Mad Hedge Biotech and Healthcare Letter
February 14, 2023
Fiat Lux
Featured Trade:
(BETTER SAFE THAN SORRY)
(JNJ)
The market has been unstable but upbeat this year as a mix of optimistic investor sentiment and nagging concerns about the global economy has troubled investors. This is why investing in businesses on a long-term basis appears to be the trend these days.
After all, doing so makes it easier to get past near-term issues and enables investors to focus on excellent companies that can deliver significant returns in the course of more extended periods.
With these in mind, Johnson & Johnson (JNJ) emerges as one of the stable stocks worth consideration not only in the field of biotechnology and healthcare but also across the broader market.
JNJ is one of the biggest healthcare companies across the globe, and it will soon be split into two distinct entities. This spinoff is projected to be completed by November 2023, with both companies being publicly traded and aiming to pay out dividends.
A spinoff is in the works, with the company’s consumer health business turning into a new company named Kenvue. At the same time, its pharmaceutical and medical device sectors will continue under the central umbrella of JNJ.
The company’s consumer health segment historically records moderate growth, which fails to keep up with the more rapid growth experienced by its medical devices and pharmaceutical sectors.
In 2022, JNJ reported its total sales to be $95 billion, which was 1.3% higher than in 2021, with net earnings worth $18 billion. Broken down by division, the operational sales of consumer health climbed by 4%, while the pharmaceutical sector rose by 7%, and the medical devices sector increased by 6% compared to the prior year.
These results are somewhat expected considering the maturity of the consumer health segment along with the profit margins for the products in its portfolio. Nevertheless, having brands like Benadryl, Tylenol, Listerine, and Motrin would undoubtedly boost the consumer health arsenal. These widely known brands would enable this segment to sustain its growth, translating to stable ongoing gains over the long run.
JNJ’s move to buy Abiomed, the developer of the world-famous smallest heart pump, bolstered the company’s medical device sector.
Meanwhile, the company estimates its pharmaceutical sector to reach $60 billion in terms of revenue by 2025 courtesy of top-selling treatments such as cancer drug Erleada and Darzalex and plaque psoriasis medication Tremfya. In addition to the company’s robust pipeline, these projections propel JNJ’s top line forward.
Recently, JNJ increased its investment in biotech stock MeiraGTX (MGTX), lifting its stake from 3.7 million to 6.6 million shares. The two companies have been working together on the central nervous system, salivary glands, and eye treatments since 2019, with JNJ being the second-largest shareholder in this clinical-stage gene-therapy firm.
While its 2022 figures do not seem to be as impressive as others in the sector, it’s nothing to sneeze at either. In fact, it should be appreciated in the context of the longevity of JNJ’s business as well as the company’s long-established ability to continue delivering moderately-paced growth. Reviewing the last five years of JNJ, the business has grown its top and bottom line by approximately 17%.
The sheer size of JNJ and its leadership across practically all critical healthcare sectors ensured solid business and shareholder returns in the past years.
Over the last 10 years, this top-tier stock has delivered a total return of 190% for its shareholders. Meanwhile, its dividend, which the company has boosted for 60 consecutive years and counting, has climbed by 90%. Hence, investors on the lookout for a resilient company to buy and hold for a long time would be hard-pressed to find a more stable stock than JNJ.
Mad Hedge Biotech and Healthcare Letter
February 9, 2023
Fiat Lux
Featured Trade:
(AN EMERGING KING OF BIOSIMILARS)
(AMGN), (ABBV), (JNJ), (BAYG), (AZN), (REGN)
Patience is one of the key attributes that long-term investors need to cultivate, but practicing it is challenging. Stock markets are entirely unpredictable, and their ups and downs tend to rattle even the most experienced investors.
However, it’s essential to keep a calm mind and to be confident that the businesses you invest in have the fortitude to overcome even the most challenging economic or market downturn.
The biotechnology industry is an excellent place to search for stocks that can overcome market turmoils and succeed in the long run because the treatments they develop are so crucial to the lives of their clients.
Amgen (AMGN) is a biotech that would make an excellent long-term investment.
This business, which has been a leader in the biotech sector since the 1980s, is among the largest in the world.
Amgen is also a member of the renowned Dow 30 companies, with a focus on oncology, biosimilars, and inflammatory diseases. In the past 10 years, it has established a strong track record and solid revenue growth trajectory.
The company recently released its fourth-quarter results, and they looked a tad flat on the surface. The report disclosed a total revenue growth of only 2%, which could have been caused by the pressures linked to pricing and competition around the company’s top-selling cholesterol-lowering treatment Repatha, migraine drug Aimovig, and immunology medications Otezla and Enbrel.
