Biotech Letter - John Thomas - Mad Hedge Fund Trader

Who's Really the Boss

Carl Icahn—the legendary investor known for toppling corporate behemoths and taking charge of their destinies—has swooped in to save Illumina (ILMN) from its own misguided move.

To salvage what’s left of the promising biotechnology company, he has emerged with a plan for shareholders: halt their recent deal with Grail—a cancer-screening firm that Icahn and his faithful followers want nothing more than to see dropped. Part of his plan is to nominate three people to sit on the board of Illumina. The move sent shares of ILMN soaring – no doubt leaving Icahn feeling pretty victorious himself.

For additional background, Icahn isn’t an ordinary businessman and investor. He is the founder, chairman, and majority shareholder of Icahn Enterprises, a diversified conglomerate holding company based in New York City, formerly American Real Estate Partners. He is one of the world's most successful and influential investors, having made billions through his investments in companies such as Apple (AAPL), Time Warner Inc. (TWX), RJR Nabisco (now Mondelez (MDLZ)), and Texaco (CVX). His extensive corporate takeover activities have resulted in him being dubbed "The King of Corporate Raiders."

As an activist investor, he is an individual or a member of a group of investors who uses their financial resources to directly influence the actions and decisions of organizations, often by purchasing shares in the business.

They often demand changes to corporate structure and strategy changes, board composition, and executive compensation practices. Needless to say, activist investors have a significant impact on a company, as they typically target companies that are undervalued and push for changes that can increase their value.

This is an extremely timely announcement for Illumina since the company’s value plummeted from $70 billion in 2021 to $31 billion in 2023. However, the biotech isn’t going down without a fight.

The acquisition of Grail by Illumina was first announced in September 2020, and it has been a subject of discussion and scrutiny since then. The proposed deal involves Illumina buying out the remaining stake in Grail that it does not already own, for a total of $8 billion in cash and stock.

Illumina believes that its plan to acquire Grail is a significant development in the field of genomics and cancer diagnostics. At the moment, Illumina is a leading provider of genomics technology, while Grail is a biotechnology company focused on developing a blood test for early cancer detection.

The acquisition is expected to create significant synergies between the two companies. Illumina's expertise in genomic sequencing technology combined with Grail's cutting-edge liquid biopsy technology could potentially lead to the development of a powerful and efficient cancer detection tool.

The acquisition has, however, faced some challenges, including regulatory hurdles. The Federal Trade Commission (FTC) expressed concerns that the acquisition could lead to Illumina having a monopoly in the market for sequencing machines, which are used in Grail's liquid biopsy tests. As a result, the FTC filed a lawsuit to block the acquisition.

Despite the challenges, Illumina and Grail remain committed to the deal, and in December 2021, they announced that they had reached a settlement with the FTC. The settlement requires Illumina to sell its existing liquid biopsy technology to a third party and abide by certain conditions to prevent any potential anti-competitive effects of the acquisition.

All things considered, it is undeniable that the acquisition of Grail by Illumina has the potential to revolutionize cancer diagnostics and improve patient outcomes. However, the regulatory hurdles demonstrate the importance of ensuring mergers and acquisitions do not harm competition and ultimately negatively impact consumers.

Overall, Illumina is a promising biotech with much room to grow. It pioneered the development of next-generation sequencing (NGS) technology, which revolutionized the field of genomics. NGS allows researchers to sequence large amounts of DNA quickly and at a lower cost than traditional Sanger sequencing methods.

NGS works by breaking the DNA into small fragments and sequencing them simultaneously. These short reads of DNA are then assembled to create a whole genome. Illumina's NGS technology is based on a proprietary sequencing-by-synthesis method, which uses flourescently labeled nucleotides to detect and record the sequence of DNA bases as they are incorporated into a growing DNA chain.

NGS has many applications in genomics research, including identifying genetic mutations, studying gene expression patterns, and characterizing the microbiome. The technology has also played a critical role in advancing precision medicine and personalized healthcare.

Illumina's pioneering work in NGS has allowed the company to establish a dominant market position in the genomics industry and has driven significant innovation in the field of genomics.

Thanks to this biotech’s products, the cost of a complete human genome analysis dropped from the hundreds of millions range in 2001 to less than $1000 today. More notably, the company projects the price to go lower and be below $200 when it releases its new services.

Being hailed as a market leader is a well-deserved description for the company. After all, Illumina quadrupled its revenues in the past 10 years and continues to deliver decent results.

