Biotech Letter - John Thomas - Mad Hedge Fund Trader

Another Ride in Biotech

The biotech industry is a rollercoaster of investment opportunities, where great successes and flops can easily be the difference between riches or ruin.

Companies like Moderna (MRNA) have seen this firsthand - going from a $4 billion valuation to nearly 15-fold that amount in just one successful drug launch resulting from their COVID vaccine development program. To rekindle investor interest in what may seem like an erratic space, giants such as Merck (MRK) are also putting money into promising companies; with its recent acquisition of Prometheus Biosciences (RXDX) evidence enough that even long-established pharmas recognize the potential rewards available within biotechnology markets.

Investors seeking the next big win in biotech should look beyond household names for potential gems.

Take CRISPR Therapeutics (CRSP), whose collaboration with Vertex Pharmaceuticals (VRTX) is taking exa-cel to new heights, and Bluebird Bio's (BLUE) progress on lovo-cel as just two examples of lesser-known science ahead of its time that could pay off handsomely in your portfolio.

Recent news shows that two upcoming treatments for sickle cell disease, exa-cel and lovo-cel, could be cost-effective if priced below $1.9 million - a figure the Institute of Clinical and Economic Review (ICER) concluded after conducting an extensive assessment of their financial aspects. Momentum is building as both companies aim to secure FDA approval soon; investor optimism in CRISPR continues to grow increasingly evident due to this good news.

Here’s a quick recap of the treatment’s market opportunity.

Sickle cell disease and thalassemia patients face a hefty financial burden over their lifetime, with disease-related expenses ranging from $4 million to $6 million.

As a gene-editing therapy, exa-cel is a complex treatment to manufacture and administer, which further justifies its potentially high price tag. With this innovative therapy, Vertex Pharmaceuticals and CRISPR Therapeutics aim to target 32,000 sickle cell disease (SCD) and thalassemia (TDT) patients in the United States and Europe, emphasizing the significant market opportunity for the companies.

The potential market for exa-cel, assuming a price point of $2 million, amounts to a staggering $64 billion opportunity.

While this price tag may seem steep, it is not unprecedented in the industry. Bluebird Bio, for instance, secured approval for its gene-editing medicine Zynteglo last year, pricing it at $2.8 million.

The question remains whether third-party payers will be willing to cover the high costs associated with these treatments. Case in point – Bluebird Bio exited the European market after being unable to secure favorable deals with third-party payers. As such, how exa-cel will fare in this challenging reimbursement environment is yet to be determined.

As CRISPR Therapeutics and Vertex Pharmaceuticals chart their path for the launch of exa-cel, they are keenly aware that pricing gene editing therapies rightly is critical.

Both companies have been in active dialogue with insurance providers and governmental programs like Medicaid to ensure this goal comes to fruition. Even if it means accepting modest prices for its product, there's still immense potential for exa-cel due to the lack of existing treatments meeting SCD and TDT patients' needs.

Given these details, where does CRISPR currently stand?

Investing in clinical-stage biotech stocks can be a tricky, with the potential rewards marred by the risks of what still lies ahead. However, for those brave enough to take on this challenge, there's an astronomical market opportunity at stake—the CRISPR Therapeutics and Vertex Pharmaceuticals tag team are vying against formidable foes like Bluebird’s Zynteglo as well as lovo-cel, one that could transform how SCD gene editing is treated if approved soon by FDA.

With a bigger war chest, however, Vertex may have an edge in the race, but CRISPR is no slouch, with an agreement in place to retain 40% of exa-cel's profits. It remains to be seen who will come out on top remains to be seen, but the potential rewards are undeniably huge.

As investors eagerly await the approval of exa-cel, CRISPR Therapeutics' promising gene-editing therapy for sickle cell disease, the company's market capitalization may not reflect the therapy's massive potential.

Assuming that exa-cel delivers and truly becomes a multi-billion-dollar opportunity, CRISPR Therapeutics and Vertex Pharmaceuticals are poised to capture a significant market share with their forthcoming therapies. With the advantage of a stronger cash position, Vertex could push the scales in its favor, helping with the therapies' launch.