Still, Amgen continues to be a solid profit-making business, holding an A+ grade in terms of profitability. It sustains considerable pricing power on its treatments under exclusive patents and from its up-and-coming portfolio of biosimilar candidates.
Amgen has maintained a BBB+ rated balance sheet. It also pays a respectable dividend yield of 3.5%, with a well-protected payout ratio of 44%.
The company has also recorded consecutive growth in this aspect for 11 years. Looking at these figures, Amgen has scored primarily As in terms of consistency, growth, dividend, and yield.
Notably, the company’s foray into the biosimilar landscape would make long-term investors of the company quite happy soon.
Its long-awaited biosimilar version of the No. 1 selling drug worldwide, AbbVie’s (ABBV) Humira, has recently been launched to market.
Amgen’s version, called Amgevita, is the leading biosimilar in this market to date. It already has a five-month lead over the next competitor, arming it with a lot of time to establish a more competitive standing.
Beyond this candidate, Amgen has at least six more biosimilars that it plans to launch in the US and across the globe from 2023 until the end of 2030. This timeline would give the company excellent visibility in the long run.
Another potential biosimilar blockbuster is ABP 654, which is a biosimilar of Johnson & Johnson’s (JNJ) top-selling immunology treatment Stelara.
Amgen also has biosimilar versions of Bayer's (BAYG) and Regeneron’s (REGN) eye disorder drug Eylea and AstraZeneca’s (AZN) rare kidney disease treatment Soliris.
Basically, biosimilars are knock-offs for biologic drugs. They cost less because the manufacturers do not spend less in the research, trials, and approval stages. The processes are also shorter and less risky.
Biosimilars provide a way for patients and the whole healthcare system to save billions of dollars, signaling a bright future for this segment. They offer more affordable options to patients, which is an excellent response to the rising prices of medicines.
This means biosimilar development is far less speculative than creating a new drug, as manufacturers only need to replicate the already established results and success of the existing “original” drug.
Moreover, biosimilars bring with them a degree of pricing power. Unlike traditional treatments, no two biosimilars are allowed to carry the same biologic profile and should still undergo a stringent FDA assessment prior to gaining approval.
Overall, Amgen is a good option for long-term investors on the lookout for a quality biotech to add to their portfolios. Thanks to its burgeoning portfolio of potentially top-selling biosimilars, it has long-term solid revenue growth catalysts. These factors make Amgen a compelling buy on the drop.
Mad Hedge Biotech and Healthcare Letter
February 7, 2023
Fiat Lux
Featured Trade:
(AN ICONIC BLUE-CHIP PHARMA SELLING AT A DISCOUNTED PRICE)
(PFE), (MRNA), (NVAX), (BNTX), (LLY), (NVO)
Pfizer (PFE) possibly contributed more than any other business in getting the world back to normal from the pandemic. It was rewarded with an impressive windfall courtesy of its twin COVID-19 programs: the blockbuster vaccine and the top-selling treatment, Paxlovid.
However, the world has already stopped fretting over COVID. As expected, Pfizer is paying the price for this turn of events. Sales of its COVID blockbusters are estimated to decline by more than 60% in 2023 after raking in a total of roughly $57 billion in 2022.
The company projects that Comirnaty vaccine sales would fall from $37.8 billion in 2022 to $13.5 billion in 2023, while Paxlovid would drop from $18.9 billion to $8 billion. After all, the United States and several countries already have massive stockpiles of the Pfizer vaccine and Paxlovid, recorded under the 2022 revenue. It would take until June 2023 to work through them.
In effect, Pfizer and other COVID plays like Moderna (MRNA), Novavax (NVAX), and BioNTech (BNTX) have fallen out of favor.
Still, Pfizer remains positive about the future of its COVID franchise. The company anticipates that 24% of Americans, or about 79 million, will get a COVID vaccine in 2023. In comparison, 31% or roughly 104 million, received the vaccine in 2022. Pfizer also expects to sustain its dominance, with a 64% market share for the vaccine alone.
Moreover, Pfizer has a robust pipeline—and pipelines are the driving force behind drug stocks.
With mRNA technology's momentum, Pfizer is optimistic about its combined flu-COVID vaccine. The company foresees around 132 million Americans lining up for this two-disease vaccine, which it hopes to launch by 2026.
Shifting the discussion away from COVID, Pfizer estimates non-COVID revenue to increase by 6% annually through 2025, then projects a similar trajectory or better every year through 2030 to hit at least $70 billion.
Announcing these projections is a bold move, especially since Pfizer faces one of the most significant patent cliffs starting 2025 to 2028. Several top-selling treatments, which generate roughly $17 billion in yearly sales, will lose patent protection and face generic competition.
