Mad Hedge Biotech and Healthcare Letter
August 18, 2022
Fiat Lux
Featured Trade:
(MORE THAN JUST A ONE-TRICK PONY)
(MRK), (SGEN), (SNY), (PFE), (BNTX), (GSK), (CVAC), (MRNA)
When executed correctly and sufficient time is allocated, stock market investing can be highly rewarding. But, what can investors do to make the most of their opportunities in the market?
The short answer: Choose businesses that have or are building a strong competitive advantage.
Those investing in the biotechnology and healthcare sector know that buying companies with promising portfolios and diverse pipelines is vital.
After all, a solid lineup can generate and secure steady cash flow to fund R&D efforts as well as acquisitions to expand the pipeline. Consequently, this guarantees steady growth in revenues as existing products face patent exclusivity losses.
Within this sector, one of the companies with a strong portfolio and promising pipeline is Merck (MRK).
Merck has become practically synonymous with Keytruda—the #1 cancer drug in terms of sales globally. In the first 6 months of 2022 alone, this drug already raked in $10.1 billion in sales.
While several biotechnology companies would be content with this top-tier drug in its portfolio, Merck refuses to be a one-trick pony.
Leveraging its $222 billion market capitalization, the fifth-biggest pharmaceutical company on the planet has been steadily expanding its portfolio.
In fact, Keytruda only made up 33% of its total $30.5 billion sales in the first half of the year.
Merck has built a formidable oncology lineup and developed several blockbuster treatments in this space.
Its flagship, Keytruda, climbed 30% year-over-year in its second-quarter earnings report to record $5.3 billion for that period. Other cancer treatments improved their performance as well. Lynparza grew 17% while Lenvima rose 33%.
Amid these growths, Merck remains aggressive in expanding its oncology lineup. Earlier this year, the healthcare world has been abuzz with Merck’s plan to buy cancer-centered biotech Seagen (SGEN).
The deal, if it pushes through, would be reportedly worth $40 billion and add 4 already approved cancer drugs to Merck’s portfolio.
On top of these market-ready products, Seagen will also bring numerous late-stage candidates to the table.
Merck also recently inked a smaller deal with Orion Corporation. The agreement, worth $290 million, will grant Merck access to Orion’s drug candidate for prostate cancer.
Meanwhile, Merck just announced its plan to catch up with its peers in the COVID-era race. Specifically, the biotech giant has finally become more invested in entering the messenger RNA technology segment.
Earlier this week, Merck struck a $3.7 billion deal with Cambridge-based private biotech Orna Therapeutics for the latter’s novel take on mRNA called oRNA.
Basically, Orna’s approach involves altering the mRNA strands in such a way that it creates a circle instead of a line.
According to the firm, this will be a more effective way to apply the technology to mRNA-based vaccines and therapies.
This isn’t the first time Merck collaborated with a smaller firm to pursue mRNA technology.
As early as 2015, Merck has already been investing in this segment. In fact, it was one of the early partners of Moderna (MRNA), signing a series of agreements with the latter including collaborations on infectious diseases programs.
While some of the programs have been discontinued, Merck and Moderna continue to work together on a personalized cancer vaccine program.
Amid these efforts, Merck is still regarded as a laggard compared to its Big Pharma peers in terms of making huge investments in the mRNA space.
Recent mRNA collaborations include Sanofi’s (SNY) $3.2 billion deal with Translate Bio, Pfizer’s (PFE) massive investment in BioNTech’s (BNTX) technology, and GlaxoSmithKline’s (GSK) deal with CureVac (CVAC).
Nevertheless, the deal with Orna suggests a shift with Merck’s strategy.
Overall, Merck is a premier biotech and healthcare business with a strong portfolio and a promising pipeline.
Its profitability and expansion over the past years have been proven to be top-notch, and it’s not farfetched to expect the same or even better results in the future. I recommend buying the dip.
