Mad Hedge Biotech and Healthcare Letter
April 6, 2023
Fiat Lux
Featured Trade:
(A KING AMONG KINGS)
(ABT)
Let's talk about the esteemed Dividend Kings, the crème de la crème of companies that have consistently raised their dividends for a minimum of 50 consecutive years. This select club is made up of less than 50 members, making them a truly elite bunch.
While investing in stocks with an impressive track record is a great way to build a low-volatility portfolio with decent long-term returns, there's a catch.
Due to their maturity, some Dividend Kings may lack long-term growth potential. However, this isn't necessarily a drawback if they're profitable cash cows. Still, some investors may prefer to incorporate stocks with greater growth potential into their portfolios.
This is where Abbott Laboratories (ABT) comes in.
Abbott Laboratories has been blazing a trail in healthcare and beyond. From its top-tier medical devices to nutrition solutions, the company is leading innovation across multiple industries – including providing low-cost generic pharmaceuticals for less developed countries.
With a market cap of $172 billion, it's no wonder this powerhouse has become revered as an unstoppable force. Founded in the bustle and hustle of Chicago back in 1888, Abbott Alkaloidal Company has since cemented itself as a pioneer across multiple industries - building up fortifications through several key pillars to guarantee its dominance in the industry.
In fact, its success can be attributed to its prowess in a diverse range of fields. It has made its mark in medical devices, accounting for 34% of its 2022 sales, and has also become a major player in the diagnostics sector, which makes up a significant 38% of its sales.
In addition to its accomplishments in the medical devices and diagnostics sector, this company has made significant progress in the nutrition industry, accounting for 17% of its sales. Moreover, they've established a strong portfolio of pharmaceuticals that have proven to be reliable earners, representing 11% of their sales.
Needless to say, the breadth of expertise and consistent success in multiple industries make this company a compelling choice for investors seeking a reliable, diversified portfolio.
Apart from these, Abbott Laboratories has maintained an impressive track record of dividend payouts, with an unprecedented 51 consecutive years of increases.
These accomplishments underscore the company's unwavering commitment to growth, innovation, and value creation, making it an attractive option for investors looking to secure long-term returns.
While Abbott's history is undoubtedly impressive, the company's future is equally important. One of Abbott's greatest strengths is its innovative culture, which has enabled it to stay ahead of the curve in a rapidly evolving healthcare industry.
Given the persistent demand for revolutionary healthcare products, Abbott has consistently delivered, earning a reputation as a trusted leader in the field over the years.
Here's an example of the company's innovativeness.
When COVID-19 first hit, Abbott wasted no time in developing and launching a suite of diagnostic tests for the virus, solidifying its position as a leader in the space. This strategic move proved to be a lifeline for the company, as its medical device revenue took a hit in the early days of the pandemic.
Another example is Abbott’s blockbuster FreeStyle Libre franchise.
The FreeStyle Libre is a game-changing continuous glucose monitoring (CGM) system that provides real-time blood glucose level tracking for people with diabetes. Its impressive technology earned it the coveted title of "Best Medical Technology of the Last Half-Century" from the highly respected Galien Foundation, an organization dedicated to recognizing breakthroughs in the life sciences.
Abbott's FreeStyle Libre system has been a smashing success, raking in $4.3 billion in sales in 2022 - that's a sweet 16% YoY improvement. The company has high hopes for the product line, targeting a revenue of $10 billion by 2028.
And Abbott isn't stopping there - they plan to keep the momentum going with new product launches in areas such as structural heart and heart failure.
However, investors seeking income may overlook Abbott’s 2.0% dividend yield, but there's more to the stock than just yield. This low-volatility option offers a strong potential for long-term outperformance, with the added benefit of consistent dividend growth leading to a high yield on cost in the future.
In other words, Abbott Labs may not be a high-yield stock today, but it has the potential to become one over time.
More importantly, in the fiercely regulated healthcare industry, Abbott has built a strong brand name over the years, leading to a solid moat that is difficult for competitors to breach. Just like how customers tend to stick with familiar brands, physicians, and patients trust Abbott's products, making it easier for the company to maintain a consistent revenue stream.
This could translate into sustained earnings and stock price growth in the long term, as investors continue to place their trust in Abbott's reputation for quality and innovation.
If you're looking for a stock to add to your dividend growth portfolio, Abbott might just be the answer. With a solid brand reputation and a range of products that consistently generate revenue, including both mature cash cows and fast-growing options, it offers the best of both worlds. Plus, with a healthy dividend yield and consistent dividend growth, you can expect steady returns while enjoying an attractive valuation.
Needless to say, Abbott truly is a king deserving of its title–a king amongst kings, so to speak. Hence, I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
April 4, 2023
Fiat Lux
Featured Trade:
(IN IT TO WIN IT)
(HUM)
If you want to increase your chances of success in the stock market, forego complex formulas and algorithms. The process does not have to be rocket science. Instead of a complicated equation, remember the age-old saying, “Keep it simple.”
