Biotech Letter - John Thomas - Mad Hedge Fund Trader

Patience Is Key For This Biotech

This year has been challenging for the majority of the stocks, with even the strongest and most dominant names struggling to keep up. The three major indexes all slipped into bear territory while economic issues such as rising inflation brought turbulent earnings seasons across virtually every industry.

Still, 2022 has revealed a handful of exceptions. Some businesses delivered good news and, against all odds, solid stock performance. Some investors lined up to buy shares of these companies. While some have soared to unreasonable prices, it’s not too late to invest in other players sold at modest prices.

A particularly promising stock that meets these criteria is Vertex (VRTX).

Vertex has risen notably this year, recording a 38% boost to date. However, it’s trading at roughly 20 times its forward earnings predictions. Hence, buying this stock could very well guarantee solid investment in the long run. After all, the following years are expected to be filled with significant turning points.

An excellent starting point in reviewing Vertex’s potential is its portfolio. Right now, the company has six drugs sold commercially, reporting $7.5 billion in revenue last year. All six focus on cystic fibrosis (CF).

Vertex has been hailed as the worldwide leader in the CF market for years. On an even more promising note, the company is projected to sustain this momentum until the late 2030s.

Specifically, Vertex’s most recent CF treatment, Trikafta, has presented plenty of room for revenue growth in the years to come, courtesy of anticipated additional approvals in more countries and younger age brackets.

Vertex is also reviewing another CF candidate, which is now in Phase 3 trials. Based on previously released data, this new product has the potential to become even better than Trikafta.

Another CF candidate queued for review is the drug Vertex has been working on in collaboration with Moderna (MRNA). If approved, this product will cover patients not eligible for the current CF roster of Vertex.

Surprisingly, however, the potential catalyst for Vertex’s share price in the coming years has absolutely nothing to do with its highly successful and established CF program.

Rather, it has something to do with the company’s new venture on blood disorders: Exa-cel. This is a one-time cure developed by Vertex and Crispr Therapeutics (CRSP), which targets two blood orders. To this day, there remain minimal options for patients with these diseases.

For two key reasons, gaining approval for Exa-cel could be a massive game changer for Vertex. One is that it can provide definitive proof that the company can expand beyond its CF programs.

The second is that it would provide an additional revenue stream for Vertex, and that’s always a desired outcome regardless of the billions of dollars the company is already generating.

CF sales have clearly powered Vertex’s net income, which increased by about 1,140% in the past five years. With exa-cel, though, it’s evident that the company has been working to diversify its market to cover other diseases.

Reviewing its pipeline, Vertex has 18 programs with excellent chances of getting commercialized in the next 10 years. These run the gamut of treatments and therapies, including promising results for sickle cell disease, type 1 diabetes, kidney disease, and acute pain relief.

While it’s impossible to accurately determine the amount of money these drugs could make by 2032, it’s not that hyperbolic to believe that they can at least contribute several billions to the company.

Overall, Vertex stock offers a bright and solid future. In the next 10 years, the business would evolve into a much bigger, more entrenched, and more diversified entity. That means it would be a less risky investment compared to today.

Vertex would be an excellent choice for patient investors seeking to start a position in some biotechnology and healthcare companies.

December 15, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 15, 2022
Fiat Lux

Featured Trade:

(HASTE MAKES WASTE)
(MRNA), (MRK)

Haste Makes Waste

Biotech Letter

Many quality stocks are experiencing annual declines. The bear market has heavily and negatively affected investor sentiment and, of course, the economic climate, which hurt earnings. Nonetheless, some stocks still managed to show signs of a rebound this year.

In the biotechnology and healthcare market, Moderna (MRNA) is putting up a pretty impressive fight to bounce back. In fact, it has posted a double-digit increase over the last three months. As this biotech gains more traction, it’s reasonable to wonder if it’s time to get in on it before 2023.

The latest update that pushed the stock higher was about the company’s cancer vaccine, which it has been working on with Merck (MRK).

Based on Phase 2 trial results, adding the experimental messenger RNA-based cancer vaccine of Moderna, called mRNA-4157, to the standard Keytruda treatment of Merck and administering the combination to high-risk melanoma patients lowered the risk of death or the recurrence of cancer by 44%.

Suppose this momentum is sustained until Phase 3 in the same category of patients, as well as in similar trials expected in other indications. In that case, this could signify the beginning of a monumental shift in cancer therapies. That is, it would create a market for mRNA-based personalized cancer vaccines that can be administered in combination with readily available treatments like Keytruda.