Mad Hedge Biotech and Healthcare Letter
August 16, 2022
Fiat Lux
Featured Trade:
(A FAIL-SAFE HEALTHCARE STOCK FOR PATIENT INVESTORS)
(JNJ)
Warren Buffett is arguably one of the most celebrated investing minds in history. In the 57 years that the Oracle of Omaha was hailed as the leader of Berkshire, the business’ Class A shares (BRK.A0 grew 3,641,613% through December 31, 2021.
In fact, his company has been outperforming the broader market by leaps and bounds that even if Berkshire’s shares fall 99% tomorrow, it would still be ahead of the S&P 500—an achievement it has been celebrating since 1965.
While there’s a long list of factors behind Buffett’s long-running success, his preference for relatively safe businesses serves as one of the foundations of Berkshire’s superior and stable returns.
One of the companies in Berkshire’s portfolio is Johnson & Johnson (JNJ). Although it comprises only 0.02% of Buffett’s holdings, JNJ represents the steady and long-term holdings the Oracle has been known to chase.
Since August 2012, the company’s trailing-12-month net profit has climbed by 116%, exceeding $18.3 billion. To hit that mark, JNJ creates and markets a slew of products and treatments alongside medical devices and consumer health staples such as Tylenol and Sudafed.
It’s highly probable that JNJ’s stable track record of growth and success in expanding and diversifying its portfolio year after year is what lured Buffett to invest in the company.
JNJ’s operating segments hold a vital role in its growth as well. Although marketing brand-name pharmaceuticals comprise the majority of JNJ’s operating and growth margins, the reality is that brand-name products can only hold on to a finite period of exclusivity in sales.
To counter the issues involving patent cliffs, JNJ has implemented a myriad of tactics. For instance, it can rely on its top-performing medical device segment to help augment the loss of income.
For JNJ, when one door closes, another door or a group of doors tend to open.
Unlike most businesses that attract Buffett, which have wide economic moats, JNJ’s significant competitive edges rely on its sheer size compared to its rivals and the brand recognition attached to most of its products.
Nevertheless, a considerable part of its lineup speaks volumes in terms of highlighting Buffett’s preference for businesses that allow him to generate income without necessitating additional investments in development.
If you really think about it, you’ve likely purchased Tylenol or Listerine mouthwash several times in your life. The formulas have not been modified or changed that much, and neither has JNJ’s unit economics when it comes to manufacturing them.
Another factor that makes JNJ an excellent company is its continuity in operations. Keep in mind that this company has been in business for 136 years, and within that period, it only had 10 CEOs. Possessing continuity in critical leadership roles has guaranteed that strategic goals are constantly met.
On top of these, JNJ is one of the most financially sound—if not the most economically sound—publicly traded companies in the world. It has boosted its base annual dividend consistently over the past 60 years. It is recognized as one of the only two publicly traded companies with the highest credit rating (AAA) awarded by Standard & Poor.
Moreover, JNJ is a thriving healthcare stock.
Healthcare stocks are one of the most stable investments since they are defensive. Regardless of the economy and stock market performance, people will continue to buy prescription medicine, use medical devices, and avail of healthcare services. Therefore, this puts minimal demand on healthcare stocks. We do not stop getting sick or going to hospitals because Wall Street hits a roadblock.
Overall, JNJ is an excellent, safe, and reliable long-term investment. While it has not outperformed the broader market in the past 10 years, the business brings joy to its shareholders by steadily paying and boosting its dividend.
There’s a catch here, though. Buying a stock like JNJ signifies your willingness to hold it for years. Hence, this is a business for patient investors only.
Mad Hedge Biotech and Healthcare Letter
August 11, 2022
Fiat Lux
Featured Trade:
(BUILDING A RECESSION-PROOF PORTFOLIO)
(AMGN), (GILD), (MRK), (ABBV), (PFE), (JNJ), (BMY)
In my biotechnology and healthcare newsletter earlier this week, I talked about Amgen (AMGN) and how critical it is to determine recession-proof businesses.
In the next quarters and even years, it will no longer be as vital to identify companies that can bring high growth returns in the short term.
Instead, what’s more important is to find stocks that can withstand any bear market and a recession.
