance its science. Its success, though, will hinge on its capacity to transition into marketing and to manufacture its products.

Given its promising future, I see CRISPR Therapeutics as an excellent investment. Even though I've tempered my expectations about the market opportunity and challenges confronting both Vertex and CRISPR, the potential for exa-cel, which could rake in billions of dollars and serve as a functional cure, lends itself to investor optimism.

In the past, CRISPR shares have breached the $190 mark, translating to a near $20 billion market cap, or over 4x its current valuation. Granted, a fully commercialized pharma typically trades at around 5x sales, but an experimental pharma with a robust pipeline can trade at 50x sales without necessarily appearing overvalued. After all, pharma investing is about betting on future potential, or as we call it, "jam tomorrow."

Taking a long-term perspective and factoring in the cash reserves of over $1 billion, the potential to broaden the SCD/TDT market with Exa-cel 2.0 and 3.0, the technology validation, other pipeline assets, and a solid partner in Vertex, I believe CRISPR's stock is poised to reclaim a price above $100 in due time. There may be some turbulence along the way, but I anticipate exa-cel will one day fuel blockbuster sales exceeding $1 billion annually.

For context, consider Alnylam (ALNY), a drug developer in the field of RNA interference, which generated just over $1 billion in sales last year at a net loss of over $1 billion, yet sports a market cap of $25.1 billion.

With this perspective, the future for CRISPR looks bright indeed.

exa-cel

June 27, 2023

Biotech Letter

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

Featured Trade:

(THE INCONSPICUOUS STAR)
(BMY)

The Inconspicuous Star

Biotech Letter

Do you remember the 1999 cinematic sensation "The Matrix?" Neo, the protagonist, had a choice: swallow the red pill to wake up to reality or the blue one to slumber in illusion. Perhaps our market could do with a similar reality check—swallow the red pill and recognize the true value of companies with hefty margins and cash rivers.

After all, not so long ago, the markets were all singing praises for pharmaceutical stocks, idolizing them for their deep cash coffers and ironclad resilience against inflation.

But in the theater of investment, the curtain has suddenly dropped on them, as the market's affection has pirouetted towards the exuberant dance of AI stocks, evoking memories of the late '90s tech bubble.

Yet, for the savvy value investors in the audience, this shift is less of a tragedy and more of a golden intermission.

They now have a chance to secure prime seats at discounted prices, notably at the performance of the pharmaceutical powerhouse, Bristol Myers Squibb (BMY).

As the market narrative unfolded this year, BMY's plotline took a 9% twist, veering away from the 12% uptick of the S&P 500 (SPY). I've earlier peeked behind BMY's curtains, shedding light on its promising pipeline.

So why does BMY steal the spotlight?

Bristol Myers Squibb is not merely an actor but a maestro orchestrating symphonies in cardiovascular, oncology, and immunology sectors. The jewel in its crown is its leading role in the lucrative and burgeoning realm of immuno-oncology.

Behemoths like BMY have a magic wand—they can either acquire promising new drugs or cultivate them in their own labs, thanks to their deep wells of expertise.

BMY has been striking high notes with its margin, powered by star-performing drugs like the cancer-fighting Opdivo and cardiovascular medicine Eliquis, both of which enjoy patent protection until 2028.

In the last act (over three years), BMY has introduced nine new characters to its play, which are predicted to rake in a whopping $4 billion in this year's box office sales.

These factors ensure BMY's marquee stays lit. Notably, it has earned an A+ profitability grade, with sector-leading EBITDA margin and return on equity of 43% and 23%, respectively.

Even though the first quarter's revenue seemed to tread water YoY (with a 1% dip after adjusting for currency effects), BMY's newest cast members have outshone the rest. This is demonstrated by new product revenue that soared from $350 million YoY to a hefty $723 million in Q1.

Peering into the future, BMY's management anticipates that the revenue from these nine new stars will breathe new life into their portfolio, contributing between $10 billion and $13 billion in annual sales by 2025.

This troupe includes the cardiovascular prodigy, Camzyos, which has been stealing the limelight with promising efficacy data. Given its record thus far, we can expect a considerable upside to its fair value of $66.

Despite the looming specter of generic pressures, Bristol Myers Squibb is in the throes of a grand product launch.

Aside from Camyzos, the newly launched stars anticipated to push BMY to greater heights include cancer combatant Opdualag (an extension of the Opdivo franchise), hematologic treatments Reblozyl, Abecma, and Breyanzi, and immunological medications Sotyktu and Zeposia.

Bristol's multi-pronged attempts to capture significant market opportunities should help navigate the stormy seas of the long-term patent cliff.

As a finale, BMY flaunts a sturdy BBB-rated balance sheet, featuring a safe net debt to TTM EBITDA ratio of 1.5x. It offers a respectable 3.5% yield, and the dividend is comfortably protected by a 29% payout ratio, with a 5-year CAGR of 7%.