Icahn’s move to take on Illumina offers a fresh and seemingly more promising perspective regarding the company’s direction. He believes Illumina can unlock value by spinning off non-core businesses, returning cash to shareholders, reducing costs, and improving operational efficiency. However, Illumina's management resisted Icahn's calls for a sale and instead focused on investing in research and development to drive growth.

Still, Icahn's targeting of Illumina is likely driven by his belief that the company is undervalued and not maximizing shareholder value. While it will take time before anything gets resolved, what’s apparent is that Illumina doesn’t hold complete freedom when it comes to decision-making, which would inevitably hurt its future success.

March 14, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 14, 2023
Fiat Lux

Featured Trade:

(A MARKET LEADER SELLING AT A DISCOUNT)
(GE), (GEHC), (MTD), (DHR), (BSX), (TMO)

A Market Leader Selling at a Discount

Biotech Letter

The spanking new multibillion-dollar healthcare spinoff from General Electric (GE) is gradually turning into a favorite in the industry.

The healthcare company, GE HealthCare (GEHC), was officially spun out of GE last January 4, but its shares began trading around mid-December. To date, GEHC is up about 30%. The stock has been trading for roughly 23 times its projected earnings in 2023.

While that value is already above the market multiple, GEHC is still anticipated to boost its earnings at an average of approximately 15% per year until 2026.

GEHC’s fourth-quarter earnings report was pretty solid. The company recorded $4.94 billion in revenue, rising by 8% year over year compared to the previous $4.59 billion. Most of the growth came from its imaging division, which climbed 11% from $2.44 billion to $2.71 billion thanks to the increasing demand.

For this year, GEHC is projected to generate over $19 billion in sales. This estimate is conservative since the company has yet to gain traction on Wall Street. Given its solid performance thus far, the company is expected to post a higher figure in the coming months.

Not much is known about GEHC yet. Aside from being an Illinois- based healthcare company focusing on medical technology, healthcare software and analytics, patient monitoring systems, and medical equipment maintenance and repair services, the spinoff only describes itself as “a leading global precision care innovator.”

That’s a relatively vague explanation that could cover much ground, but it appears to be focused on artificial intelligence (AI) in healthcare. After all, this is a lucrative and growing market that has sustained the ever-increasing demand.

Based on its records, GEHC generates the majority of its revenue from ultrasound and imaging services and products. These segments comprise about 75% of the company’s overall revenue. The rest are from various services, including clinical networking systems and financial solutions.

At the moment, more than 4 million of GEHC’s products are installed across the globe, lending support to over 2 billion patients since 2022.

Although this sounds less exciting than the other developments in the healthcare industry, the total addressable market for the medical imaging segment is impressively huge.

In 2021, this market was projected to reach $28 billion and will reach $47.4 billion by 2030. This represents a promising compounded annual growth rate of 4.9%. Critical to this growth and expansion is the climbing number of chronic diseases, which triggered earlier and more frequent checkups.

GEHC notably ensures that it sustains its momentum and gains a larger market share. The company has invested aggressively in research and development, allocating $2.7 billion to this effort alone from 2020 to 2022.

In February, the spinoff shelled out $3 billion to acquire Caption Health, a healthcare technology company developing AI software for medical imaging. The company's flagship product, Caption AI, is an FDA-approved medical imaging software that uses AI to guide healthcare professionals in acquiring and interpreting ultrasound images.

Basically, Caption AI is designed to help healthcare professionals who may need more specialized training in medical imaging, such as primary care physicians and nurses, to accurately and confidently perform and interpret ultrasound exams.

Apart from those, Caption Health's AI technology can assist in acquiring cardiac, lung, abdominal, and musculoskeletal images. It is intended to improve patient access to quality care by reducing the need for specialized medical personnel to conduct ultrasound exams.

By leveraging AI, these services could increase the speed and accuracy of diagnoses and treatment, ultimately improving patient outcomes. Needless to say, this deal significantly bolstered GEHC’s lineup and is expected to generate more than enough revenue to cover the price the company paid for the acquisition.

Despite its promising performance, GEHC remains under the radar and underappreciated. Comparing it to its peers, such as Mettler Toledo (MTD), Danaher (DHR), Boston Scientific (BSX), and Thermo Fisher (TMO), the company’s valuation looks discounted. Considering that it has the potential to become a long-term compounder, I suggest you buy the dip.

gehc

March 9, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 9, 2023
Fiat Lux

Featured Trade:

(TRUE GAME-CHANGERS OF BIOTECH)
(SPRT), (CRSP), (VRTX)

The True Game-Changers with Biotech

Biotech Letter

These days, the stock market is so scrutinized that there are only a handful of sectors where an investor can find undervalued stocks capable of outperforming an index fund.