Even conservatively assuming profits of $12 billion, CRISPR Therapeutics' market cap of $3.6 billion does not do justice to the company's potential.

While it's still early days, CRISPR Therapeutics' other promising programs should not be ignored. The company is somewhat fairly valued, but exa-cel's approval could send its shares soaring.

Beyond the financial benefits, the success of exa-cel could also bolster CRISPR Therapeutics' position as a leader in gene editing technology.

The company's pipeline includes promising programs in immuno-oncology and rare diseases, and the sustained revenue generated by exa-cel could fuel further research and development efforts. This bodes well for the stock's prospects, as CRISPR Therapeutics continues to advance the frontiers of innovative medicine.

Meanwhile, another possibility for CRISPR is a buyout.

The gene-editing market may be small, but its rapid growth rate of nearly 30% until 2030 presents an enticing opportunity for healthcare businesses to pursue. The market is estimated to reach less than $15 billion by then. With an approved gene-editing therapy, CRISPR Therapeutics could be a valuable asset for a larger healthcare company seeking growth.

At a market cap of less than $4 billion, CRISPR Therapeutics is an affordable acquisition for a top healthcare company looking to expand its portfolio. The company's favorable balance sheet, with over $1.8 billion in cash and short-term investments and modest debt of just over $244 million, makes it even more appealing as a potential acquisition.

The acquisition of CRISPR's business wouldn't come with a lot of headaches, and it could instantly boost a company's growth prospects.

With the sustained revenue from exa-cel and the potential for more clinical and regulatory wins in its other programs, CRISPR Therapeutics' gene-editing pipeline is worth considering for any healthcare business looking to capitalize on the promising growth opportunities in this market.

Overall, the potential for significant upside in the short and mid-term, combined with the company's pioneering spirit, makes CRISPR Therapeutics an attractive investment opportunity for discerning investors.

April 18, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 18, 2023
Fiat Lux

Featured Trade:

(A BEAR MARKET BARGAIN)
(VRTX), (CRSP), (BLUE)

A Bear Market Bargain

Biotech Letter

When the Nasdaq Composite fell by 33%, it created the ideal excuse for savvy investors to pounce on high-quality discounted stocks.

While it can be one of the most uncomfortable learning experiences, Wall Street reminded investors last year that even the most promising stocks can and will plunge into unimaginable depths as quickly as they can skyrocket.

However, here’s a fascinating thing about the slipping prices courtesy of the bear market: These present a rare red-carpet chance for long-term investors. Although the Nasdaq Composite has been experiencing back-to-back double-digit corrections, a bull market almost always recoups its losses eventually.

Vertex Pharmaceuticals (VRTX) stands out as one of the most exciting growth stocks that investors should consider in the biotechnology and healthcare sector.

For the uninitiated, Vertex has become synonymous with cystic fibrosis (CF) treatments.

CF is a genetic disorder that affects the respiratory, digestive, and reproductive systems. It causes the production of thick and sticky mucus in these organs, leading to serious health problems. The global market for cystic fibrosis treatments is projected to reach $18.9 billion by 2027.

Vertex currently holds six approved CF treatments. Among these, the combination therapy Trikafta, also known as Kaftrio in the EU, stands out as their top-selling product. In 2022, Trikafta's sales surged to $7.6 billion from $3.8 billion in 2020, driving revenue growth.

Given its dominance in the market, it’s clear that no other drugmaker comes even close to challenging Vertex when it comes to CF. To boot, this biotech leader has several new areas of focus that hold the potential of not only delivering fresh revenue streams but also turning into blockbusters soon.

Actually, Vertex is a step closer to launching a new blockbuster in the form of a new type of treatment called exa-cel, which uses gene-editing technology to fix the genetic defect that leads to rare and often untreatable diseases.

The biotech and its co-developer, CRISPR Therapeutics (CRSP), recently submitted their application to the FDA to approve their sickle cell disease and beta-thalassemia treatments. The two companies are also waiting for approvals from the EU.

