Mad Hedge Biotech and Healthcare Letter
March 2, 2023
Fiat Lux
Featured Trade:
(AN UNBEATABLE STOCK REFORMING THE SECTOR)
(LLY), (JNJ), (SNY), (NVO)
After starting 2023 with such great promise, practically all major stock indexes in the United States fell last month. Stocks dipped because of the unrelentingly rising inflation, which economists anticipate to lead to another round of seemingly unstoppable interest rate hikes later in the year.
What can stock investors do in this climate?
The ideal stocks in this situation are those defensive in nature because they tend to be less reactive or sensitive to macroeconomic conditions. As a result, defensive stocks deliver relatively solid price performance in bear and bull markets.
Defensive stocks are companies whose products or services are considered essential or necessary, regardless of economic conditions. These companies typically provide products or services that people and businesses cannot easily do without, such as healthcare, utilities, and consumer staples. Because these companies are less susceptible to fluctuations in the economy, they are often viewed as a safe investment option during times of market uncertainty.
Eli Lilly (LLY) stands out as one of the best defensive stocks in the biotechnology and healthcare sector today.
With over 38,000 employees across the globe and products commercially available in at least 120 countries, the company is no doubt a dominant presence in the industry. It is a global pharmaceutical organization that develops, manufactures, and markets drugs for a wide range of medical conditions, including diabetes, cancer, and autoimmune disorders.
The company has been in operation for over 140 years and has a strong reputation for innovation and research. Apart from Johnson & Johnson (JNJ), Eli Lilly’s market capitalization of roughly $327 billion makes it the most prominent pharmaceutical business worldwide.
Meanwhile, Eli Lilly pays out a dividend that yields around 1.1%. Over the trailing decade, this giant drugmaker’s dividend has experienced a consistent increase of about 130%.
Given that Eli Lilly is a healthcare company that produces medicines for life-threatening and chronic conditions, it can be considered a defensive stock.
In 2022, the company’s shares gained approximately 32.4% thanks to its solid organic growth and deep and diverse new treatments and drugs pipeline. Considering its history and track record combined with the market's volatility, Eli Lilly also benefited from its image of being a “safe” stock.
Despite the uncertainties, Eli Lilly looks to be poised for another healthy run in 2023. In terms of growth, the company is projected to climb higher courtesy of its newly approved diabetes and obesity drug, Mounjaro, which shows impressive potential. The company also has a promising pipeline, with several high-value candidates in the immunology and dermatology segments expected to gain approval this year.
Recently, Eli Lilly announced that it would put a cap on the out-of-pocket expenses for insulin at $35 per month for uninsured patients and those covered by commercial insurance. The company also surprised the public by announcing its plan to lower the price of this highly controversial drug by 70%.
After drugmakers jacked up the price of insulin in the past years, this drug became the symbol of out-of-control healthcare costs.
In the US alone, over 30 million people suffer from diabetes. Of these patients, more than 7 million need to take insulin every day. The alarming part of this situation is that 1 in 7 patients who require insulin daily find their budget affected at “catastrophic” levels because of the medication’s cost. These patients allot a minimum of 40% of their disposable income to the treatment alone.
This is why Eli Lilly’s announcement marked a significant development in the sector after months of aggressive lobbying to lower the price of the drug. With the company’s decision, the pressure became more intense for other drugmakers to follow suit. Specifically, major insulin distributors like Sanofi (SNY) and Novo Nordisk (NVO) are urged to apply the same rule.
All in all, Eli Lilly has a virtually recession-proof model and a positive long-term outlook. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
February 28, 2023
Fiat Lux
Featured Trade:
(NO REST FOR THE WEARY)
(PFE), (BNTX), (SGEN), (MRK)
Pfizer (PFE), along with its partner BioNTech (BNTX), developed one of the first COVID-19 vaccines to receive emergency use authorization from regulatory bodies worldwide. The Pfizer-BioNTech vaccine has been highly effective in preventing COVID-19 infection and has played a significant role in the global effort to curb the pandemic.
In addition to its vaccine, Pfizer also developed a COVID-19 treatment called Xeljanz, which has shown promising results in clinical trials. Xeljanz, originally developed to treat rheumatoid arthritis, is an oral medication that works by blocking a molecule involved in the immune response, which can reduce the risk of severe illness and death in some COVID-19 patients.
The Pfizer-BioNTech vaccine and Xeljanz have contributed to the company's financial success during the COVID-19 pandemic. In fact, this lineup made up the bulk of Pfizer’s operational growth of an impressive 30% year over year, pushing the company’s sales in 2022 to a whopping $100 billion.
But now that the pandemic has come to an end, Pfizer faces a massive revenue hit. With its boatload of cash, however, the company is in excellent shape and position to make an acquisition.
The latest name under Pfizer’s radar is Seagen (SGEN).