The biotechnology world is one of these industries, and now is a great time to invest in it.

The potential for the majority of biotechnology companies is not really their current earnings or even their valuations. It’s actually hinged on whether these businesses could deliver positive clinical results for potential blockbuster treatments and whether the FDA approves the candidates. No matter how hard you look, you can’t easily find these types of information in companies' income statements and balance sheets.

Actually, the widely diversified SPDR S&P Biotech (XBI) has declined by over 50% since its peak of $174 per share in February 2021. One of the critical reasons biotech dropped in the past two years is the rise of dodgy IPOs, which inevitably collapsed and notably lowered investors’ confidence in the sector. Another reason is the rising interest rates, particularly in 2022, which forced many biotech companies to borrow money just to sustain their research operations.

These past weeks, though, valuations have become attractive. Rates have also been noticeably rising, and opportunities are starting to present themselves. Since 2022 was the year that focused on multiple clinical trials, 2023 is anticipated to be the year for new product launches.

Currently, the FDA has at least 75 new biotech candidates awaiting regulatory approval. This means 2023 could easily surpass 2018, when 56 drugs were approved, as the year with the most approvals.

All these will only benefit you if you find the right biotechs, especially with the word “game-changing,” which seems to get tossed around too casually in the biotech world. The truth is, many things are described as “game-changing” and “groundbreaking” when they are not. Still, there are exceptions.

One of the exceptions is Sarepta Therapeutics (SRPT). This biotech has a gene therapy treatment targeting muscular dystrophy, which is anticipated to receive FDA approval by May 2023.

Duchenne muscular dystrophy (DMD) is a genetic disorder that primarily affects boys, although in rare cases, it can also affect girls. It is caused by a mutation in the gene that provides instructions for making a protein called dystrophin, which is essential for muscle function and stability.

Without enough functional dystrophin, muscles become weak and damaged over time, leading to progressive muscle weakness and wasting. There is currently no cure for DMD, but there are treatments available that can help manage symptoms and improve quality of life.

Aside from Sarepta, other companies working on treatments for this condition include Pfizer (PFE) and Solid Biosciences (SLDB). However, Sarepta leads the rest in terms of clinical progress.

The global market for Duchenne muscular dystrophy treatment was valued at USD 2.4 billion in 2020 and is projected to increase at a compound annual growth rate (CAGR) of 40.5% between 2021 and 2028.

Another exception is CRISPR Therapeutics (CRSP), which is poised to play a significant role in the gene editing movement in the biotech world.

The company has been working with Vertex Pharmaceuticals (VRTX) on an exciting gene-editing treatment, named exa-cel, which targets rare blood diseases, sickle cell disease and beta-thalassemia.

Exa-cel uses CRISPR/Cas9 gene-editing technology to modify a patient's own blood-forming stem cells outside the body, with the goal of correcting the genetic mutation that causes these blood disorders. Aside from being a game-changer for patients with these conditions, this therapy could alter the financial landscape of CRISPR Therapeutics as it would rake in billions in revenue for the company.

If the FDA gives the green light for exa-cel, CRISPR and Vertex become red hot stocks to own. Meanwhile, having an approved rare disease gene-editing therapy in its lineup, plus its modest valuation of $3.8 billion, would make CRISPR an extremely attractive acquisition candidate.

The biotechnology sector has experienced significant growth in recent years, driven by advances in technologies such as genomics, gene editing, and synthetic biology. These technological advancements have enabled biotech companies to develop more precise and targeted therapies, potentially revolutionizing the healthcare industry.

While the biotechnology sector offers many promising opportunities, it is also a highly competitive and risky industry. Biotech companies often face significant regulatory hurdles and long development timelines, and many of their products fail in clinical trials. Additionally, biotech companies require substantial capital investments, which can be challenging to secure.

Investors looking into adding game-changing companies to their portfolio should consider Sarepta, CRISPR, and Vertex. I recommend you buy the dip.

March 7, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 7, 2023
Fiat Lux

Featured Trade:

(A PIONEERING LEADER IN THE HEALTHCARE WORLD)
(ISRG)

A Pioneering Leader in the Healthcare World

Biotech Letter

The United States allocates a jaw-dropping 18% of its GDP on healthcare alone. That comprises twice the amount spent by other industrialized nations. Despite that, the US has the shortest life expectancy among the rest of the developed countries and the highest number of recorded maternal deaths.

A potential reason for this disappointing report is that a considerable sum of the capital gets invested in administrative expenses, including insurance companies, defensive care (aka protection for doctors against litigation), and the maintenance of a majorly disconnected system that involves an unparalleled number of varying payers, and a long list of billing staff and specialists. As a result, the healthcare system is plagued with frustrating inefficiencies and an astounding absence of coordination.

