Mad Hedge Biotech and Healthcare Letter
October 27, 2022
Fiat Lux
Featured Trade:
(A HIDDEN TREASURE IN THESE TURBULENT TIMES)
(BMY), (AMGN)
Biotechnology and healthcare companies are not exactly the thrilling investments that tech stocks or other growth-centered businesses tend to be described as.
Nonetheless, one of the reasons I find this sector attractive is that the companies can offer steady growth in extensively diverse markets.
From biopharmaceutical treatments to household items, the products these businesses develop are the kinds people tend to need and use regularly constantly.
While the biotechnology and healthcare sector doesn’t always beat the general market, the combo of steady growth, resilient returns, and reliable dividends generally make it an incredibly attractive option for investors.
Among the companies in this segment, one of the names you can buy and hold in the long run is Bristol Myers Squibb (BMY).
BMY is hailed as the seventh-biggest biopharmaceutical company across the globe in terms of sales. In 2021, the business recorded $46.4 billion in total revenue, which was up by 9% from 2020.
More than half of BMY’s revenue last year was generated from sales of three of its best-selling treatments: multiple myeloma drug Revlimid, Eliquis, and cancer treatment Opdivo.
The full-year revenue for all three drugs jumped that year, with Revlimid climbing by 6% to reach $12.8 billion, blood thinning medication Eliquis rising by 17% to hit $10.8 billion, and Opdivo increasing by 8% to record $7.5 billion.
Despite the impressive performance of these top-selling products, BMY has been diversifying its portfolio to cover a vast lineup of candidates in the fields of immunology, hematology, and, of course, oncology.
The healthcare giant has also grown, in part, through acquisitions, and part of its 2021 revenue of $46 billion, which was twice more than its 2018 revenue of $23 billion, came from these efforts. Moreover, BMY has reported a free cash flow of roughly $13 billion for two consecutive years.
In 2022, BMY reported a lackluster third-quarter performance. While the company’s revenue slid by 3% to $11.2 billion, the stock still climbed 2.31%.
This could be attributed to the fact that BMY managed to beat expectations as analysts predicted a more significant drop due to foreign exchange impacts.
Aside from these, Revlimid has been dealing with increased competition worldwide in the past months. Specifically, this bone marrow cancer drug has been facing “generic erosion” thanks to the emergence of cheaper alternatives in the market.
Picking up the slack from Revlimid is Eliquis, which has become the company’s top performer in terms of revenue and projected growth. Sales for this drug rose by 10% in the third quarter to reach $2.66 billion.
Meanwhile, sales of BMY’s newly launched products jumped 61% to record $553 million.
Future growth is anticipated to be led by Sotyktu, an oral drug for moderate to severe plaque psoriasis that recently gained FDA approval.
In the US alone, roughly 7.5 million individuals suffer from psoriasis. This is a promising market for BMY, which has been aggressively searching for products to rejuvenate its portfolio.
Since it was only recently approved, Sotyktu’s contribution to BMY’s revenue has yet to be proven. However, the drug recorded better results than Amgen’s (AMGN) blockbuster drug Otezla, which raked in $2.25 billion in sales in 2021.
Given the released data, target market, and more promising results from Sotyktu, BMY’s drug is estimated to reach peak sales at $4.2 billion by 2028.
Overall, BMY is an excellent bet during these turbulent times. In the past 10 years, the company has generated total returns, including dividends, of 190%.
This isn’t far from the 223% returns recorded by the S&P 500. Moreover, if BMY sustains its recent performance, then it’s only a matter of time before it successfully shrinks that gap. I suggest that long-term investors buy the dip.
Mad Hedge Biotech and Healthcare Letter
October 25, 2022
Fiat Lux
Featured Trade:
(A FAIL-SAFE HEALTHCARE STOCK)
(JNJ)
What’s a clear indicator of a well-run business? It’s when customers across the globe can easily recognize your company’s brands.
It’s safe to state that practically everyone in the world knows at least one or two products in Johnson & Johnson’s (JNJ) portfolio.
Since the pandemic started and until now, when things remain uncertain and economic headwinds continue to befall the market, JNJ has proven itself to be virtually recession-resistant.
In fact, based on its third-quarter earnings report, JNJ is one of the handful of companies receiving short-term boosts. Amid the issues over inflation and supply chains, this healthcare company reported $23.8 billion in revenue, rising by 1.9%, and earnings per share of $1.68, up by 22.6%.
In the past 10 years, JNJ has boosted its revenue annually except in 2015.
The biopharmaceutical giant is also diligent in making sure its investors are happy. It has shelled out $2 billion in 2022 alone on share buybacks, with an additional $3 billion scheduled.
It has also paid out $3 billion worth of dividends to investors, with the market-proclaimed Dividend King raising its payout for 60 consecutive years.