This is the second time Seagen has found itself the center of acquisition reports. In 2022, the biotech was said to be in serious discussion with Merck (MRK). At one point, Merck reportedly offered $200 per share, but the talks fell apart because neither party was happy with the final price.
Now it’s Pfizer’s turn to pitch its offer. The Big Pharma company is said to be in discussions to buy the cancer-focused biotech for a deal worth more than $30 billion.
This deal could prove to be a boon for Pfizer as the company sustains its momentum and continue to boost its portfolio and late-stage programs. Aside from the waning sales of its COVID products, it also faces a patent cliff as some of its blockbuster drugs will soon lose their exclusivity.
Seagen focuses on a group of cancer therapies called antibody-drug conjugates, or ADCs.
Basically, ADCs are a type of cancer treatment that combines the specificity of antibodies with the potency of chemotherapy. ADCs consist of three components: an antibody that targets a specific cancer cell marker, a cytotoxic drug that kills the cancer cell, and a linker that connects the two components.
Once the ADC is administered to the patient, the antibody portion of the ADC selectively binds to the cancer cell surface marker. Then the entire ADC is internalized into the cancer cell. Once inside the cancer cell, the linker is degraded, and the cytotoxic drug is released, killing the cancer cell.
The advantage of ADCs over traditional chemotherapy is that they are more selective and can target cancer cells more precisely while minimizing damage to healthy cells. ADCs have shown promising results in clinical trials and are currently approved for the treatment of several types of cancer.
In 2019, Seagen received FDA approval for its ADC named Padcev. The treatment raked in $451 million in 2022, but sales are projected to reach $2.4 billion in 2027.
Since Merck has been working on its own ADCs, a Pfizer acquisition of the sought-after Seagen seems likely as it would not attract anti-trust investigations.
One of the main reasons Big Pharma names are fighting over Seagen is the biotech’s revenue forecasts. By 2026, Seagen is projected to rake in $5 billion in revenue and peak at $9 billion by 2030.
Aside from Padcev’s current indication, Seagen has been working on how it could be used as a combo treatment alongside Merck’s top-selling Keytruda to target bladder cancer. The company also queued the drug for several trials. These would boost the company’s $2 billion annual revenue and $30.1 billion market value if approved.
Pfizer has been sitting on a massive war chest thanks to the success of its COVID programs. Despite its impressive cash flow, the company has no time to rest as it scrambles to ride the momentum and ensure that all its progress doesn’t go to waste.
Since then, the company has been aggressive in striking deals, including its $11.6 billion purchase of Biohaven Pharmaceuticals, which came with a top-selling migraine treatment, and its $5.4 billion agreement with Global Blood Therapeutics, which brought with its rare hematological therapies.
If Pfizer buys Seagen, it will mark the most significant deal since the Big Pharma’s acquisition of Wyeth for $68 billion back in 2009.
Pfizer disclosed that it plans to add $25 billion to its annual revenue via business development agreements at the end of the decade as it aims to mitigate the projected $17 billion loss from its products going off-patent. Considering that the company would buy Seagen shares at a premium, the deal would be a win-win for both parties.
Mad Hedge Biotech and Healthcare Letter
February 23, 2023
Fiat Lux
Featured Trade:
(BATTLE FOR GENE THERAPY SUPREMACY)
(CRSP), (NVS), (BIIB), (BLUE), (VYGR), (GBIO), (SIOX), (NTLA), (EDIT), (VRTX), (PRIME), (BEAM)
Gene therapy is arguably one of the most fascinating and revolutionary fields in the healthcare and biotechnology industry.
A significant reason for the excitement behind gene therapy is that it provides the possibility of “functional cures,” such as “one-and-done treatments,” for patients. It’s also why these therapies are some of the most costly on the market.
For example, Zolgensma from Novartis (NVS), which focuses on treating spinal muscular atrophy in infants, has a whopping $2 million-plus price tag. Despite that, it’s considered the best option.
For context, its counterpart, Spinraza from Biogen (BIIB), costs roughly $750,000 in the first year of treatment. Unlike Zolgensma, Spinraza needs to be administered four times each year. After the first treatment, patients would need to pay $350,000 per annum. By the fifth year, Spinraza has surpassed the treatment cost of Zolgensma.
Despite its incredible potential, gene therapy is one of the riskiest bets.
Take Bluebird Bio (BLUE) into consideration. This biotech has won not only one but two regulatory approvals for its innovative gene therapies. One is for Skysona, which targets a rare cerebral condition called adrenoleukodystrophy; the other, Zynteglo, is for the blood disorder beta-thalassemia. Unfortunately, this biotech’s price has slid by more than 90% in the past five years.