Pfizer is aggressively filling these anticipated voids with acquisitions, including three exciting companies: Global Blood Therapies, Biohaven Pharmaceuticals, and Arena Pharmaceuticals.
In 2022 alone, the company spent $26 billion, which granted Pfizer access to promising drugs for sickle-cell anemia, migraines, and ulcerative colitis.
By 2030, the company projects these and its subsequent acquisitions to generate at least $25 billion in annual revenue. This means it’s still on the lookout for more acquisitions.
Actually, the company estimates that it’s just 40% on the way to hitting its target of $25 billion in 2030 revenue coming from acquired treatments. This means the company would most likely spend another $50 billion in acquisitions to reach its goal.
In terms of its internal pipeline, Pfizer’s candidates can rake in at least $20 billion in sales by 2030. Some of its key launches include vaccines for the flu, meningitis, and respiratory syncytial virus (RSV). It also has treatments targeting blood cancer and atopic dermatitis.
Meanwhile, its oral diabetes and obesity products, which are currently in clinical trials, have the potential to generate roughly $10 billion in annual sales. If approved, these would allow Pfizer to go head-to-head against Eli Lilly (LLY) and Novo Nordisk (NVO).
Overall, Pfizer is an “iconic, blue-chip company” that’s on a discount these days. It is down roughly 15% this 2023, offering an excellent window for investors who want to buy the stock.
The company trades for 13 times its estimated earnings in 2023 and yields 3.7%, which is over double the S&P’s dividend rate. With this payout, along with its solid earnings and one of the best balance sheets across the industry, Pfizer looks incredibly safe.
However, it’s essential to be realistic. Pfizer’s goal is to go through this year minimally unscathed. Although its performance in 2022 was impressively strong, with revenue surging to a whopping $100 billion compared to $42 billion in 2020, the year 2023 is a reset period for the business.
Mad Hedge Biotech and Healthcare Letter
February 2, 2023
Fiat Lux
Featured Trade:
(A STRONG CONTENDER AGAINST THE ENDLESS VOLATILITY)
(BMY)
Despite substantial advances, cancer remains the second-leading cause of death in the United States. In 2022 alone, it was estimated that over 1.9 million new instances of cancer would be diagnosed in the United States alone. More than 600,000 deaths from cancer are anticipated in 2023.
There’s also a massive financial expense that’s continuously growing. Last 2018, the country's top 15 kinds of cancer cost more than $156 billion. By 2030, the spending for cancer-related treatments is projected to soar to a whopping $246 billion.
However, every problem brings with it an opportunity. In the case of cancer treatments, there is a huge opportunity. While several small companies are working on cancer therapies, many investors feel uneasy with the high risk and volatility of these early-stage biotechnology stocks. This is where well-established players come in.
Among the biotechnology names associated with cancer, one of the standouts is Bristol Myers Squibb (BMY). The company currently markets five treatments, each generating sales of a minimum of $1 billion yearly.
BMY’s best-selling drug is blood cancer treatment Revlimid. Unfortunately, Revlimid sales are falling because of the emergence of generic competition.
Meanwhile, cancer immunotherapy Opdivo continues to be on track with its goal to surpass Revlimid in BMY’s lineup. By 2026, this product is projected to reach peak sales of $11.75 billion. This is roughly 50% more than its current sales record.
Aside from these blockbusters, BMY has several rising stars. One of them is Opdualag, an immunotherapy that’s a combination of Opdivo and a LAG-3 inhibitor called relatlimab. This new drug has the potential to hit peak sales of over $4 billion. The other blood cancer drugs, specifically Breyanzi and Abeam, also have the potential to reach blockbuster status in the following years.
BMY has placed itself in a prime position for success in early 2023 thanks to years of careful planning in anticipation of the patent expirations of its blockbusters.
With about $40 billion in operating cash flow, BMY has created the third most extensive Phase 2 trial base. These efforts ensure investors would be happy with short-term results as the company has released nine new treatments in the past three years. This trend is expected to continue until the end of the decade.
For the subsequent years, investors can expect more approvals, eventually becoming new revenue streams and cash flow generators. Looking at the candidates in its pipeline, BMY is estimated to generate $25 billion in additional revenues from these new treatments by 2030.
Then the candidates in earlier-stage trials would replace the newly approved treatments in the queue. This continuous cycle represents the power of a solid and robust pipeline.
Suppose you’re still uncertain about the dependability of BMY. In that case, it’s good to remember that even the Oracle of Omaha believes in this stock.
While healthcare names do not typically make up a considerable share of the portfolio of Berkshire, BMY has made the cut. Warren Buffett’s penchant for consistent and reliable stocks underscored BMY’s solid performance amid the pandemic.