Based on the prevalence of these genetic blood disorders, the lack of effective treatments, and the potential of Vertex and CRISPR’s candidates to provide a one-time cure, the market size for exa-cel treatments for beta-thalassemia and sickle cell disease is estimated to be worth a total of $3.5 billion annually.

But, Vertex appears to have more plans for exa-cel.

For context, here is how exa-cel is applied to treatments for sickle cell disease and beta-thalassemia: the patient's own stem cells are collected and edited using CRISPR/Cas9 technology, creating exa-cel cells. These cells are then infused back into the patient after a conditioning process, which is currently done through chemotherapy with the drug Busulfan.

However, this approach is risky and has caused adverse effects in clinical trials. As a result, some patients with these conditions may not be able to benefit from exa-cel.

This concern prompted Vertex to explore new conditioning agents for exa-cel treatments that may be less aggressive on the body. They have licensed ImmunoGen's (IMGN) antibody-drug conjugate (ADC) technology, which is commonly used in cancer treatments to deliver cancer-killing agents directly to cancer cells without harming other cells.

ADCs are often used in cancer treatments to target cancer cells, specifically, sparing healthy cells from damage. This technology can potentially make the exa-cel treatment safer and more accessible for patients.

Regarding competitors, the frontrunner would be Bluebird Bio (BLUE). This was the first biotech to submit a sickle cell disease treatment candidate to the FDA. Unfortunately, its approval has faced delays. Still, Bluebird remains the only biotech that could be considered a direct rival of Vertex and CRISPR.

Apart from these, Vertex has two additional pipeline programs queued for launch by 2024.

The biotech expects to finalize its late-stage clinical trials for VX-548, a non-opioid pain treatment, by the first quarter of 2024. Vertex is also assessing a triple-drug combo targeting CF. Both candidates hold the promise of delivering over $2 billion in sales annually.

In addition, Vertex has been aggressive in acquiring companies to expand its portfolio.

Just last year, the biotech signified its plan to become an active player in the diabetes space when it bought ViaCyte and Catalyst Bioscience. Based on the portfolio of the acquired companies, Vertex appears to be making headway in developing stem cell treatments for Type 1 diabetes.

What do these developments mean? Well, it’s critical to review the whole picture.

Vertex already rakes in billions of dollars from its CF treatment franchise, and it’s highly plausible that the biotech will sustain its monopoly of the market for years to come.

At the same time, the company is also aggressively widening its reach and expanding into more lucrative segments. In short, the company is clearly on a roll. Given its track record and steady progress, it is an excellent long-term stock. I suggest you buy the dip.

April 13, 2023

Biotech Letter

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

Featured Trade:

(SMOOTH SAILING THROUGH ROUGH WATERS)
(NVO), (LLY), (SNY)

Smooth Sailing Through Rough Waters

Biotech Letter

Even in the toughest of times, some stalwart companies manage to maintain their footing and keep making strides. Novo Nordisk (NVO) has taken this feat to heart by continuing its success despite facing numerous market speed bumps—making it one resilient company worth considering.

Novo Nordisk, a veteran player in the pharmaceutical industry, has been consistently delivering impressive financial results. In 2022, the company's net sales increased by a remarkable 26% year over year, amounting to approximately $25.5 billion. However, it's worth noting that currency exchange rate fluctuations may have played a role in this growth.

The company continues to showcase impressive financial performance, with net sales surging by 26% to $25.5 billion in 2022. Even after accounting for currency exchange rate fluctuations, the pharmaceutical company's revenue still jumped by a commendable 16%. Additionally, Novo Nordisk's net profit increased by 16% to $8 billion, solidifying its position as a top-performing player in the industry.

Moreover, Novo Nordisk remains a prominent contender in the diabetes drug arena, capturing almost a third of the market share as of November 2022.