That means you should choose companies whose products and services make up the backbone of our economy, such as healthcare, technology, and energy.
Investing in healthcare stocks can offer a safe haven for your portfolio, no matter the economic climate. These essential goods and services are always needed by patients, so it pays to explore quality investments that will stand up over time.
Quality healthcare stocks can provide a reliable means for investors to capitalize on growing markets, and the insurance sector is an especially noteworthy opportunity.
As the world's population ages and healthcare costs continue to soar, health insurance is rapidly becoming a crucial necessity. That's why experts project a steady 7.1% annual increase in global health insurance industry revenue. By 2028, they project that revenue will have surged to nearly $2.6 trillion, up from $1.7 trillion in 2022.
These statistics underline the growing importance of investing in the health insurance sector, as it continues to expand and offer promising growth opportunities.
When it comes to capitalizing on the promising growth prospects in the health insurance sector, Humana (HUM) is a heavyweight contender.
Humana's roots date back to 1961 when it was founded in Louisville, Kentucky. Today, it stands tall as one of the largest insurance companies in America. Its specialty lies in providing government-subsidized plans, catering to Medicare Advantage, Medicaid, and Tricare (for the military).
With over 22 million members enrolled in its various plans, including medical, dental, and vision coverage, the company is well-positioned to reap the benefits of this burgeoning industry.
In fact, with a market capitalization of $64 billion, Humana is currently the fifth-largest health insurer globally.
As the demand for health insurance continues to grow, Humana's strong market position and broad range of offerings make it a compelling option for investors looking to tap into the sector's potential.
Humana's Q4 performance was a sight for sore eyes for investors, with revenue up 6.6% YoY to $22.4 billion. The company's medical membership grew by 0.1%, reaching 17.1 million, boosted by a 3.2% growth in Medicare Advantage membership.
Coupled with premium hikes, this led to an upward trend in Humana's revenue. The cherry on top was the non-GAAP diluted EPS of $1.62, reflecting a staggering 30.6% YoY growth rate.
Humana has a bright future ahead thanks to organic membership growth and strategic acquisitions.
Analysts predict the company's adjusted diluted EPS will compound at a rate of 14.3% annually over the next five years, outpacing the industry average of 12.4%.
While Humana's current 0.6% dividend yield may seem low compared to the S&P 500's 1.6%, the quarterly dividend per share has tripled over the last decade to $0.7875.
Plus, with a payout ratio of just 12% in 2022, there's plenty of room for future dividend increases. This means Humana can continue to invest in the business and strengthen its balance sheet while also rewarding shareholders.
If you're looking to get a real return on your investment, make sure Humana is in the mix.
With the company's growth prospects well above the industry average, this means that the stock is currently undervalued and is a prime candidate for those looking for some solid growth potential. So if you're in it to win it, now is the time to consider adding Humana to your portfolio.
Mad Hedge Biotech and Healthcare Letter
March 30, 2023
Fiat Lux
Featured Trade:
(ANOTHER MONOPOLY ON THE RISE)
(ZTS), (PFE)
Whether you’re a devoted dog mom or a tough-as-nails cattle rancher, you’ll most likely agree that animals should have healthcare, pretty much like humans. This is where Zoetis (ZTS) comes in, a company that focuses exclusively on developing treatments and other healthcare needs for livestock and, of course, pets.
Zoetis is the only pure-play animal health company in the world. It sells everything related to animal healthcare, from painkillers for your beloved pets to diagnostic equipment needed in veterinary clinics. Spun off from Pfizer (PFE) roughly a decade ago, Zoetis’ profits have consistently climbed thanks to the steady rise in spending on domestic animals.
Admittedly, macroeconomic issues and a pause in earnings growth recently affected the stock negatively, which saw its price fall by almost 13% since 2022. However, short- and long-term catalysts are anticipated to boost the stock this year, with the company expected to report at least a 33% increase in price in the following months.
Pet ownership across the globe has been exhibiting an increase in demand even before the pandemic, with pets gaining more importance and getting treated as part of the family. This indicates lower chances of skimping when it comes to their health, paving the way for more innovative treatments and possibly more expensive trips to the vet.
The increasing demand for animal protein has also called for higher livestock production worldwide, which translates to more sales in the animal healthcare sector. In fact, over half of the antibiotics sold in 2022 were used for the improvement of farm yields.
Incredibly, even concerns over recession have not hampered these trends. If anything, the demands continue to rise.
This is one of the most compelling reasons to consider Zoetis stock. It is already the biggest name in the global markets, particularly for companion animals, cattle, swine, and even fish. Since it is virtually a monopoly in the animal healthcare industry, it is strategically positioned to sustain its momentum and penetrate the market quicker than the up-and-coming competition.
