Mad Hedge Biotech and Healthcare Letter
July 14, 2022
Fiat Lux
Featured Trade:
(GOODBYE BIG PHARMA, HELLO BIG BIOTECH)
(GSK), (PFE), (BMY), (VTRS), (LLY), (JNJ), (AMGN), (GILD),
(MRK), (RHHBY), (AZN), (NVO), (ABBV), (SNY), (ABT)
The moment GlaxoSmithKline (GSK) completes the spinoff of its massive segments marketing drugstore staples, such as Tums and Advil, it will become the latest name to join the list of Big Pharmas shuffling their assets and rebranding itself into a pure-play biopharma stock.
The reorganization of this UK-based company is the culmination of years-long process that has transformed practically all the biggest pharmaceutical companies globally into biotechnology companies on steroids.
This type of transformation, which gets rid of sideline businesses, has been going on for years. Pfizer (PFE) dumped its chewing-gum segment back in 2002 and established another spinoff unit, Viatris (VTRS), with Mylan in 2020.
Bristol Myers Squibb (BMY) decided to spinoff its infant-formula division in 2009. In 2018, a new animal health company came to be from Eli Lilly (LLY).
By 2023, Johnson & Johnson (JNJ) expects to complete the creation of a spinoff company and unload its consumer health segment, which offers Tylenol and Band-Aids.
Essentially, they’re turning into Amgen (AMGN) and Gilead Sciences (GILD) but with more money and resources to churn out high-priced, complex treatments for rare diseases.
However, not all Big Pharma names plan to become pure-plays. For example, Merck (MRK) still intends to retain its animal health sector while Roche (RHHBY) wants to keep its diagnostics segment.
As for the rest, including AstraZeneca (AZN), Novo Nordisk (NVO), and AbbVie (ABBV), their plan is to focus on creating new drugs and marketing these treatments—nothing more, nothing less.
The idea of Big Pharma transforming into “Big Biotech” dates back to 1992, when Henri Termeer, the CEO of Genzyme—now owned by Sanofi (SNY)—was summoned to a Senate hearing in Washington to argue and justify one of the most expensive medicines ever put to market.
The medication in question was for a rare genetic condition called Gaucher disease. A year-long treatment for one person needed tens of thousands of human placentas, and the price tag? A jaw-dropping $380,000 annually.
Amid the demand to make the treatment cheaper, Genzyme stood by its decision and the price barely budged after two years.
The company’s tenacity and insistence on standing by its pricing altered the biopharma landscape. That is, drug developers realized that rather than marketing cheaper drugs to combat common diseases, they can focus on biotech-style treatments to target rare conditions.
At that time, Big Pharma companies were battling over pieces of massive markets. They allocated considerable funds to their commercial teams, hoping to outrank one another in crowded spaces.
Meanwhile, biotechs like Genzyme decided on a different strategy.
They concentrated on more innovative approaches. Actually, the biotech focused on biologics at that point. Then, the company simply ignored the pricing rules and set its own prices, which were considerably higher.
A more recent go-to proof of concept for this strategy is Abbott Laboratories (ABT), which was initially a diversified company that offered an extensive range of products like medical devices and even infant formula.
In 2013, the company spun off its branded pharmaceutical sector into AbbVie, which became a pure-play biopharma that focused on developing and marketing the arthritis drug Humira. Since then, Humira has transformed into one of the top-selling drugs in history.
More than that, AbbVie pays substantial dividends while its shares have delivered 500% returns since the spinoff. In comparison, the S&P 500 has returned roughly 220% within the same timeframe.
While this is a shift that investors have clamored to see in the healthcare sector, it also means that the transformations could turn companies with solid revenue streams that have become reliable despite the ups and downs of the drug discovery process into riskier bets.
Although treatments for rare diseases admittedly come with very high price tags, focusing on smaller markets brings with it the inherent risk that these buy-and-stuff-under-the-mattress blue chips could no longer deliver returns as consistently.
These days, though, the advancements have made faster and safer scientific breakthroughs much more plausible.