Novo Nordisk's market dominance in diabetes drugs owes much to its portfolio of effective and innovative products like Rybelsus, Ozempic, and the recently approved Wegovy. This dynamic trio has been instrumental in driving the company's sales growth and maintaining its edge in the competitive pharmaceutical industry.

Ozempic has been a critical player in Novo Nordisk's revenue stream, bringing in over a third of the company's total revenue at just under $8.9 billion last year.

Novo Nordisk's market exclusivity for Rybelsus and Ozempic remains intact, giving the Danish pharmaceutical company a few more years to maximize its potential.

Both drugs are injected weekly and heavily marketed in the U.S. With patent expirations in China in 2026, followed by Europe and Japan in 2031, and the U.S. in 2032, Novo Nordisk is likely to maintain its strong position for a while yet.

As for Wegovy, the newcomer in the obesity care market contributed just 3% of the company's total revenue, with $930 million in sales for 2022. However, with its recent approval for chronic weight management by the FDA and in the UK, the potential for growth and expansion is promising.

In its 2022 annual report, Novo Nordisk announced that it controls over half the global market for GLP-1 drugs, with a market share of 54.9% in 2022, up from 52.7% in 2021. Its primary competitors include Eli Lilly's (LLY) Trulicity and Sanofi-Aventis's (SNY) Adlyxin, which exited the U.S. market at the end of 2022.

Overall, the international diabetes market seems to favor Novo Nordisk, with its market share rising from 29.3% to 31.9% from 2020 to 2022.

The company is projected to continue its success, with sales and operating profits expected to increase in the 13% to 19% range at CER in 2023, according to its annual report. Analysts' average estimate of $30.1 billion in 2023 revenues aligns with this projection, representing a 16.7% increase at CER.

Leveraging this dominance, the company is further strengthening its position in the diabetes market, a disease affecting over 415 million people worldwide, and the numbers continue to grow. According to the Centers for Disease Control and Prevention, there will be over 500 million patients by 2040.

For instance, its recent announcement of the positive results of its Phase 3b Pioneer Plus clinical trial of Rybelsus is a further testament to its ability to innovate and stay ahead in the diabetes treatment arena. The trial showed a statistically significant reduction in blood sugar levels, indicating the potential for a more intense treatment option for type 2 diabetes patients.

Meanwhile, Obesity, a major risk factor for diabetes and other health problems, also presents a significant market opportunity for Novo Nordisk.

In fact, the company's revenue from these treatments doubled in the previous year, propelling its overall sales to an upward trajectory for the past half-decade.

Needless to say, Novo Nordisk is showing no signs of slowing down, and its strong position in the diabetes and obesity treatment market is poised to fuel its growth for the foreseeable future. I suggest you buy the dip.

April 11, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 11, 2023
Fiat Lux

Featured Trade:

(NOT NOW, BUT SOON)
(JNJ), (NVO), (LLY), (AMGN), (GILD), (ABBV), (BMY)

Not Now, But Soon

Biotech Letter

During times of market turbulence, many investors may find themselves hesitant to participate due to the uncertainty and risks involved. However, one potential strategy to weather the storm could be to seek out dividend stocks.

By investing in these types of equities, individuals can find a sense of stability and security, as they often offer a reliable source of income regardless of market fluctuations. In short, dividend stocks can serve as a safe harbor amid a choppy investment climate.

If you're looking for a healthcare stock with some serious street cred, check out Johnson & Johnson (JNJ).

Before delving into the company, knowing that JNJ’s stock price isn't exactly bargain-bin material is crucial. Still, it's not the most expensive pharmaceutical company out there, either. Novo Nordisk (NVO) and Eli Lilly (LLY) are commanding higher valuations, while JNJ’s peers like Amgen (AMGN), Gilead Sciences (GILD), AbbVie (ABBV), and Bristol-Myers Squibb (BMY) are trading at a lower price-to-free-cash-flow ratio.

Let's not forget that JNJ isn't just a one-trick pony in the pharmaceutical game.

With around 30% of its revenue from medical devices, we can't compare it apples-to-apples with other pharma companies. Peers in the medical devices sector typically trade at higher valuation multiples, so it's essential to keep that in mind when evaluating JNJ's price-to-free-cash-flow ratio.