The results, which showed a decrease in the risk of relapse or death by almost half, also demonstrate a notable vindication for Moderna and represent a significant step towards realizing its ambitions to expand and diversify its profile as a COVID-19 vaccine maker.

This collaboration between Moderna and Merck on personalized cancer vaccines dates back to 2016, with the latter exercising its option to co-develop mRNA-4157 in October 2022.

Basically, mRNA-4157 is a tailored approach based on every patient’s specific tumor. According to Moderna, the procedure typically only takes a few weeks to complete. The idea behind adding Keytruda is rooted in boosting the immune response of the patient’s T-cells, while mRNA-4157 guides the T-cells to the specific tumor.

Apart from the proteins included in the personalized cancer vaccine, mRNA-4157 is actually identical to the COVID-19 vaccine distributed by Moderna across the globe. Both have the same mRNA chemistry, same lipid, same intramuscular route, and same manufacturing process.

If this treatment shows conclusive evidence that it can work on melanoma patients, then Moderna and Merck can expand their application to other indications. After all, Keytruda has several approvals under its belt, making it convenient for both companies to keep testing the combination.

To date, Moderna has fallen by roughly 30%. However, it has managed to bounce back by over 20% in the past three months. While the broader market downturn definitely hurt Moderna shares, another primary reason for its decline is the concern over its post-pandemic performance.

Realistically speaking, vaccine sales will likely not surpass the approximately $18 billion that Moderna recorded in 2021 and expects this year. Still, revenue will probably remain within the blockbuster territory.

Looking at the demand, the coronavirus booster market is projected to follow in the footsteps of the flu vaccine sector.

For context, the flu market worldwide reaches 500 million to 600 million doses yearly. Depending on the pricing, this demand could rake in somewhere between $12 billion to $24 billion.

On top of these, Moderna has been working on two additional candidates in Phase 3 trials: vaccines for the flu and respiratory syncytial virus. Both are anticipated to hit commercialization by 2024 and 2025.

Overall, Moderna could become an overwhelming success with its mRNA candidates in the years to come. However, the most challenging question is still estimating the company’s earnings for the next five years or more.

There remain notable uncertainties surrounding its pipeline. While I could always take a stab at estimating its profits, that’s just guesswork at this point. So despite Moderna’s impressive results over its personalized cancer vaccine program, I don’t think it’s a safe bet—for now.

mrna

December 13, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 13, 2022
Fiat Lux

Featured Trade:

(A LONGER-TERM INVESTMENT FOR PATIENT BIOTECH HOLDERS)
(AMGN), (HZNP), (JNJ), (SNY), (ABBV)

A Longer-Term Investment for Patient Biotech Holders

Biotech Letter

Amgen (AMGN) announced what could be the biggest M&A deal in the biotechnology world this 2022.

The giant biotech disclosed its deal to acquire Horizon Therapeutics (HZNP) for $27.8 billion in cash, amounting to roughly $116.50 per share which is quite a move for Amgen. Prior to this, Amgen was engaged in an aggressive bidding war against fellow bigwigs Johnson & Johnson (JNJ) and Sanofi (SNY).

While they is a massive company with a market capitalization of $140 billion, shelling out $27.8 billion is still a significant risk.

Aside from that, Horizon is based in Ireland; Irish takeover rules Amgen and its competitors needed to comply with repeated disclosure of its key documents throughout the course of the negotiations.

This begs the question: Why was Horizon so sought-after by some of the biggest names in the biotechnology and healthcare world?

One reason is that all companies, regardless of size, need a blockbuster—and this doesn’t spare Amgen and its peers.

Actually, Amgen has been preparing for patent expirations of some of its top-selling drugs for years. By 2030, the company would be dealing with the threat of a very serious decline in revenue of key products Otezla and Enbrel. When that comes, these two blockbusters would need to battle it out with the slew of generics and biosimilars raring to compete with their market share.

Meanwhile, Enbrel, which is projected to rake in $4.1 billion in revenue in 2022, will face biosimilar competition as early as 2023. Its main and biggest rival, AbbVie’s (ABBV) Humira, will lose patent exclusivity next year. That opens the floodgates for biosimilars and generics, pushing back against Enbrel’s share of the market while attempting to take over Humira’s.

Looking at how much these blockbusters contribute to Amgen, it’s projected that $10 billion or approximately 40% of the company’s revenue could be lost by the end of the decade.

This is where Horizon comes in.

The most crucial among Horizon’s products is Tepezza, which targets a rare condition know as thyroid eye disease. Based on its performance since getting launched in 2020, this drug is estimated to rake in roughly $2 billion in 2022.