Like Amgen, Gilead Sciences (GILD) also performed better than the S&P 500 (SPY) and the Nasdaq 100 (QQQ) in the past 12 months.
Considering that we are anticipating a steep recession and a potentially brutal bear market in the following quarters, Gilead Sciences is presenting itself as a solid pick.
Some refer to Gilead Sciences as a one-trick pony, but that’s not an opinion I agree with despite the company’s over-reliance on its HIV programs and antiviral treatments.
For perspective, its antiviral portfolio comprises more than 90% of the company’s 2021 revenues while its top-selling products that year are all from its HIV segment.
Although Gilead Sciences has been expanding its portfolio, the company’s HIV program remains its best moneymaker. In the second quarter of 2022, sales of its HIV treatments have risen by 7% year-over-year.
Demand for treatments in this space has climbed in the past months, which allows for more room for growth in the foreseeable future.
Among the HIV treatments, Biktarvy is the best-selling product. It’s also the treatment that continues to gain a bigger market share.
By the second quarter of 2022, Biktarvy has been reported to claim roughly 44% of the market share in the US, marking a 4% increase year-over-year.
Meanwhile, another potential blockbuster is Lenacapavir. This is a new product, which will be marketed as a long-acting injectable HIV treatment once it gains FDA approval. If this gets the green light, this could rake in an estimated $2 billion in the first year of its release.
Aside from its HIV treatments, Gilead Science’s hepatitis franchise has also been steadily growing.
Amid the competition against the likes of Abbvie’s (ABBV) Mavyret, the company’s combo treatments with Sofosbuvir continue to generate significant cash flows and promising sales.
However, this segment raked in $1.9 billion in sales, down 9% year-over-year. The decline could be attributed to the effects of the pandemic.
Nevertheless, Gilead Sciences have been working on updating this particular program and adding newer treatments to deliver better results.
Another segment that saw a spike in 2021 is the antiviral program, primarily due to Veklury or Remdesivir.
When COVID-19 broke, Veklury was hailed as the first-in-line treatment. This led to a substantial boost in sales since 2020, with the company earning $2 billion from the product at that time.
By 2021, Veklury sales skyrocketed by 98% to hit $5.6 billion.
Frankly, no one truly expected Veklury to reach those figures—even Gilead Sciences’ management. In their first-quarter conference call in 2021, the company estimated full-year sales for the product to be roughly $2 to $3 billion.
While Veklury’s numbers are impressive, I think this product’s days are numbered because of the emergence of more competitors and better alternatives in the market these days.
In any case, this treatment is a testament to Gilead Sciences’ ability to deliver effective and reasonably priced antivirals to market.
Moving forward, Gilead Sciences looks to be exploring the oncology sector.
Its move to acquire CAR T-cell therapies via the $12 billion deal with Kita Pharma in 2017 is one of the clearest indicators of this plan.
On top of that, Gilead Sciences also acquired Trodelvy from Immunomedics in 2020. As far as fast-tracking its expansion in the oncology space goes, this definitely pushes the company to the forefront.
As a standalone treatment, this can reach peak sales of $2 billion to $3 billion.
Other than testing it with its own pipeline as a breast cancer treatment, Gilead Sciences has been collaborating with Merck (MRK) to determine the efficacy of Trodelvy when combined with Keytruda as a first-line treatment for non-small cell lung cancer.
Overall, Gilead Sciences is a great addition to a portfolio of recession-proof companies.
While it may not be as impressive as industry titans like Bristol Myers Squibb (BMY), Merck, AbbVie, Pfizer (PFE), and Johnson & Johnson (JNJ), it definitely bears the early signs of improvement, a promising future, and the ability to withstand a recession.
Mad Hedge Biotech and Healthcare Letter
August 9, 2022
Fiat Lux
Featured Trade:
(A REVIVED BIOTECH GAINING MOMENTUM)
(AMGN), (SEGN), (MRK), (REGN), (GILD), (CCX), (BMY)
Biotechnology stocks have been rallying since mid-June, and it looks like the sector doesn’t have plans of stopping anytime soon.