Working on gene therapies is filled with complicated and challenging obstacles. Most companies in this segment ended up burning through their cash without successfully launching a marketable product. Some examples of these are Voyager Therapeutics (VYGR), Generation Bio (GBIO), and Sio Gene Therapies (SIOX).
However, there is a field in the gene therapy world that has substantially rewarded investors: CRISPR gene editing.
CRISPR means Clustered, Regularly Interspaced Short Palindromic Repeats, which was discovered by Jenifer Doudna and Emannualle Charpentier. Their discovery won the Nobel Prize for Chemistry in 2020.
Basically, CRISPR is utilized by bacteria to recognize genetic sequences that belong to dangerous or harmful viruses and cleave them via specialized enzymes like CAS-9. Eventually, Doudna and Charpentier discovered that the system could be modified to target and remove, destroy, or even edit damaging genetic sequences in human beings.
This discovery gave birth to many biotech companies. Intellia Therapeutics (NTLA) was the brainchild of Doudna, while Charpentier co-founded CRISPR Therapeutics (CRSP).
Over the past five years, NTLA's share price has risen by 146% while CRISPR skyrocketed by 210%. In comparison, the S&P 500 recorded a 53% gain within the same timeframe.
Given the volatility of the field and market volatility, other CRISPR-centered companies failed to replicate this success.
The share price of Editas Medicine (EDIT) fell by 55% over the past five years. Caribou Biosciences (CRBU) also failed to ride the momentum and slid by 44%.
Still, there are positive updates amid the struggles of the sector.
The latest news is from CRISPR Therapeutics, which expects several catalysts in 2023 thanks to its promising pipeline of candidates and clinical trials. So far, one of the most anticipated catalysts is its biologics license application for its sickle cell disease candidate, which the company aims to file by March 2023.
CRISPR Therapeutics developed this candidate, called exa-cel, alongside Vertex Pharmaceuticals (VRTX). It would be the first-ever Crispr-based therapy to edit or rewrite faulty genes if approved. Based on the company’s data, patients who underwent this one-time treatment have continued to be free of sickle cell disease symptoms.
Every year, 100,000 patients in the US are reported to suffer from sickle cell disease. Many companies have offered treatments for this condition for years but no cure. Hence, CRISPR and Vertex’s one-and-done therapy has received a fast-tracked designation. Consequently, this would give the developers sought-after market exclusivity.
As anticipated, CRISPR Therapeutics’ competitors are hot on its heels with sickle cell disease treatments of their own. To date, Prime Medicine (PRME), Beam Therapeutics (BEAM), Editas, and Intellia have candidates queued for clinical trials.
Overall, the gene editing sector continues to be an exciting and interesting field. Investors looking to take part of the action in this segment should consider buying and holding CRISPR Therapeutics stock for at least five years because the company has a reasonable chance of becoming the most dominant name in the business soon.
Mad Hedge Biotech and Healthcare Letter
February 21, 2023
Fiat Lux
Featured Trade:
(AN UNFAILING STOCK FOR YOUR WATCHLIST)
(UNH)
After a grueling year, investors are desperate for high-quality stocks that can push their portfolios toward a robust recovery. Besides, the stock market is still expected to suffer from volatility because of skyrocketing interest rates and concerns over a possible recession.
This is why it’s critical to look for stocks with long-term potential regardless of the short-term uncertainties.
One of the stocks that fall under this category is UnitedHealth Group (UNH).
United is the second biggest health insurance plan provider in the United States. It handles over 45 million individuals domestically and more than 5 million customers across the globe. On top of these, United has over 100 million clients via its Optum Health subsidiary.
United shares have catapulted by 115% over the past 5 years and 748% in the last decade. This shows the company’s stability and solid leadership. After all, these incredible gains didn’t occur by accident.
The company has reported positive year-over-year growth in its bottom line in 19 out of 20 years, with the Great Recession in 2008 being the only exception.
The company provides an extensive range of services, including medical and commercial insurance, prescription, Medicare Part D plans, Medicare Advantage, Medicaid, and Medicare Supplement. Its sheer size and diverse portfolio easily set United apart from its counterparts in the sector. More importantly, the company is consistent in its performance and frequently surpasses its rivals in terms of profitability.
It also boasts of higher margins that consequently lead to better efficiency ratios like return on equity and return on assets. This indicates United’s superior way of handling its financial resources to ensure it delivers good returns for its shareholders.
These factors all result in a notably solid company that delivers stable cash flows throughout the different economic cycles. Admittedly, though, United will never become a transformative stock. Instead, it should be regarded as one of the most reliable dividend stocks in anyone’s portfolio.
Over the last 10 years, United’s shareholder distributions have regularly grown, with the stock offering a 1.3% dividend yield. While this is notably lower than the S&P 500’s current average yield at 1.7%, the company has been aggressive in boosting its payouts every quarter.