Another potential blockbuster from Horizon is Krytexxa, which was developed for uncontrolled gout, and is projected to record $706 million in sales this year.

The third potential blockbuster is Uplinza, which targets an autoimmune disease called neuromyelitis optics spectrum disorder. This product is anticipated to reach $159 million in sales in 2022.

These three could bring in roughly $3.3 billion in revenue for 2023.

Based on the company’s pipeline and portfolio, it can add $2 to $5 billion of new product sales from 2024 to 2030. Needless to say, this would offset the patent cliffs faced by Amgen.

In terms of pipeline, Horizon has several of promising candidates as well. In 2021, the company acquired a biotech named Viela Bio. At that time, the smaller company’s candidates focused on inflammatory diseases and are valued at $3.1 billion.

On top of these, Horizon’s pipeline has candidates targeting rare diseases like myasthenia gravis, lupus, and Sjogren’s Syndrome. With Amgen’s size, experience, and resources, the development of these products would most likely be accelerated.

Originally, Horizon’s strategy was to keep buying clinical-stage treatments from smaller biotechs then pushing them through to commercial approval. Since then, it has transformed into a company that develops its own candidates targeting rare diseases and lucrative markets. Given its portfolio and pipeline, Horizon seamlessly fits with Amgen’s strategy.

Overall, this acquisition is an excellent deal for both companies.

While Amgen shareholders shouldn’t expect any significant increase in dividends any time soon or substantial share buybacks, it’s reasonable to believe that the company is poised for more growth in the coming years.

This makes Amgen a worthwhile buy for longer-term investors who are committed to staying with the company until 2030 or longer.

December 8, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 8, 2022
Fiat Lux

Featured Trade:

(THE MASTODON OF HEALTHCARE)
(UNH), (HUM), (CI), (ELV), (CVS)

The Mastodon of Healthcare

Biotech Letter

Most earnings reports across all industries recently include the terms “inflationary pressures,” “short-term macroeconomic conditions,” “labor shortages,” and, of course, “supply chain issues” to justify why revenues are down or flat. The S&P 50 index has declined by over 20% to date, with signs of sliding further.

Clearly, the economy cannot be described as recession-proof. It typically follows a relatively predictable, albeit irregular, path commonly called the economic cycle. Needless to say, recessionary periods can be heartbreaking and brutal for the market and its investors.

However, some sectors are somewhat immune to the ups and downs of the economy. These industries provide investors with recession-proof stocks that can be held onto during these challenging periods. One of them is the healthcare industry.

Healthcare stocks, particularly high-quality businesses, tend to be viewed as recession-proof. Despite the economic turbulence, companies in this sector still enjoy relatively solid and steady demand. That’s not entirely shocking since people can’t exactly just cancel their healthcare needs.

No matter what’s happening in the world, when you’re unwell, you have no other option but to see a doctor and get medicine.

Within the healthcare sector, not all businesses are created equal. Some still felt the recession's nasty consequences, while others managed to thrive.

One name that continues to impress amid the economic turmoil is UnitedHealth Group (UNH).

Basically, UNH operates 2 main segments.

One is UnitedHealthcare, which offers a complete range of healthcare insurance. The other is Optum Health, which provides data-driven healthcare gathered from partner surgery centers. It also obtains information from OptumRx, UNH’s pharmacy management arm.

Both UnitedHealthcare and Optus Health delivered excellent results to date, boosting the company’s full-year guidance from $20.85 to $2105 in terms of EPS. In comparison, UNH recorded an annual EPS of $18.08 back in 2021.

In the first 9 months of 2022, UNH raked in $192.5 billion in revenue. This shows a 14% increase year over year. Meanwhile, its earnings per share climbed to $16.15 compared to the $13.82 it reported during the same period in 2021.

One of the key drivers for these results is the boost in the number of subscribers to UNH’s services, which rose by 850,000 in 2022. Apart from these, the company has an attractive dividend that keeps investors satisfied. For the 13th consecutive year, UNH has raised its dividend, announcing a quarterly boost of 14% to reach $1.65.

Keep in mind that the health insurance industry climbs higher each year, and COVID-19 has forced everyone to reconsider and review their perspectives towards healthcare.

On top of these, UNH’s long-term growth is supported by the inevitable: the continuous and increasingly expensive demands of an aging population. That is, the company has a massive addressable market that keeps on expanding year after year.

Looking at the trajectory of this industry, it is estimated that 73.5 million individuals will be enrolled in Medicare by 2027. This represents a 28.5% boost from the 57.2 million reported in 2017.