In fact, the administrative expenses of America’s National Health Expenditure (NHE) reach a total of about $1 trillion annually. That is roughly 30% of its overall spending.

This staggering amount has paved the way for artificial intelligence (AI) to enter the fray. If AI can offer tangible solutions to administrative issues, the US could save a quarter of its yearly spending on healthcare.

While that is promising, the benefits of AI won’t end there.

The convergence of AI, robotics, and surgery is an exciting area of technological advancement that will likely shape the future of medicine in the coming decade. AI and robotics are already being used in surgery to improve the accuracy and precision of procedures, reduce the risk of human error, and enhance patient outcomes.

In the case of surgeries, a critical question to ask your surgeons is, “How many times have you performed this specific procedure?”

Undoubtedly, surgeons who have done the surgery more times are considered the best options. They have presumably witnessed every potential variation and gained valuable experience when things go awry and, of course, how to remedy the situation. Typically, an experienced surgeon will perform hundreds of procedures every year.

But how would you feel if you discovered that your surgeon is an “AI-robotic platform” that has performed millions of operations yearly?

This AI-robot system would offer a multitude of benefits. First, it can assess the surgical field via infrared and ultraviolet, as well as conduct any procedure with incredible precision and dexterity. Second, the robot won’t be a victim of “human factors” like taking too much coffee, not getting sufficient rest or sleep, or arguing with their spouse hours before the surgery. Third, the platform could offer ways to eventually demonetize and democratize the procedure, enabling thousands of hospitals across the globe to access the technology.

So far, though, there’s no AI capable of performing 100% autonomous procedures. The closest we’ve gotten to date was in 2022 when a group of researchers at Johns Hopkins successfully created STAR or “Smart Tissue Autonomous Robot.”

STAR could perforce a laparoscopic surgery on a pig without any assistance from a human operator or surgeon. This makes the system not only unique but also extremely promising because it needs minimal to no human guidance.

Meanwhile, until this technology becomes completely available, the only company closest to this advancement is Intuitive Surgical (ISRG).

Intuitive’s platform, an “Avatar Robotic System” called da Vinci, allows an experienced surgeon to perform the surgery remotely in what they call “tele-operation mode.” Thus far, more than 60,000 surgeons have completed over 10 million surgical procedures via the da Vinci platform.

Another promising product in Intuitive’s portfolio is called the Ion Endoluminal System.

Intuitive's Ion Endoluminal System is a robotic-assisted platform designed for minimally invasive lung biopsy. It is intended to provide a minimally invasive method for obtaining lung tissue samples that can be used to diagnose lung diseases such as lung cancer.

Basically, the Ion Endoluminal System is made up of a flexible robotic catheter inserted through the patient's mouth or nose and guided to the target area of the lung via real-time imaging. A small needle on the catheter can be used to collect tissue samples from the lung without the need for a surgical incision.

The system guides the catheter to the precise location where the tissue sample is required using advanced imaging technologies such as ultrasound and electromagnetic navigation. The system also includes a workstation, allowing the physician to control the catheter and view the imaging results in real-time.

The Ion Endoluminal System has several advantages over traditional biopsy methods, including less trauma to the patient, shorter recovery times, and the ability to obtain tissue samples from difficult-to-reach areas of the lung. Overall, the Ion system is a significant advancement in the field of minimally invasive lung biopsy, with the potential to improve lung disease diagnosis and treatment.

Robot-assisted medical procedures beat the shaky hands of human surgeons. That thesis has not been proven wrong since Intuitive went public in 2005. The company has emerged as the apparent market leader with its “razors and blades” model that ensures it generates a recurring revenue stream as its platforms are used to perform surgeries.

At this point, Intuitive controls about 805 of this multi-billion-dollar market worldwide. In 2022, the surgical robotics market was valued at $8.5 billion, with this sector projected to exhibit tremendous growth to reach over double its valuation to $18 billion by 2027.

If you’re searching for a profitable business in a booming healthcare industry segment, Intuitive appears to be a no-brainer stock to add to your portfolio and hold for the long term. I suggest you buy the dip.

March 2, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 2, 2023
Fiat Lux

Featured Trade:

(AN UNBEATABLE STOCK REFORMING THE SECTOR)
(LLY), (JNJ), (SNY), (NVO)

An Unbeatable Stock Reforming The Sector

Biotech Letter

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.

February 28, 2023

Biotech Letter

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

Featured Trade:

(NO REST FOR THE WEARY)
(PFE), (BNTX), (SGEN), (MRK)