Companies have gained a better understanding of the human genome, oncology treatments, genetic diseases, and groundbreaking modalities like gene therapies.
The science has now caught up with the demand. More importantly, Big Pharma has finally woken up and started to leverage its resources to take advantage of the opportunities.
This gradual change can be seen in the surge of new treatments in the past years. From 2016 to 2020, the FDA approved an average of 46 new therapies annually.
This is more than half the number between 2006 and 2010 when the organization only approved an average of 22 new treatments every year.
Needless to say, these changes are also partly in response to the overall dissatisfaction of investors with the diversification strategies of Big Pharma.
Basically, the general message here is that Big Pharma should let the investors worry about diversifying their own portfolios and focus on developing safe and effective drugs.
Mad Hedge Biotech and Healthcare Letter
July 12, 2022
Fiat Lux
Featured Trade:
(THE LEADERSHIP BATON IS IN BIOTECH’S HANDS NOW)
(MRK), (SGEN), (CRSP), (VRTX), (BLUE), (BIIB), (LLY), (RHHBY)
Biotechnology companies have taken the reins and are expected to outperform the general market in the near future.
To date, the Nasdaq Biotech Index (NBI) has been up by 2.41% while the iShares Biotechnology (IBB) exchange-traded fund has climbed by 2.47%.
Numerous crucial factors place this industry in an advantageous position for growth. Alongside other segments of the pharmaceutical and healthcare industries, the biotechnology sector is essentially recession-proof.
With a roughly 40% fall in the biotech sector from 2021’s high, it’s highly likely for us to witness a boost in takeover activity in this space.
This is evident in recent reports of Merck (MRK) attempting to acquire cancer biotech Seagen (SGEN), as discussed in the June 30 issue of this biotech and healthcare letter.
The talks have progressed, and it appears that Merck is nearing the end of the process. The goal is to have the details worked out by the time the quarterly earnings report is released on July 28.
While no specifics have been made public, it is estimated that the larger healthcare company will pay a staggering $40 billion for this Seagen acquisition.
If this goes through, Merck will pay more than $200 per share for Seagen.
The news of this acquisition bolstered Seagen’s business as the stock rose by 4.6% at the time of the announcement.
This is welcome news given the perceived slowdown in biotech M&A activity since 2020. As a result, the idea fueled pessimism among investors who failed to see the big picture during this time period.
Analysis of 101 contracts signed by small, medium, and large biotechnology companies between January 2015 and June 2022 reveals that this year's contract volume and size are comparable to those of previous years.
In fact, there have been $17.7 billion in transactions so far in 2022. This translates to more than $13.9 billion in 2020 and $7.2 billion in 2021.
Some investors may be concerned about the quality of these acquisitions.
Even though the companies involved paid good premiums, the last 12 months' acquisitions were done at a big discount to the highest share prices of the businesses being bought.
To put it simply, there has been a problem with pricing in the sector as of late.
This is admittedly a "bittersweet" reality of recent biotech M&A transactions. As a result, market perceptions are clouded and investors are misled into believing that a much larger problem is brewing in the sector.
Executing megadeals is an obvious solution. This is why the Merck-Seagen merger is such good news for the industry.
The impact of this report suggests that large-scale M&A could be part of the path to the biotech sector's recovery.
The mere possibility of this transaction has already increased the SPDR S&P Biotech exchange-traded fund by approximately 20%.
In addition to Merck and Seagen, other biotechnology companies have been widely discussed as potential acquisition targets.
CRISPR Therapeutics (CRSP), which has a long-term partnership with Vertex Pharmaceuticals (VRTX), is a fan favorite. By the fourth quarter of 2022, the two intend to submit their sickle cell and beta-thalassemia treatment for approval.
Bluebird Bio (BLUE) is another company that has been on the radar whenever acquisition discussions begin.
This gene therapy and cancer biotech has been unnerving investors for months, even before the pandemic triggered an economic crisis, due to its lackluster performance. Despite this, its gene-editing program has enormous potential.
With a market capitalization of $368 million, it is an ideal candidate for Merck and even Moderna (MRNA). After all, both have been considering expanding its oncology program, and a dirt-cheap acquisition target appears to be an appealing option.
