Biotech Letter - John Thomas - Mad Hedge Fund Trader

In It To Win It

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.

humana

March 30, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 30, 2023
Fiat Lux

Featured Trade:

(ANOTHER MONOPOLY ON THE RISE)
(ZTS), (PFE)

Another Monopoly on the Rise

Biotech Letter

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.

March 28, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 28, 2023
Fiat Lux

Featured Trade:

(NOWHERE TO GO BUT UP)
(REGN), (SNY), (RHHBY)

Nowhere To Go But Up

Biotech Letter

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.

March 23, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 23, 2023
Fiat Lux

Featured Trade:

(OLD BUT GOLD)
(HUM), (UNH)

Old But Gold

Biotech Letter

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.

humana

March 21, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 21, 2023
Fiat Lux

Featured Trade:

(A BUMP IN THE ROAD)
(SRPT), (BIIB), (VRTEX), (RHHBY)

A Bump In The Road

Biotech Letter

Little Orphan Annie had already predicted it: “The sun will come out tomorrow.” While it is disheartening that we’re still in a bear market, stocks will bounce back eventually.

It looks like Wall Street overreacted once again following the change in leadership in the Food and Drug Administration earlier this month. Dr. Billy Dunn, the public face of the highly controversial accelerated approval granted to Biogen’s (BIIB) Alzheimer’s disease drug and the standard bearer of the organization’s push for more flexibility on drug approvals, retired.

Biotech investors have expressed anxiety over the possibility of facing more stringent rules in the drug approval process. The fear is that Dunn’s departure would signify a step toward a more conservative handling of applications.

While the FDA assured the public that the approval process would likely remain the same, some notable decisions are proving otherwise.

One of them involves Sarepta Therapeutics (SRPT).

Sarepta Therapeutics is a biopharmaceutical company that focuses on developing and commercializing RNA-targeted therapies for rare neuromuscular diseases. Founded in 1980, this Cambridge-based company’s most notable drug is Exondys 51 (eteplirsen), used to treat Duchenne muscular dystrophy (DMD), a rare genetic disorder affecting muscle function.

Exondys 51 is designed to skip over a faulty section of the dystrophin gene, which helps to produce a functional protein that can slow the progression of the disease. Sarepta is also developing RNA-targeted therapies for rare diseases, such as limb-girdle muscular dystrophy and myotonic dystrophy. Since then, the company has earned additional approvals for Vyondys 53 and Amondys 45.

Basically, Sarepta is to DMD as Vertex Pharmaceuticals (VRTX) is to cystic fibrosis—both have virtual monopolies in their target markets.

Recently, though, Sarepta stock has started to fall. This came after the FDA announced its plan to seek additional input from a panel of independent experts regarding the company’s new DMD gene-therapy candidate: SRP-9001.

The move came as a surprise since Sarepta disclosed only a week or so ago that the FDA had no intention to convene an advisory board to evaluate the candidate. However, since SRP-9001 is one of the first-ever gene therapies biologics license applications built on a surrogate perspective, meaning it’s an alternative to clinical results, the FDA felt the need to add a layer of review.

Still, the fall in Sarepta’s share prices appeared to be yet another overreaction. Besides, the move was not triggered by any issue with the candidate or data from the trials. It was simply a precautionary measure. Despite the slight detour, Sarepta remains optimistic that it will receive the go signal for SRP-9001 by May 2023.

Prior to this, Sarepta shares have been beating the market since 2023 started and have recorded more than double increases in the last five years. Although the company does not enjoy the same name recall as several of its peers, Sarepta’s platform of promising and innovative treatments has delivered critical wins in the past, especially in the DMD market.

On top of its DMD-centered products, Sarepta has over 40 clinical programs. That’s impressive for a biotech with an $11 billion market capitalization.

More importantly, the latest catalyst for Sarepta, SRP-9001, is projected to become another blockbuster. This Roche-partnered (RHHBY) treatment is estimated to generate more than $4 billion in peak sales.

Notably, this particular DMD indication has been shown to exhibit an extremely high barrier to entry, with practically all experimental treatments falling apart in clinical trials. Needless to say, SRP-9001 would have an exceedingly high commercial ceiling plus a built-in competitive moat.

Investors can expect remarkable progress from Sarepta as a company and its programs in the next five years. Given the company’s track record and history, it won’t be farfetched for it to come up with more blockbusters soon.

March 16, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 16, 2023
Fiat Lux

Featured Trade:

(WHO’S REALLY THE BOSS?)
(ILMN), (AAPL), (TWX), (MDLZ), (CVX)