Its total addressable market is estimated to be approximately $45 billion. For context, this market recorded an annual growth of 5.8% over the past 20 years.
Surprisingly, Zoetis only spent $529 million out of its $8 billion revenue for research and development, which means it won’t cost the company too much money to continue churning out new drugs, vaccines, software packages, treatments, and other animal healthcare needs for the foreseeable future.
The company is also expanding faster compared to the broader market, with Zoetis’ earnings forecast to rise at an average of 13% each year over the following five years.
Another underappreciated factor that makes Zoetis attractive is its pipeline of innovation. Unlike competitors that depend on price hikes for their growth, Zoetis leverages its cutting-edge innovations.
An excellent example is its game-changing drug, Simparica Trio, a triple combo product for parasite prevention launched in 2020. By 2022, sales of this drug jumped by an impressive 57% to hit $744 million. Another example is Librela, an osteoarthritis treatment for dogs, which achieved the blockbuster status of $100 million in sales outside the United States and is slated for release in the country sometime this 2023. Meanwhile, a feline counterpart of the drug, Solensia, received FDA approval last year and raked in $30 million in revenue.
These types of innovations provide Zoetis with a competitive edge in the form of a unique organic volume growth trajectory that’s not found in other companies.
Notably, a mere $100 million qualifies an animal health drug as a blockbuster. This is one reason that discourages potential Big Pharma rivals from entering the space and challenging Zoetis. After all, they are used for human drugs worth $1 billion or more.
However, it’s essential to remember that many animal treatments are paid out of pocket. That means there are no insurance companies pressuring the patients to get or switch to cheaper drugs or generics even when Zoetis’ products lose their patent exclusivity. Actually, in 2019, about 75% of the company’s revenue was generated from its products that had already lost patent protection.
Overall, Zoetis is a solid investment thanks to its growth potential and highly competitive moat. It has a strong track record and an impressively diverse revenue stream, making this animal health company well-equipped to sustain its momentum in the years to come at a fast pace. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
March 28, 2023
Fiat Lux
Featured Trade:
(NOWHERE TO GO BUT UP)
(REGN), (SNY), (RHHBY)
For any biotechnology company, one of the critical elements of success is the capability to create and develop new and innovative treatments.
That is one requirement Regeneron (REGN) has no trouble meeting.
The latest update from this biotech involves its blockbuster asthma medication, Dupixent. The top-selling drug delivered promising results from a study that aims to expand its indication, signifying the potential for additional billions of dollars in revenue.
According to Regeneron and its co-developer, Sanofi (SNY), the Dupixent trial on current or previous smokers displayed a 30% reduction in moderate or severe acute exacerbations of chronic obstructive pulmonary disease (COPD).
COPD is a lung condition that makes it difficult for air to move in and out of the lungs due to the narrowing of the airways. It's is caused by long-term exposure to irritants such as cigarettes, coal, and other pollutants. It can be fatal and life-threatening. There is no cure for COPD, but treatments may help improve symptoms and slow down the progression of the disease.
The market for COPD is estimated to grow significantly over the next five years due to the increasing prevalence of COPD and related comorbidities, such as asthma, cardiovascular diseases, and diabetes.
Additionally, factors such as continuous growth in the elderly population and the introduction of novel therapies are likely to drive the growth of this market during the forecast period. The global COPD market was valued at $27 billion in 2018 and is expected to reach $50 billion by 2025 with a compound annual growth rate of 8.5%.
Considering Dupixent’s positioning in the market and the competitors for this segment, Regeneron is projected to rake in an additional $4 billion in sales from this expanded COPD indication. Taking all its indications together, this blockbuster drug is estimated to contribute a whopping $19.2 billion in the company’s sales.
Aside from Dupixent, Regeneron has also aggressively expanded the indications for another blockbuster drug, Eylea.
In February, the company submitted its application to the Food and Drug Administration to allow them to administer Eylea in 8-milligram doses.
Eylea is a medication used to treat wet age-related macular degeneration (AMD), diabetic retinopathy, and diabetic macular edema. This treatment is typically administered via an injection into the patient’s eye once every two or four weeks, depending on their condition.
In terms of revenue, the wet AMD market is expected to grow significantly over the following years. This growth is driven by the climbing number of cases and the prevalence of associated comorbidities like diabetes and hypertension. In 2018, the global wet AMD market was valued at $17 billion. This number is anticipated to reach $28 billion by 2025.
Going back to Regeneron, the company’s move to increase the formulation of Eylea from 2 mg to 8 mg is critical. This will enable patients to undergo fewer injections of the treatment from 8-week intervals to 12- and even 16-week intervals, which would be a key selling point.