Biogen is another name associated with multiple interested parties (BIIB). Since its Alzheimer's treatment failed to materialize and deliver despite the biotechnology company exhausting virtually all available options to salvage the situation, the stock has yet to exhibit any signs of recovery.
After betting the farm on this candidate, Biogen has struggled to maintain its financial stability. In an effort to improve its cash flow and pay off its debts, the company has also been working overtime to advance the other programs in its pipeline.
Eli Lilly (LLY) and Roche (RHHBY), which have been working on their own Alzheimer's treatment, have recently been linked to Biogen.
With a market capitalization of $32 billion and a money-losing program, however, any transaction involving this biotech would require significantly more time.
Overall, it appears that biotechs are gradually regaining their footing. It is only a matter of time before all the pieces fall into place and the sector begins to move forward with full force.
Mad Hedge Biotech and Healthcare Letter
July 7, 2022
Fiat Lux
Featured Trade:
(A BIOTECH WITH A QUIVER FULL OF ARROWS)
(VRTX), (UNH), (SIGA), (CRSP)
Even with the decline of the general market, several stocks have managed to buck the trend and thrive.
However, no stock is worthy of serious consideration if it isn’t at least delivering some positive returns.
In the biotechnology sector alone, there are roughly 750 biotech stocks on the major US exchanges.
Approximately 50 of these have been in the positive territory in the last 12 months. Among them, only 25 have shown a 20% or above jump.
In this very short list of promising biotechnology stocks in 2022, one name stands out as a huge winner amid a growing number of losers: Vertex Pharmaceuticals (VRTX).
Vertex shares have increased and soared near 50% over the past 12 months. In fact, the stock is up by over 30% thus far this year.
On top of stock performance, another factor to consider is the quality of the underlying business.
At the very least, the company needs to show potential to grow sales and deliver profits. Vertex once again delivers on these aspects.
The durability and dependability of revenue and earnings growth are critical.
This year, only three of the surviving biotechnology companies from the whittled-down list managed to generate positive top- and bottom-line growths over the past five years.
These are United Therapeutics (UNH), Siga Technologies (SIGA), and, of course, Vertex.
Vertex’s recent performance is a complete 180 from earlier times. The stock fell more than 30% from October 2020 until October 2021. This decline was primarily due to the investors’ anxiety over the company’s heavy reliance on its cystic fibrosis (CF) program.
Evidently, the tide has turned for Vertex. More importantly, this could only be the start.
While a biotech with an excellent track record is a good indicator, it’s not a guarantee that it can deliver the same results in the future.
However, Vertex appears to be doing an exceptional job of continuing its winning streak.
The company holds a rare advantage that only a handful of biotechs have: a rock-solid moat.
While investors may not like Vertex’s complete reliance on its CF business, it’s critical to remember that expansion is far from over for this particular therapeutic segment.
Moreover, Vertex is the market leader in this field worldwide—and it’s expected to keep this position until the late 2030s at the very least.
Four CF treatments have been approved in both the US and Europe, and Vertex makes all of them.
Sure, several companies are attempting to enter this market and compete against Vertex, but none of them have gotten past Phase 2. Actually, most of the potential rivals are still in the preclinical testing phase.
This monopoly enables Vertex to generate solid revenue and earnings growth continuously. In the first quarter of 2022, the company’s cash position reached $8.2 billion.
If that’s not enough to secure Vertex’s position in this market, then here’s another one. The biggest threat to Trikafta, one of Vertex’s CF blockbusters, is a candidate being studied and developed by none other than Vertex itself.
That’s right: Vertex’s biggest threat is another Vertex candidate.
In terms of patent exclusivity, Vertex has this concern covered as well because its best-selling CF treatment won’t expire until 2037.
Nonetheless, investors aren’t the only people hoping to expand Vertex’s portfolio. The company has been steadfastly working on that, too.
Aside from working on a potential groundbreaking mRNA-based CF treatment with Moderna (MRNA), Vertex has been developing candidates in several key segments, including diabetes, blood disorders, and pain.