Due to the increasing demands in healthcare in the coming years, particularly among the aging population, spending in this segment is also anticipated to rise rapidly. In fact, healthcare spending is projected to hit $6 trillion annually by 2028.

Thus far, UNH is hailed as the leading company in healthcare. The company’s hegemony looks and feels incomparable, and none of its competitors appear to be strong enough to dethrone it. For context, the leading rivals of UNH in the US include Humana (HUM), Cigna (CI), Elevance (ELV), and CVS Health (CVS).

For these competitors to stand a chance at beating or at least competing with its on equal grounds, they would need to merge—a move they’ve all attempted in the past but were blocked by regulators.

Overall, UNH remains a solid choice, especially during these trying times. This company is a widely respected mastodon in the insurance market worldwide, showing off substantial growth in revenue and profit practically every year. Buy the dip.

December 6, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 6, 2022
Fiat Lux

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(A DISCOUNTED MISUNDERSTOOD STOCK)
(ABBV)

A Discounted Misunderstood Stock

Biotech Letter

At times, a single stressful scenario triggers such wide-ranging panic among already anxious investors that it blocks out all the positive things occurring simultaneously.

This is what’s currently happening with AbbVie (ABBV), which is struggling to keep investors’ fears at bay as its mega-blockbuster Humira reaches patent expirations.

Humira is a treatment for various diseases such as rheumatoid arthritis, psoriatic arthritis, any losing spondylitis, and Crohn's disease. Since its approval and commercial launch in 2002, this immunosuppressive has managed to rake in a whopping $200 billion in sales.

For 2022, this drug is projected to account for 36%, or roughly $21.2 billion, of the company’s sales. Needless to say, it’s one of AbbVie’s top-selling treatments.

While AbbVie fought extremely hard to extend its patent protection, Humira has already lost exclusivity in Europe.

It is also gearing up to battle an increasing number of eager competitors in the form of biosimilars in the United States, which would all be allowed to market their versions of Humira by 2023.

AbbVie is more than just Humira, though. This giant biopharmaceutical company has actually developed treatments with the capacity to fill the anticipated revenue gap following Humira’s decline.

In fact, shareholders who opted to wait and hold until AbbVie reaches the transition point from Humira to the new products may have erred. After all, the company’s stock is up by over 19% thus far in 2022.

Besides that, AbbVie stock appears cheap and has an attractive dividend yield. Hence, it’s worth owning, especially in these challenging times.

To date, the company has been hard at work in developing its blood cancer or hematologic oncology program. This franchise is estimated to bring in $7.6 billion in sales by 2025, which is up from the $6.8 billion expected this year.

AbbVie is also experiencing increasing sales from two newly released drugs, Skyrizi and Rinvoq, which target psoriasis and arthritis, respectively. Both are estimated to account for $7.7 billion in the 2022 revenue of the company or 13% of the total.

Moreover, these treatments should be exclusively owned by AbbVie for a while. The company won’t be facing another patent loss on any essential product until 2029.

Looking at the trajectory of Skyrizi and Rinvoq, the two can become the next big stars and eventually offset the losses from Humira’s decline.

Not only those, but AbbVie also bought Allergan in 2020, building an ironclad plan to ensure it won’t sink after Humira’s patent expiration. The aesthetics franchise, which covers Botox, cool sculpting, and Juvederm, now contributes 10% to the total sales of the company.

This implies that AbbVie’s earnings, despite the Humira issue, are anticipated to hold up better than projected.

Moreover, AbbVie has a $22 billion free cash flow from 2021, while its dividend yield is currently at 3.7%.

These factors make AbbVie look even more lucrative as interest rates continue to hike and a potential recession is on its way.

At this point, it’s prudent to keep defensive stocks, particularly businesses without massive debt maturities, in the near future. In such a volatile market, AbbVie is one of the safest and most attractive stocks to invest in.

Overall, AbbVie is a well-positioned stock. Its tactical acquisitions, such as its aggressive move to buy Allergan, have all but guaranteed that it won’t be heavily relying on a drug with an expiring patent.

More importantly, this giant biopharmaceutical company developed potentially blockbuster successors of Humira in the form of Rinvoq and Skyrizi, ensuring that its future remains bright even without its decades-long top-selling product.

AbbVie has proven itself to be a solid stock and an excellent buy for long-term investors. It’s highly advisable to buy the dip.

December 1, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 1, 2022
Fiat Lux

Featured Trade:

(A RECESSION-PROOF STOCK)
(LLY), (ESALY), (BIIB), (JNJ)