As in the previous quarters, JNJ’s pharmaceutical business division delivered the most substantial sales gains, while its consumer health division struggled to overcome foreign currency woes.
Minor tweaks to JNJ’s guidance offered some color to the earnings report. The company narrowed its sales growth estimates and lowered its range for full-year revenue to somewhere between $93 billion and $93.5 billion, primarily due to the strong dollar. Nevertheless, the company’s adjusted earnings guidance remains the same, with anticipated operational gains.
Meanwhile, its plan to spin off its consumer health segment in 2023 into a new company called Kenvue has shareholders hopeful for an increase in the value of JNJ stock soon.
The plan to spin off this segment has been in the works for quite some time and is anticipated to enable JNJ to become a more profitable company in the long run.
While brands like Listerine, Band-Aid, and Benadryl have high name recall, the company’s consumer health segment remains a slow growing and has become a burden. Actually, these well-known brands only account for roughly 15.6% of the company’s $47.4 billion recorded in the first 6 months of 2022.
The true catalyst in JNJ’s growth is and will continue to be its pharmaceutical division. This segment includes the mega-blockbuster immunology treatment Stelara and the oncology drug Darzalex, both of which rake in at least $5 billion in sales every year.
JNJ also has 11 more drugs and its COVID-19 vaccine in its portfolio, which are all on pace to add a minimum of $1 billion in sales for this year.
Looking at its current portfolio and pipeline, JNJ is projected to record a 4.1% annual earnings growth in the next 5 years. On top of these, JNJ has 99 drug indications queued for clinical development across various therapy areas like oncology and immunology. These should offer the company more than enough firepower to bolster its sales and earnings higher gradually.
Coupling this earnings growth with JNJ’s dividend payout ratio at a reasonably 44%, then I can confidently say that the company’s 60-year dividend growth streak is on track. It’s also safe to project 5% to 6% annual dividend growth in the short term.
One of the critical principles in investing is to ensure that you are diversifying your portfolio not only in terms of the companies but also the sectors you put your money into.
This measure can help protect your portfolio and its income from headwinds in a particular industry at any given time.
Throughout the years, healthcare has proven to be a must-own segment. After all, everyone will require access to the healthcare system, whether for a routine checkup, prescription, or surgical procedure.
Moreover, the part of the global population needing more focused and frequent medical care—people aged 65 and older—is projected to nearly triple from 2015 to 2050 to record 1.6 billion individuals.
Considering these factors and the stability offered by JNJ, it’s easy to see how this company can become a lucrative long-term investment for those looking to diversify their portfolio. I strongly suggest buying the dip.
Mad Hedge Biotech and Healthcare Letter
October 20, 2022
Fiat Lux
Featured Trade:
(A CURE FOR A SICKENING MARKET)
(MRK), (OGN)
In this sickening market, it makes sense that the biotechnology and healthcare industry is proving to be a great hedge.
This sector has managed to remain one of the handful to post gains in 2022 amidst the seemingly never-ending barrage of negative news caused by the bear market, economic and political turmoil, and even health crises.
The criteria bring me to Merck (MRK), which has performed excellently this year.
Merck is a globally dominant biopharmaceutical company, standing the test of time, and having been in operation for more than 130 years.
It has consistently delivered stable results, showing off a 28% growth in sales in the second quarter of 2022. Among the names in its roster, the most profitable drug is cancer treatment Keytruda, which recorded a 30% year-over-year growth in sales during the same period.
Despite the already remarkable performance of Keytruda, this oncology medication has proven to be capable of targeting more than just lung cancer as it was recently given the green light for 6 additional indications.
In line with ensuring the company is not reliant on a single blockbuster drug, Merck has been aggressive in seeking potential high-selling candidates to add to its portfolio.
Recently, its $11.5 billion bet on Sotatercept, a heart medication, seems to have paid off as the company disclosed positive results from a Phase 3 trial focused on treating a condition called pulmonary arterial hypertension.
It was in 2021 when Merck bought Sotatercept as part of its agreement to acquire Accelerant Pharma. The goal was to find a drug to fill the anticipated revenue gap from the impending patent loss of Keytruda by 2030.
The strategy was high risk at that time because data on Sotatercept were limited on Phase 2 trial results. Nevertheless, Merck paid a significant sum to the company. That was reported as one of the biggest acquisitions of 2021.
Given the current data, the conservative estimate for Sotatercept sales is at $700 million annually. However, the established nature of the target market has some analysts pushing the forecast to potentially reach $4 billion by 2031.
However, unlike other biopharmaceutical companies that heavily depend on one or two blockbuster treatments, Merck has a strong lineup of high-margin products in the market.
Moreover, its pipeline candidates support its solid profitability and investment capital returns for several years. This becomes even more apparent with the spinoff of Organon (OGN) in 2021, where Merck retained a portfolio of drugs with strong patent protection.