Another excellent reason behind this move is that Eylea’s patent expires in 2023, making it a target for biosimilar competitors. Regeneron’s decision to switch to a higher dosage formulation is a strategic way to sidestep this impending concern.
On top of blockbusters Eylea and Dupixent, Regeneron is also charging headlong on efforts to expand its immune-oncology franchise. Its top treatment in this field, Libtayo, is slated for multiple clinical trials to expand its indication. In addition, Regeneron has seven or so candidates queued in this lucrative but crowded space.
While Roche (RHHBY) has more candidates than the biotech in the immuno-oncology field, Regeneron’s speed in capitalizing on opportunities in this fast-advancing sector is nothing short of breathtaking. Given that immuno-oncology is a relatively new segment, the company’s ability to deliver promising results enables it to stand out in the biotech world.
Regeneron is a beacon of stability in an otherwise unpredictable industry, steadily ascending since its inception. But the stock’s continued success isn't just luck. Their past successes with their treatments and medicines have placed them on solid ground to continue advancing, while further wins through the widening use of approved drugs have only reinforced that position - setting up Regeneron for continued growth into the future.
Mad Hedge Biotech and Healthcare Letter
March 23, 2023
Fiat Lux
Featured Trade:
(OLD BUT GOLD)
(HUM), (UNH)
The entire point of investing is to place your hard-earned cash to work for you, hoping that one day you will no longer need to work just as hard. A growth investing strategy could deliver just that when executed correctly and offered sufficient time.
Choosing stocks that can survive and even thrive in just about any type of economic environment is typically a critical contributing aspect to the success of an investment strategy. While daunting, this step doesn’t need to be complicated. Investors simply need to focus on picking stocks under sectors of the economy that are vital.
Healthcare is one of the sectors that constantly perform well regardless of the turmoils happening across the globe. This is because patients depend on the goods and services this industry offers at all times.
Narrowing it down some more, the segment in the healthcare world that should be taken into consideration when selecting stocks is the health insurance sector.
The health insurance industry worldwide is projected to grow by 7.1% every year from an already whopping $1.7 trillion in 2022 to approximately $2.6 trillion by 2028.
For companies like Humana (HUM), focusing on older patients is a crucial strategy in dominating this sector.
To date, Humana has roughly 22.3 million members enrolled in its medical, vision, dental, and supplemental programs, ensuring that the company can sustain its operations and still have room to expand. This company has an impressive $64 billion market capitalization, ranking it as the fifth biggest health insurer in the world.
Humana’s pièce de rèsistance is Medicare Advantage. The plans provide seniors with sets of bundled benefits and charge a handful of out-of-pocket payments.
This segment generated around $73 billion in sales last 2022, with the insurance premium offerings comprising over 84% of the company’s revenue. The remaining 16% comes from its newly launched CenterWell platform, which offers pharmacy, home care, and primary care services to seniors. In terms of revenue, these figures put Humana in second place behind UnitedHealth Group (UNH).
Even considering the potential slowdown in adding new members, the sheer number of patients signing up for Medicare Advantage most likely won’t. At the moment, about 30 million of the total 60 million seniors in the United States alone subscribe to the plans, with the other 30 million anticipated to sign up eventually. On top of that, the number of senior patients is expected to keep climbing to reach 95 million by 2060.
Despite the incredible potential of this segment, Humana has more to offer than simply Medicare Advantage.
The health insurer is ramping its CenterWell venture by acquiring more physician practices. In 2022, the number of primary-care units handled by the company rose to 235 from the 206 centers recorded in 2021. Humana collaborates with them in searching for low-cost, reliable options for patients. This strategy is a win-win for both parties.
Although it’s still a tiny business compared to Humana’s Medicare Advantage system, the figures from the CenterWell segment look promising. In the fourth quarter of 2022, it reported $4.1 billion in sales with an operating margin of 6.4%. That’s beyond the health insurer’s anticipated margin for 2023, which was set at roughly 4.8%.
As CenterWell expands in terms of how much it contributes to Humana’s total, the company’s operating margin is predicted to grow to about 5.2% by 2026. This would indicate approximately 14% annual earnings per share growth through 2026.
Humana’s 0.6% dividend yield is a potential turnoff factor, which pales compared to the S&P 500’s 1.6%. Still, this isn’t necessarily bad if given the proper context. Over the past 10 years, Humana’s quarterly dividend paid per share has continuously tripled.
This is a promising indication, especially since the dividend payout ratio of Humana was only 12% in 2022. Hence, the company has nowhere else to go but up. This is because offering a conservative payout enables Humana to maximize its funds and focus on growing the business and strengthening its balance sheet. That’s clearly why the health insurer should have no problems delivering double-digit dividend boosts within the next few years.
Overall, Humana is a demonstrably excellent company, but the stock remains underrated. I suggest you exploit the market’s disinterest in this profitable business and buy the dip.