Vertex and CRISPR Therapeutics (CRSP) are expected to seek regulatory approval for exa-cel (CTX001), a potential one-time cure for sickle cell disease and transfusion-dependent beta-thalassemia, within 2022.
It also moved its kidney disease candidate, VX-147, into late-stage trials last March. If this works out, the treatment can target a larger patient population than CF.
Another program expected to move into late-stage trials in the second half of 2022 is VX-548, an experimental non-opioid pain drug.
Meanwhile, its Type 1 diabetes pipeline is anticipated to grow soon. The company already has at least one cell therapy queued for early-stage testing, and the plan is to advance another program into clinical trials by the fourth quarter of this year.
Simply put, Vertex’s pipeline is akin to a quiver full of arrows. Considering the company’s track record, it would no longer be surprising if it hits all its targets.
Mad Hedge Biotech and Healthcare Letter
July 5, 2022
Fiat Lux
Featured Trade:
(AN AAA-RATED STOCK POISED TO DELIVER MARKET-BEATING RETURNS)
(JNJ), (AAPL), (GOOGL), (AMZN), (MSFT), (TSLA), (META), (BRK.A)
More than six months after what appeared to be a never-ending assault on the biotechnology and healthcare industries, the sector seems to be slowly reviving.
While it is still too early to declare the pullback over, there are a few companies that provide a ray of hope for investors.
In the US, only four stocks have recorded a market capitalization of $1 trillion or higher: Apple (APPL), Alphabet (GOOGL), Amazon (AMZN), and Microsoft (MSFT). This year's market crash saw Tesla (TSLA) and Meta Platforms (META) departure from this elite group.
The market-wide selloff also made it more difficult for stocks to reach the $1 trillion mark. However, this does not necessarily preclude them from achieving this goal in the future.
Companies are rapidly expanding and equipped with the right tools and strategies to capitalize on growth opportunities, making them prime candidates to make the $1 trillion cut in a couple of years.
One of them is Johnson & Johnson (JNJ).
Almost everyone is familiar with JNJ's century-old brands, such as Band-Aids and Listerine. What many people probably do not realize is that the company's med-tech and pharmaceutical segments account for the vast majority of its total revenue.
In 2021, its pharmaceuticals segment alone comprised 55% of JNJ sales, while its medical devices unit contributed 29% to the company’s top line.
So far, the most promising drug in JNJ’s pharmaceutical segment is Tremfya. First-quarter sales for this psoriasis treatment jumped to a whopping 41% year over year to record an annualized $2.4 billion.
Meanwhile, JNJ's med-tech segment is poised for massive growth as a result of the strong demand for its electrophysiology products. These devices, used to keep hearts beating normally, have been identified as lucrative revenue streams and growth drivers in the long run.
The company has been working on spinning off its consumer segment into a separate publicly traded entity in the following months. This means that investors with JNJ stock will eventually end up owning shares of two different companies by 2023.
The decision to spin off its consumer health segment is part of the company's effort to shed a cyclical segment and become a health pure play focused on pharmaceuticals and medical devices.
Hence, now is an excellent time to buy JNJ shares.
While JNJ isn’t known as a high-growth stock, the company’s strategies have the potential to spur exponential growth and send shares soaring.
The next decade will be crucial for the company's success as it transforms. If the company executes its plans successfully, its current market capitalization of $467 billion could slowly but steadily increase to approximately $1 trillion.
J&J will be able to invest and concentrate its resources on segments with high sales and margins, which should increase the company's income and cash flows at a faster rate than at present.
Furthermore, JNJ's plan is expected to increase shareholder returns through higher dividends and share repurchases because of its growing cash flow. With these factors combined, JNJ's stock price will undoubtedly rise, as will its market cap.
On top of these, JNJ offers a 2.6% dividend yield. Admittedly, this isn’t remarkably high. However, investors can rely on its steady rise. Moreover, JNJ is a Dividend King. In fact, it recently raised its payout for the 60th year in a row.