It holds a moat-worthy portfolio of specialty treatments in various sectors, including oncology, immunology, cardiometabolic disease, rare diseases, and infections. It also has an extensive vaccine segment that targets HPV, pediatric conditions, shingles, and Hepatitis B.
In the past trailing 12 months, the company generated roughly $57 billion in revenue, with half coming from US sales and the rest internationally.
More importantly, Merck sports a notable 3.1% dividend yield that’s easily supported by a low 35% payout ratio. It reports a 9% five-year CAGR and has an impressive 11-year growth streak.
Throughout the years, Merck’s stock, underlying strategies, and growth model have demonstrated their resilience against macroeconomic headwinds, with the company’s core businesses firing on all cylinders.
It has one of the most solid balance sheets in the industry, which illustrates its financial flexibility to comfortably invest in promising R&D prospects and sustain its dividend at a solid pace.
Overall, Merck is an excellent choice for investors looking to deploy some capital but want to minimize exposure to volatility on top of the possibility of earning some extra dividend income.
Mad Hedge Biotech and Healthcare Letter
October 18, 2022
Fiat Lux
Featured Trade:
(JUST WHAT THE DOCTOR ORDERED)
(MRNA), (MRK), (PFE)
A newly announced collaboration extension with Merck (MRK) might just be what the doctor ordered for Moderna’s stock, which has been experiencing a decline in revenue since the public started resisting boosters.
Moderna stock rose 12% following the news that the FDA approved its collaboration deal with Merck as well as its COVID booster geared towards young kids.
Those positive updates most likely mark the end of a falling knives stage for the company, as it was coming off a 52-week low just days before the announcements.
The deal between Moderna and Merck involves a personalized cancer vaccine, which the two have been working on since 2016. The goal is to use Moderna’s technology as a combo treatment alongside Merck’s mega-blockbuster Keytruda.
The cancer vaccine, currently dubbed mRNA-4157, will be tailored for every patient. It generates a reaction according to the particular mutational signature of an individual’s tumor.
The collaboration is already in its Phase 2 trial for a high-risk melanoma vaccine.
The deal involves Merck shelling out $250 million in cash to exercise its option on this personalized cancer vaccine candidate. Had Moderna not earned copious amounts of cash over its COVID-19 vaccine over the past two years, this money would have seemed like a much bigger deal.
Nevertheless, the agreement is for a 50-50 sharing of costs and, eventually, potential profits. The results of Phase 2 should be disclosed to the public before December 2022.
Regarding how this affects Moderna’s pipeline, the collaboration demonstrates the versatility of the mRNA technology.
The other update that boosted the stock is the emergency use authorization granted to Moderna and fellow COVID-19 vaccine maker Pfizer (PFE), which allowed their boosters to be used on children.
As you know, Moderna markets and sells only a single product: SpikeVax. While this COVID vaccine is, apart from Pfizer’s Comirnaty, the most extensively used worldwide, pushing revenues to $18.5 billion in 2021, and is on track to hit roughly $21 billion in 2022, sales for SpikeVax are expected to decline now that the pandemic has been deemed “over.”
The company’s agreement to 70 million vaccine doses to the US government, on top of the option to purchase up to 230 million, which will be worth about $4.8 billion at $16 per dose, may very well be Moderna’s last to a government.
Currently, the biotech is looking into the private market, in which its vaccine may start costing up to $100.
Reviewing the demand and the current situation, my best estimate is that Moderna would earn roughly $7 billion annually from the private market for its COVID vaccine.
Nevertheless, Moderna’s vaccine has shown proof of concept. This would translate to more confidence in the company’s pipeline. Its expanded collaboration with Merck is a clear indicator of this sentiment.
In terms of the rest of its pipeline, Moderna has several candidates.
The most advanced so far are its Phase 3 programs for a flu vaccine, a respiratory syncytial virus vaccine (RSV), and a cytomegalovirus vaccine (CMV).
Considering the respiratory nature and the resounding success of its mRNA COVID vaccines, it’s reasonable to believe that the Phase 3 trials for these candidates would also be successful.
Hence, Moderna could be looking at substantial revenues once these vaccines enter the market.
While it can be argued that flu vaccines already exist, sometimes being the first to market is insufficient to keep a significant market share.
The current flu market is estimated to be worth $5 billion to $6 billion, and there are definitely a lot of competitors in the sector.
However, Moderna aims to develop a more efficacious vaccine. Needless to say, that could easily command a higher price tag and attract more customers.
Meanwhile, Moderna’s RSV vaccine—if approved—would not have any rivals. This is also another massive segment, with the market for the older adult population alone already worth $10 billion.
Both RSV and flu vaccines are anticipated to be released by late 2024 or early 2025.