Moreover, BMY raked in a lot of money, enjoying a free cash flow in the past 12 months that totaled more than $12.7 billion. This marks the company’s third consecutive year of delivering free cash flow of at least $10 billion.
Having substantial cash is a crucial, especially for a company that frequently gets involved in acquisitions. In 2022, BMY bought oncology firm Turning Point Therapeutics for $4.1 billion, which dwarfs in comparison to its $74 billion acquisition of Celgene in 2019.
In addition to all these, BMY pays a 3.1% dividend yield. For long-term shareholders, these factors make the stock an excellent investment.
Overall, BMY is a great addition to your healthcare portfolio. Apart from being a frontrunner in the highly lucrative cancer market, this stock has a proven track record that outshone the rest of its peers amid the volatility and uncertainties in the previous years.
Mad Hedge Biotech and Healthcare Letter
January 31, 2023
Fiat Lux
Featured Trade:
(A SAFE HARBOR IN TUMULTUOUS TIMES)
(JNJ), (AZN), (BGNE)
Investors are still determining what to expect in 2023. The stock market could either gradually make a recovery or plummet deeper. In any case, it’s an excellent plan to add some high-quality stocks to your portfolio.
When choosing which company to invest in, it’s good to keep in mind Warren Buffett’s advice: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.”
A safe and reliable stock to bet on is Johnson & Johnson (JNJ).
JNJ recently disclosed its fourth quarter and full-year financial report, wrapping up a resilient showing in 2022 amid the macro headwinds. In fact, the stock is up compared to 2021, outperforming the broader market and underscoring JNJ’s position as an undisputed “blue-chip” leader.
Apart from highlighting JNJ’s position, this healthcare titan’s earnings typically serve as a bellwether for the rest of the companies in the biopharma space. This means that the relative rosiness of JNJ’s report could back up the belief that Big Pharma is one of the defensive havens in this tumultuous market environment.
In its fourth-quarter earnings call, JNJ shared some ambitious sales growth projections for the following years. For instance, pharmaceutical sales that reached $52.6 billion in 2021 are anticipated to hit $60 billion in 2025. While this is exciting for investors, the road to that goal would be challenging.
JNJ has recently been struggling with the declining sales of two major drugs. The first is its blood cancer treatment called Imbruvica, which has been losing its market share to newer drugs like AstraZeneca’s (AZN) Calquence and BeiGene’s (BGNE) Brukinsa.
On top of the falling sales for Imbruvica, JNJ would also need to battle it out with biosimilars of its top-selling anti-inflammatory injection called Stelara by the end of 2023.
Nonetheless, JNJ’s overall sales climbed by 6.2% in 2022, with the business’ pharmaceutical sector expanding a little faster at 6.8%. As for its medtech segment, it grew a bit slower at 6.1%.
Then, JNJ has the consumer health sector. The segment’s operational sales recorded only 3.9% growth, which was well below the company’s two key business units. Clearly, this division is holding back JNJ’s overall development.
In an effort to resolve this situation and enable the company to grow into a more streamlined business, JNJ plans to spin off the consumer health sector into a new and separate company. This will be Kenvue, which is expected to be launched by the second half of the year.
This move will turn JNJ into a nimbler and more rapidly growing business with a renewed focus on medtech and pharmaceuticals. Moreover, the planned spinoff could offer a short-term catalyst for JNJ stock.
On top of all these, JNJ will most likely announce its 61st consecutive annual dividend increase in April. It’s expected that the company will pay shareholders $4.52 per share every year, showing off a dividend yield of 2.67%. In comparison, the industry average is approximately 2.15%.
These issues cast some doubt on JNJ’s ability to hit its $60 billion target. Nevertheless, it reported a positive outlook for 2023. In its full-year guidance, JNJ projected sales to be between $96.9 billion and $97.9 billion. This indicates an annual growth rate of 5%.
Let’s circle back to the idea that JNJ serves as a good bellwether for the rest of the broader market. This Big Pharma leader is a part of the Dow Jones Industrial Average (DIA) and is included in the Top 10 names in the S&P 500. These are critical factors in using JNJ as an indicator for the rest of the companies.
If JNJ can deliver, or even exceed, EPS estimates and report positive earnings this 2023, then the projections are optimistic for other big companies expected to face similar headwinds.
Big Pharma notably outperformed the broader market in 2022, with investors looking into this segment as a safe harbor amid the economic and financial meltdowns. For context, the S&P 500 Pharmaceuticals industry sector increased by 5.6%. Meanwhile, the broader index fell by 19.4%.
Overall, JNJ is a top-quality stock that maintains a positive outlook in the long run amidst the short-term macro headwinds.