The SPDR S&P Biotech ETF (XBI), which keeps track of the segment, has been up by 32.5% since the second half of 2022—a period that saw the S&P 500 rise by only 11.4%.
Nonetheless, doubts still linger in terms of how long this sector’s bull run will last. There are also questions on whether the recent shift in market sentiment indicates a substantive change or merely a momentary blip.
News about the biotech industry has been leaning towards the positive in the past months, and hopes for its recovery were bolstered by the much-discussed potential acquisition of Seagen (SEGN) by Merck (MRK).
The strong earnings reports of Regeneron (REGN) and Gilead Sciences (GILD) also added to the overall positivity of the sector.
Meanwhile, another big mover in the biotechnology world appears to be gearing up for a major move soon.
Amgen (AMGN) recently announced its plans to acquire ChemoCentryx (CCXI) for $3.7 billion.
This all-cash acquisition works out to roughly $52 per share and a whopping 115% premium to ChemoCentryx’s price.
ChemoCentryx is mostly known for its autoimmune disorder pipeline. In 2021, the company received FDA approval for Tavneos, which targets a relatively rare autoimmune condition called ANCA-associated vasculitis.
In the first quarter of 2022, Tavneos delivered $5.4 million in sales.
The announcement boosted ChemoCentryx’s shares to skyrocket by 108.4% while Amgen shares remained flat. However, this jump isn’t all too surprising.
The company getting acquired records a jump in stock price after the announcement because the acquirer typically pays a premium for the deal. It’s a strategic move since the higher the premium, the better the chances that the shareholders will approve the acquisition.
If all goes well, this acquisition is expected to be completed by the fourth quarter of 2022.
This move is a good indicator of Amgen’s response to its problem of stagnation. Over the years, this biotech giant has been seemingly left behind in churning out innovative treatments.
Pursuing a promising company like ChemoCentryx is an excellent way to diversify its pipeline and reignite growth.
The deal is especially promising in light of the company’s major setback in 2020 when the Phase 3 clinical trial for its heart failure drug fell short of delivering the promised results.
While issues with new products aren’t exactly new, particularly in the biotechnology sector, Amgen’s failure made investors skittish and led to selloffs.
However, Amgen was not deterred. After all, the setback came following decade-long progress leading up to 2020 when the company’s revenues steadily rose from $15 billion to $23 billion.
In the end, Amgen was still able to surpass its projected revenue to hit the $25 billion mark in 2020 thanks to its strategic move to acquire Otezla from Bristol Myers Squibb (BMY).
By 2021, Amgen shared that its 2020 results were up 9%. Last year, the company ignited some momentum and managed to raise its earnings from the year before to $26.2 billion.
Despite these efforts, the company still struggled with organic growth. This is perhaps why it has been aggressive in pursuing multiple revenue streams via M&A to find more ways for multiple expansions.
Part of this plan is the 2021 acquisition of Five Prime Therapeutics for $1.9 billion and Teneobio for $900 million.
Given the deals last year, investors didn’t truly expect Amgen to deliver more growth in 2022. This is possibly why the company’s shareholders were a bit surprised by the new acquisition.
However, this deal with ChemoCentryx will grant Amgen access to a slew of orally administered treatments not only for autoimmune diseases and inflammatory conditions but also for cancer.
Realistically, Amgen’s near-term outlook is not that groundbreaking. However, the overall valuation and potential of its M&A dealmaking are compelling enough to encourage investors patient enough to wait for the rewards in the long run.
Mad Hedge Biotech and Healthcare Letter
August 4, 2022
Fiat Lux
Featured Trade:
(A SELLOFF SURVIVOR READY FOR MORE GAINS)
(PFE), (SRPT), (PTCT), (GSK), (JNJ), (MRNA)
The broader market hasn’t been putting that much faith in drugmakers these days, and this could very well be a mistake.
While 2022 has not been particularly kind to equities recently, several names in the biotechnology and healthcare sector still managed to keep themselves safe from the selloff.
Pfizer (PFE), with its COVID vaccine sales, is one of them. Admittedly, this pharmaceutical giant has not shown substantial growth in the past monthS. Nonetheless, its quarterly updates and, more importantly, pipeline have exhibited notably encouraging signals.