BMY also has a trick up its sleeve to return capital to shareholders tax-savvy via share buybacks, currently having $7 billion in remaining buyback authorization. At a forward PE of just 8.2, BMY essentially gets a 12% earnings yield on share buybacks.

Lastly, I find BMY to be priced just right at $65.66 with the aforementioned PE of just 8.2. This valuation seems unfairly low for a company with a strong line-up of newer drugs.

While only a modest 4% EPS growth is predicted for the company this year and low single-digit EPS growth over the next couple of years, BMY management could stir up the plot and boost the bottom line with share buybacks at the current discounted price.

BMY, currently being snubbed by investors, provides a fantastic opportunity for value and income investors to scoop up high-quality stocks at the perfect price.

Its robust balance sheet, high margins, and portfolio of new drugs all add up to make BMY a compelling long-term buy for investors.

With the stock priced at a discount and offering a well-covered, attractive yield, income and value, investors could see significant returns over the long term.

June 22, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
June 22, 2023
Fiat Lux

Featured Trade:

(A ROLLERCOASTER RIDE ON THE BIOTECH HIGHWAY)
(AMGN), (HZNP), (AMZN), (MSFT)

A Rollercoaster Ride on the Biotech Highway

Biotech Letter

What gets my heart racing about Wall Street's wild rodeo is its capricious personality. This unpredictable creature weaves a tapestry of inflated possibilities, stretching across a vibrant spectrum of asset classes. It's like being at an all-you-can-eat financial buffet; every day, there's a fresh plate of opportunities to dig into.

Just last year, for instance, we saw a grand opportunity to pack our portfolios with tech titans like Amazon (AMZN) and Microsoft (MSFT) when the market was frolicking after cash-flush pharmaceutical stocks, allured by their pricing power and inflation defense.

But oh, how the pendulum swings. Today, we find the market donning its risk-taking garb again, pursuing high-growth stocks and leaving value stocks eating its dust.

This brings us to Amgen (AMGN).

Amgen, a trailblazer in the biotech industry since its inception in 1980, has earned its stripes, boasting membership in the esteemed Dow Jones Industrial Index and Nasdaq 100. Over the past year, AMGN churned out an impressive $26 billion in total revenue.

The company proudly displays a well-rounded product portfolio experiencing a strong global thirst. This is echoed by the hearty 14% YoY volume growth in the first quarter.

Notably, much of this surge was fueled outside U.S. borders, with the Asia Pacific region flexing a muscular 47% volume growth. Credit this partly to the rapidly aging populations in Japan and China, where medicines like Amgen’s Repatha and Prolia are enjoying a burgeoning demand.

However, we're not getting the complete picture from these favorable metrics.

Amgen is embarking on a journey into a period filled with question marks, marked by stiff competition from biosimilars for its aging blockbusters, pushback from the Federal Trade Commission over its proposed acquisition of Horizon Therapeutics (HZNP), and valid doubts surrounding the rationale behind this hefty $28 billion buyout.

The firm has had a tough time finding a true growth engine in recent years, despite launching several new drugs for high-value indications such as lung cancer, cardiovascular disease, and migraine headaches. Can Amgen sail past these patent headwinds?

While most in the industry are betting on Amgen to win its legal battle to acquire Horizon, this move carries its own set of hitches.

The spotlight is on Horizon's primary growth engine, Tepezza, which is dealing with recent commercial setbacks.

In Q1 2023, Tepezza sales took an 18% sequential dip from Q4 2022 and were down 19% YoY.

Horizon blamed seasonality for this significant sales dip, which is disheartening for a drug slated to hit $4 billion in annual sales.

If Tepezza is the mainstay behind the proposed merger with Amgen, the biotech could set itself up for a rocky journey.

And remember, Amgen's previous attempts at value creation via business development haven't always been home runs.

Take the 2013 acquisition of Onyx's cancer drug Kyprolis. Despite initial excitement, Kyprolis has underperformed expectations, illustrating that Amgen's $28 billion bid for Horizon may not be a guaranteed solution to its patent woes.

Furthermore, Amgen's clinical pipeline isn't bursting with potential stars.

Its metabolic disorder candidate AMG 133 has been flagged as a potential blockbuster by some analysts, but the obesity treatment market is heating up. The same applies to Amgen's various candidates in hematology and immunology. Therefore, its current pipeline might not be the panacea to its legacy medicine challenges.

So, what's the play for investors?

The silver lining here is that Amgen isn't predicted to suffer a sharp drop in annual sales anytime soon, irrespective of the Horizon deal or its internal pipeline.

The main concern lies with the drugmaker's potential to resurrect robust top-line growth in the latter part of the decade. Given its low trailing-12-month payout ratio of 54%, the dividend appears to be on solid ground, which is a tick-in-the-box for its prospects as an income stock.