Moreover, this mega-brand dominates both the pharmaceutical and consumer goods scenes. With fingers in many pies - pharma, med tech, and consumer goods - JNJ has made quite the name for itself.

Despite being a seasoned player, Johnson & Johnson (JNJ) still has some spring in its step; come year-end, the company will be shaking things up with a spin-off of its consumer segment into a new entity, Kenvue.

JNJ’s upcoming spin-off is about sharpening its focus on what matters - its pharma business. And for good reason - this is where the big bucks are made.

The healthcare giant’s immunology and cancer drugs are outperforming the rest of the pack, with two key players, Stelara and Tremfya, delivering some serious sales growth last year. Together, they raked in a cool $12.3 billion, proving that sometimes, less really is more.

JNJ’s pharma segment is crushing it. Darzalex, the multiple myeloma med, racked up an impressive $8 billion in sales, a 32% boost from the previous year. Meanwhile, prostate cancer drug Erleada wasn't far behind, with a 45.7% increase in sales to $1.9 billion.

All in all, JNJ's pharma segment hauled in a massive $52.5 billion in revenue in 2022. Not too shabby.

Looking deeper into its performance in fiscal 2022, JNJ reported a slight increase of 1.2% YoY in sales, reaching $94.9 billion, but currency effects had a negative impact. However, adjusted earnings per share increased by 3.6% YoY, with operational growth at 9.2%.

The "Consumer Health" segment reported a 0.5% decline in revenue, but adjusted operating growth was 3.6%.

The "Pharmaceuticals" segment, responsible for more than half of revenue, increased sales by 1.7% YoY to $52.6 billion, with operational growth at 6.7%.

The "MedTech" segment increased revenue by 1.4% YoY to $27.4 billion, with operational growth at 6.2%.

For fiscal 2023, Johnson & Johnson is expecting revenue growth of 4.5% to 5.5% and adjusted earnings per share growth of 3% to 5%.

Despite the positive reports, JNJ investors are still anxious about the future primarily because of the impending patent expirations of existing products. Unfortunately, the company is heading towards a patent cliff, as it faces the challenge of replacing revenue from products with expiring patents.

Stelara generated $9.7 billion in revenue in fiscal 2022 and will lose patent protection in 2023. Simponi, which generated $2.2 billion in revenue in fiscal 2022 and will lose patent protection in 2024, are two of the biggest concerns.

These two products account for 12.5% of the company's total revenue and 22.5% of the pharmaceutical segment revenue. Replacing these sales will not be an easy feat.

Additionally, in 2027, JNJ will lose patent protection for two other vital drugs - Xarelto and Imbruvica, which generated $2.5 billion and $3.8 billion in revenue in fiscal 2022.

To resolve these concerns, JNJ is putting its money where its mouth is regarding innovation. The company invested a whopping $14.6 billion in R&D in 2022 alone, and it looks like it's paying off. With plenty of promising drugs in the pipeline, JNJ is poised to continue its growth trajectory in the coming years.

When it comes to dividends, JNJ is royalty. With a 60-year track record of annual dividend increases, JNJ company has earned the coveted title of Dividend King.

JNJ boasts a healthy payout ratio of 41% and a juicy dividend yield of 2.8%, well above the S&P 500's average yield of 1.7%. The company's steady cash flow quickly covers these payouts, making it a solid choice for investors seeking reliable income.

While JNJ may be a top-notch investment option in the long run, the current market conditions make it a tad pricey. So, for now, just give it a spot on your watchlist and wait for the dip to go for a bargain. Remember, patience is not just a virtue but also a lucrative strategy in investing.

jnj

April 6, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 6, 2023
Fiat Lux

Featured Trade:

(A KING AMONG KINGS)
(ABT)

A King Among Kings

Biotech Letter

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.

April 4, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 4, 2023
Fiat Lux

Featured Trade:

(IN IT TO WIN IT)
(HUM)