When people hear Moderna, they immediately think COVID stock. Then, they immediately begin to wonder about the company’s future. Basically, Moderna has become a victim of its own success.
At the moment, the market is focused on Moderna’s potential revenue loss from its COVID vaccine. That sentiment is clearly weighing on the company’s price, making it undervalued. However, these very same fears make Moderna a steal considering the company’s long-term prospects well beyond its COVID program.
Long-term investors would see this as an opportunity to buy an innovative biotech for a bargain and reap the rewards when Moderna’s other candidates start to gain momentum.
Mad Hedge Biotech and Healthcare Letter
October 13, 2022
Fiat Lux
Featured Trade:
(A SAFE BET IN A VOLATILE MARKET)
(AMGN), (NVO), (LLY)
The biotechnology and healthcare industry is fraught with risk. However, it’s also brimming with opportunities.
On the one hand, a new drug takes years of clinical research. On top of that, the average cost to bring each product to the market reached $1 billion between 2009 and 2018.
On the other hand, the chosen few that receive the green light from the FDA more often than not deliver on their promise to become blockbusters, raking in sales of over $1 billion every year.
This arguably justifies the risks that come with the industry.
Amgen (AMGN) has become the recent embodiment of this promise. Despite the volatility of the market in the past months, the company remains a strong player thanks to several factors that could bolster its share price.
In particular, Amgen investors are looking forward to potential gains courtesy of the pipeline of drugs slated for market release over the medium term.
The most exciting among them is its obesity drug AMG 133.
The positive data from AMG 133’s unveiling had experts excited over the drug, with many expecting it to become a multi-billion dollar revenue stream for Amgen.
As expected, Amgen will be facing stiff competition in this market, specifically between 2025 and 2030.
To date, investors have been closely monitoring the obesity segment, with two companies clearly leading the charge: Novo Nordisk (NVO) and Eli Lilly (LLY).
Novo Nordisk markets Wegovy, which is a shot that targets obesity by zeroing in on the glucagon-like peptide receptor, or GLP-1. This is also the same target for many diabetes treatments.
Meanwhile, Eli Lilly is working to integrate obesity as part of the conditions treated by its recently approved diabetes drug Mounjaro. Like Wegovy, this drug also targets GLP-1.
What makes it more potent is that it also targets glucose-dependent insulinotropic polypeptides or GIP. Both GLP-1 and GIP are hormones linked to blood sugar control.
What makes AMG 133 different from other approved and experimental treatments for obesity is that it blocks not only a particular hormone but also a specific protein involved in controlling blood sugar.
While it targets GLP-1, Amgen’s candidate works on a gut protein linked to digestion, called the gastric inhibitory polypeptide receptor, or GIPR.
The obesity market is a lucrative space since the medical world now categorizes obesity as a type of chronic illness instead of a mere consequence of lifestyle choices.
That is, obesity drugs are on the cusp of entering the mainstream primary health care system.
An apparent precedent for this opportunity is the high blood pressure sector, initially a nascent segment in the 1980s and eventually skyrocketed to a $30 billion industry by the 1990s.
In 2022, the obesity market is estimated to be worth $2.4 billion. By 2030, this space is projected to reach $54 billion.
That places all competitors in the same space, Amgen, Eli Lilly, and Novo Nordisk, in excellent positions. In fact, Novo Nordisk has been dealing with shortages of Wegovy due to rising demand.
While any upgrade or downgrade prompted by a single drug’s potential, or even multiple treatments’ potential, is exciting, it should be taken with a grain of salt.
The biotechnology and healthcare industry is continuously in flux, and any company in the sector is one major failed trial or one rival’s success away from facing trouble. Simply put, they tend to be volatile.
Amgen is not an exception to this harsh truth despite the company’s solid obesity prospects and impressive portfolio and pipeline. That means investors expecting an immediate payout following the recent developments might get disappointed.
Nonetheless, it’s also vital to remember that biotechnology and healthcare stocks tend to deliver better results than the broader market even amid the economic turmoil.
These companies seem to operate and function outside typical economic cycles, providing investors with dependable performance when most businesses are struggling.
Amgen is one of the biggest biotechnology companies in the world. It has been one of the pioneers in this segment since the 1980s. It’s also a part of the prestigious Dow 30 list of companies.
Moreover, it has a massive and diversified product portfolio, with nine treatments that individually generate more than $1 billion in sales annually.
These drugs are not only huge sellers, but also offer wide margins because of the existing restrictive and high barriers to entering the biotech world.
Hence, this enables Amgen to enjoy a remarkable pricing power and autonomy over its products while still growing its top line at a steady pace.
If you’re looking for a conservative and attractive long-term investment, then buying Amgen when the price drops wouldn’t be a bad bet.