Overall, this stock could be a top pick for income investors considering its ample yield coverage, substantial margins, and double-digit average dividend growth.

Although the top line may seem a little shaky, buybacks should help keep EPS growth on track. Given its resilience, the stock presents an attractive opportunity for income investors. Just don't hold your breath waiting for a sudden surge.

In fact, if you're on a DRIP (Dividend Reinvestment Plan), you'd rather want the shares to slump for a bit.
After all, Amgen has the makings of a SWAN (Sleep Well At Night) stock. So, keep those midnight snacks handy.

biotech

June 20, 2023

Biotech Letter

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

Featured Trade:

(THE RISE OF THE TRILLION-DOLLAR PHARMA)
(LLY), (NVO), (AAPL), (MSFT)

The Rise of the Trillion Dollar Pharma

Biotech Letter

It's hardly a surprise when we think of titans like Apple (AAPL) and Microsoft (MSFT) topping the trillion-dollar club. After all, these tech leviathans have their tendrils in the lives of billions worldwide.

But guess what? This playground isn't just for tech heavyweights.

There's another contender in the ring, flexing its muscles from the biotechnology and healthcare sector: Eli Lilly (LLY).

Even as I write, I can almost hear the gears of potential turning. Eli Lilly could soon be donning the badge of the biopharma representative in the trillion-dollar league. What's more, this could happen sooner than you might think—say, before we're toasting to 2030.

Today, Eli Lilly stands proud with a market cap hovering over $410 billion, rubbing shoulders with the crème de la crème of the pharmaceutical world.

To reach the coveted trillion by 2030, it needs to rev up its growth engine by almost 166% in the next six or so years.

Given that its market cap ballooned by 178% since May 2020, we're not betting against the odds here.

Let's dissect this potential behemoth and scrutinize its growth prospects, valuation, and their likely dance over time.

With a trailing 12-month net income of $6.2 billion and a price-to-earnings ratio lingering around 69, Eli Lilly isn't exactly shy.

This valuation is higher than the industry standard but not bloated like some tech stocks.

Credit its remarkable net income growth of around 14% per annum over the last decade to persistent R&D investment, the frequent launch of new sought-after medicines, and strategic label expansions for its already-approved drugs.

Now, the market is giddy with anticipation, pricing in growth that surpasses its own impressive average. This is likely due to Eli Lilly's ambitious ventures into thriving markets with treatments for conditions like diabetes, obesity, and chronic kidney disease.

If Eli Lilly maintains its current PE ratio and boosts its earnings by a mere 13.5% each year between now and 2030, it will rake in a net income of about $15.1 billion, nudging its market cap just above $1 trillion.

A lofty goal? Perhaps, but Eli Lilly isn't one to back away from a challenge.

The question hanging in the air like an eager balloon is whether the company can maintain this steady pace.

Analysts are optimistic, predicting an EPS of $8.76 in 2023 and around $16 in 2025. This promising growth is tied to the launch of new medicines from its four programs awaiting approval decisions and a Phase 3 roster filled with 21 promising programs.

Meanwhile, Eli Lilly is acing its game in another affluent market: obesity treatments.

The company has long been a trailblazer in diabetes and obesity drugs, and its recent approval of Mounjaro, a revolutionary treatment for Type 2 diabetes, adds another feather to its cap.

Mounjaro has made waves, garnering $568.5 million in sales in the first quarter, and is predicted to hit peak annual revenue of $25 billion.

Obesity, a global health concern responsible for at least 2.8 million deaths yearly, opens up another massive market for Eli Lilly.

Branded anti-obesity drugs could hit $44 billion in risk-adjusted sales by 2030, up from a modest $2.5 billion in 2022.

As it stands, Eli Lilly's primary contender in this arena is Novo Nordisk (NVO).

So, can Eli Lilly flex its muscles and reach a market cap of $1 trillion by 2030? Signs point to a resounding yes.

With a steady stream of treatments on the horizon and a projected growth trajectory through the end of the decade, it seems to be business as usual for Eli Lilly.

However, like a precarious game of Jenga, the entire venture hinges on its valuation. As long as investors see sunny days ahead, all's well. But maintaining a P/E ratio of around 70 isn't a walk in the park. A dip in performance or a market crash could bring the whole structure down.

That being said, don't let these concerns hold you back from joining Eli Lilly's growth ride. Come 2030, you'll probably be smiling at your investment, whether or not Eli Lilly cracks that 13-digit milestone.

June 15, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
June 15, 2023
Fiat Lux

Featured Trade:

(A WINNING GAME PLAN)
(PFE)

A Winning Game Plan

Biotech Letter

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.

June 13, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
June 13, 2023
Fiat Lux

Featured Trade:

(BUCKING THE TREND)
(VRTX), (ABBV), (CRSP)