For context, its $1.65 per share payment in the current quarter is almost eight times the $0.2125 it paid its shareholders 10 years ago.
Remarkably, the company only took 7 years to triple its payout in 2015, which was at $0.50 per share.
All in all, these average out to a compound annual growth rate of 18.6%.
That’s an impressive rate of growth, and this performance could very well be sustained thanks to United’s strong earnings.
With the business showing no signs of slowing down anytime soon and the continuous expansion of its Medicare segment, United’s bottom line is projected to climb between 13% and 16% every year over the long term.
Currently, United trades at 23 times earnings, making it reasonably priced albeit a bit more costly than the S&P 500’s average of 20. Still, this type of growth and such a solid dividend make the healthcare stock worth a premium.
To date, United has a payout ratio of 29%, demonstrating that the company is capable of producing more than enough earnings to sustain and boost its dividends.
It also has a forward P/E ratio under 20, indicating that investors can buy United shares sans the risk brought by too much volatility. Hence, this is an excellent stock for income investors and retirees. I suggest you put it on your current watchlist and be ready to buy the dip.
Mad Hedge Biotech and Healthcare Letter
February 16, 2023
Fiat Lux
Featured Trade:
(AN INFALLIBLE GROWTH STOCK IN BIOTECH)
(VRTX), (CRSP), (MRNA)
A buzzer-beater that you have no doubt would win your team the championship trophy. A job interview where you unequivocally know you impressed the recruiter. A stock exhibiting incredible growth prospects. There are just some things you simply know will succeed no matter what.
One surefire growth stock comes to mind in the biotechnology and healthcare sector: Vertex Pharmaceuticals (VRTX).
Although several biotechnology stocks took it on the chin in 2022, Vertex has been spared. In fact, this biotech crushed the market in the trailing-12-month timeframe, amplified by solid revenue, promising earnings growth, and remarkable long-term catalysts. On top of these, Vertex continues to dazzle with its financial reports.
Last year, the company’s revenue jumped by 18% year over year to reach $8.9 billion. Meanwhile, Vertex’s net income soared by 42% compared to 2021 and hit $3.3 billion.
The main business of Vertex is focused on a lineup of treatments targeting the underlying causes linked to cystic fibrosis (CF), which continue to be significant moneymakers. However, the drugmaker also has its sights on gaining new approvals.
No other company has gotten close to challenging Vertex in the CF treatment market. The company holds the only approved medications targeting the underlying causes of this rare genetic disease. Its closest rival remains several years away from even having a chance at gaining regulatory approvals.
Nonetheless, Vertex isn’t satisfied to simply rest on the blockbuster success of its CF therapies. The company remains aggressive in developing its pipeline of new candidates, mainly targeting different segments of the rare disease treatment market.
Some of the most promising candidates in its pipeline are its work with CRISPR Therapeutics (CRSP) on a rare blood disease treatment, an mRNA-centered CF treatment with Moderna (MRNA), and a non-opioid medication targeting acute pain.
Its candidate with CRISPR is expected to gain approval in the second half of 2023, while its Moderna candidate is slated for the next phase around the same period.
Its non-opioid treatment, dubbed VX-548, is hailed as a potential new class of drug that can help manage acute pain by blocking the patient’s pain signal in the peripheral nerves. This drug could offer effective pain relief sans the risk of addiction.
To date, VX-548 has demonstrated strong efficacy in Phase 2 trials, with an excellent benefit-risk profile and absolutely no abuse potential. The Food and Drug Administration has granted it the fast track and breakthrough therapy designations—an acknowledgment of the rising unmet demand and the drug’s compelling clinical profile.
Currently, the standard of care for acute pain management continues to sorely lack a treatment that is both effective and not prone to abuse. VX-548 has the potential to fill the void and target a market size worth $4 billion in the United States alone.
Vertex also recently disclosed its move to send applications for regulatory approvals for two blood-related disorders, exa-cel and sickle cell disease, in the United Kingdom and Europe. With only a handful of available treatment options for these conditions, Vertex would be addressing a severely underserved demographic while opening new and lucrative revenue streams.
Another noteworthy move that indicated Vertex’s plans to go beyond its CF pipeline is its $320 million acquisition of ViaCyte last year.
ViaCyte gained popularity for its initiative to utilize novel stem cell-derived cell replacement therapies as a functional cure for Type 1 diabetes.
These decisions are in line company’s “five-in-five goal,” wherein the plan is to release new treatments targeting five conditions within a five-year window. If Vertex succeeds, then these could open multi-billion-dollar revenue streams for the company.
Looking at its trajectory and track record, Vertex is expected to earn major regulatory approvals soon and diversify its portfolio of treatments over the next couple of years. This would translate to sustained growth in its revenue and earnings, which would push its stock price higher. Overall, these comprise an excellent recipe for long-term growth.