If these aren’t enough to cement the company’s reputation as a solid investment, consider the fact that JNJ is one of the largest holdings in Warren Buffett’s (BRK.A) portfolio.
It’s also one of the only two publicly traded companies with the coveted AAA credit rating from S&P. For context, the US government only has an AA rating. Needless to say, this makes JNJ one of the safest—if not the safest—income stock to date.
Overall, JNJ has been diligent in getting all of its ducks in a row and is poised to provide market-beating returns to patient investors.
Mad Hedge Biotech and Healthcare Letter
June 30, 2022
Fiat Lux
Featured Trade:
(A SOLID BIOPHARMA WITH A GAMECHANGER UP ITS SLEEVE)
(MRK), (SGEN), (AZN), (ABBV), (BMY)
The mounting uncertainty over fears of a global recession, heightened volatility, and ongoing geopolitical concerns resulted in the decline of the S&P 500 index, pushing it towards a bear market.
In this type of environment, investors can lean on solid dividend stocks to smooth out losses and generate some much-needed passive income.
A great biotechnology and healthcare stock that fits the bill is Merck (MRK).
For one, Merck’s business is solid, rising by 23% year-to-date. The company, with a market capitalization of $233 billion, is the fifth-biggest pharma stock globally.
It develops products for humans and animals, excelling and becoming a frontrunner in both fields.
Among its programs, the most noteworthy is the top-selling cancer drug Keytruda. This product continues to gain more indications despite already having over two dozen regulatory approvals under its belt.
In 2021, Merck launched five blockbuster products. Even its animal health sector posted double-digit growth in net sales for that period.
This also included its COVID-19 antiviral treatment, Lagevrio, which raked in $3.2 billion in sales in the first quarter of 2022 alone.
Merck also has roughly 77 programs queued for Phase 2 trials and 29 more for Phase 3 studies in its pipeline. These cover diverse projects ranging from vaccines, cardiovascular, and diabetes treatments to oncology and endocrinology therapies.
Needless to say, the continuous expansion of the company’s drug portfolio bodes well for its future. Moreover, Merck offers investors a 2.9% dividend yield.
To put that in perspective, 2.9% is about twice the S&P 500’s 1.6% yield.
While Merck is considered one of the top companies in the healthcare industry, reporting almost $50 billion in revenue in 2021, the business has been missing something in the past years: a big growth catalyst.
Despite its solid performance and steady expansion of existing products, Merck’s sales have only increased by roughly 15% from 2019 to 2021.
This might change soon.
Merck has been persistently linked with biotech company Seagen (SGEN) in an effort to bolster its oncology portfolio.
If this plan pushes through, it could be a massive game-changer for both companies.
With a market capitalization of over $32 billion, buying Seagen won’t be cheap for Merck. More than that, other names are supposedly interested in acquiring this company as well. However, it looks like Merck has the best shot at actually sealing the deal.
Growing its revenues impressively over the past 10 years, Seagen is an attractive target for any Big Pharma.
In fact, this biotech has grown from raking in only roughly $200 million in revenue in 2012 to $1.57 billion in 2021. It has also since then expanded its portfolio and broadened its pipeline. This means that the company’s 2027 revenue estimate of $6.9 billion and $10.2 billion by 2031 are within reach.
Seagen would be an excellent fit for Merck because of the overlapping interests of both businesses.
The deal would expand Merck’s oncology footprint, bolster its foothold in the market, and introduce new technology to its pipeline while simultaneously allowing Seagen to inject substantial cash flow to sustain and bring to market its innovative programs.
If this goes through, the deal would be expected to benefit Merck in the same way AstraZeneca (AZN) benefited from Alexion, AbbVie (ABBV) with Allergan, and Bristol-Myers Squibb (BMY) with Celgene.
While it’s risky to speculate on a potential acquisition, Merck remains a good buy regardless of the plans with Seagen.
Considering that the company’s dividend payout ratio is projected to be at 38% in 2022, its dividend seems to be safe and should be able to increase almost as fast as its earnings.
This means Merck could reasonably deliver high-single-digit yearly dividend growth, making it a stock with an excellent combo of income on the side and high growth potential.