As a massive underperformed in the past 20 years, Pfizer has taken aggressive steps to transform its strategy. The most obvious way to shake up the business is to eliminate the bulk of its noncore products.
However, it’s not advisable to buy a company just because it has been underperforming and would then be sold at lower prices. Instead, it is critical to determine whether there’s a catalyst.
For Pfizer, the catalyst was clear: COVID.
The company was and still is at the heart of the coronavirus vaccine drives and treatments—a position that’s projected to be sustained for years to come.
The company has made a fortune from this program, and it’s still reaping the rewards in a massive way.
In the second quarter of 2022, Pfizer’s revenue climbed by 53% year-over-year to reach $27.7 billion. Based on the company’s record, this is the most significant quarterly sales during this period to date.
For context, its COVID vaccine, Comirnaty, raised $8.8 billion in sales. This is 20% higher than its reported sales in 2021 over the same period.
Meanwhile, Pfizer’s new COVID therapy, Paxlovid, recorded $8.1 billion in sales. Taken together, Paxlovid and Comirnaty comprise over half of the company’s total revenue for the second quarter.
Leveraging these growth opportunities, Pfizer has been steadily expanding its pipeline.
To date, the company has roughly 96 drugs in its pipeline. Of these, 6 drugs are in registration, while 29 candidates are queued for Phase 3 trials. There are 31 drugs in Phase 2 and 30 more in Phase 1.
Pfizer’s candidates range from treatments for inflammation, immunology, oncology, vaccines, and internal medicine to rare disease therapies.
Among the treatments in its Phase 3 study, two have been identified to bring in billions of dollars for Pfizer potentially.
One is PF-06939926, which is a treatment for Duchenne syndrome. The other is PF-06928316, which is for Respiratory Syncytial Virus (RSV).
Globally, 1 in 3,500 to 5,000 males suffer from Duchenne syndrome. This puts the number of patients at roughly 250,000, with about 10,000 to 15,000 found in the US. While it generally affects males, it can sometimes affect females as well.
In terms of market size, the Duchenne syndrome market is expected to be worth $4 billion in 2023 and $7 billion by 2027.
Currently, the major approved treatments for this condition are Sarepta's (SRPT) Exondys 51, Vyondys, and Amondys, as well as PTC Therapeutics (PTCT) Emflaza and Translarna.
PTC recorded $236 million in sales for Translarna, which is approved in Europe, and $187 million for Emflaza, approved in the US, for a total of $423 million in sales in 2021. Meanwhile, Sarepta’s overall sales reached $612 million for that same period.
Adding the rest of the minor competitors for Duchenne syndrome treatments, only $1.5 billion of the projected market value is held by the existing drugs. Clearly, there’s a lot of room for more companies to join the fray.
Meanwhile, RSV presents another lucrative market. According to the Centers for Disease Control and Prevention, this condition causes approximately 58,000 hospitalizations annually in the US.
Of these, 100 to 500 deaths are children under 5 years old and 14,000 are adults aged 65 and above. The average expense in managing adult patients alone has reached roughly $3 billion every year.
In terms of market value, the RSV market is projected to reach $4 billion by 2027. So far, the biggest competitors in this space are GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), and Moderna (MRNA).
While its rivals are challenging, Pfizer still estimates sales for its RSV vaccine to reach at least $1.5 billion annually.
Thanks to its COVID programs, Pfizer has been hailed as the undisputed leader of the pack in terms of reputation and credibility in research.
Needless to say, these factors would serve as a valuable growth lever for the healthcare giant for decades.
As one of the largest biopharmas in the world, Pfizer has established a reputation for outstanding innovation. Over the years, the company has delivered several revolutionary treatments to the market like Viagra or Lyrica.
Simultaneously, it developed Lipitor, reaching $14.5 billion in sales over 14.5 years.
Since then, it has become a highly reputable industry name. Its diverse and extensive pipeline demonstrates that it remains a company highly capable of innovating and maintaining its dominance.
