Biotech Letter - John Thomas - Mad Hedge Fund Trader

Is This The Next Moderna?

The growing concern for a potential global outbreak of monkeypox has sent shares of the biotechnology company behind the only approved vaccine soaring.

From a market value of $1.2 billion in May, Bavarian Nordic (BVNRY) has now reached $3.4 billion.

More than that, this figure is expected to climb higher as the World Health Organization (WHO) recently declared monkeypox a “public health emergency of international concern.”

Bavarian Nordic wasn’t the only vaccine maker that benefitted from this announcement. Shares of other developers, notably Siga Technologies (SIGA), Emergent Biosolutions (EBS), and Inovio Pharmaceuticals (INO), were also buoyed.

To date, there are roughly more than 16,000 recorded cases of monkeypox worldwide and 5 deaths. Most regions are categorized as moderate risk, while Europe is placed at high risk due to the number of infections in the area.

Siga Technologies rose 26% following WHO’s announcement. This company develops an antiviral named TPOXX, which is approved by the EU to use against monkeypox. The US has also stockpiled this drug despite not yet being approved by the FDA.

Meanwhile, Emergent Biosolutions climbed 11% after the news came out. While it’s also not yet marketed commercially for this particular outbreak, this biotech has developed a smallpox vaccine that could be applied as a preventive measure for monkeypox.

As for Inovio Pharmaceuticals, which rose 6%, the company does not have a monkeypox-centered product in its pipeline or portfolio. However, the biotech worked on an experimental vaccine against smallpox in 2010. This candidate is reportedly able to provide protection against monkeypox.

Despite all these candidates, Bavarian Nordic’s monkeypox vaccine, called Jynneos, is expected to remain the dominant vaccine. Apart from the US, it was also approved as a monkeypox vaccine in the EU and Canada.

Jynneos, which is administered in two doses, works as a non-replication live virus vaccine. It uses a modified or altered version of a virus that came from the same family as the monkeypox. The goal is to train the immune system to fight off monkeypox and smallpox infections.

Essentially, Jynneos is an advanced version of Emergent Biosolutions’ smallpox vaccine.

Considering the potency and safety of Jynneos, experts believe that no other smallpox or monkeypox candidate could rival Bavarian Nordic’s vaccine in the next 10 to 20 years.

Aside from the difficulties of developing a new and better vaccine, gathering data to prove the efficacy of the candidates would be highly challenging. Large-scale clinical trials involving humans might not be possible, both from an ethical and practical point of view.

Since it’s the only vaccine authorized so far, Bavarian Nordic is arguably the best bet for investors looking to capitalize on this demand.

Moreover, the biotech company has a strong balance sheet and can produce at least 30 million doses of its product. It also has several candidates in its pipeline, making it a safe play in this space.

In terms of competitors, the closest would most likely be Siga Technologies, which has a market capitalization of $1.3 billion. This biotech has a similar profile to Bavarian Nordic.

Meanwhile, its vaccine, TPOXX, showed little to no side effects. More than these, Siga recently received approval from the EU. That means gaining FDA approval in the US could very well be on the way as well.

Overall, there’s an apparent demand for the monkeypox vaccine. Right now, it’s only offered to individuals suffering from monkeypox or with significant exposure to infected people.

While it may not reach the heights of Moderna (MRNA) and BioNTech (BNTX) in terms of skyrocketing share prices, Bavarian Nordic’s vaccine is a great stepping stone for the company.

After all, Jynneos is basically a cousin to the smallpox vaccine that practically saved humanity.

So, if someone gets it, they would probably get the vaccine, just like you would rush to the hospital for a tetanus shot if you stepped on a rusty nail. Without these vaccines, life and the economy as we know them today would not be possible.

July 26, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 26, 2022
Fiat Lux

Featured Trade:

(ANOTHER TECH AND HEALTHCARE CROSSOVER)
(ONEM), (AMZN), (TDOC), (AMWL), (GOOGL), (AAPL), (MSFT), (CVS), (WBA), (UNH)

Another Tech and Healthcare Crossover

Biotech Letter

The battle for telemedicine dominance might have just ended before it even began.

Amazon (AMZN) just announced its all-cash plan to acquire One Medical (ONEM) for $3.9 billion, paying $18 per share.

To date, this will be Amazon’s biggest step toward the healthcare world.

With the entry of Amazon into this telehealth segment, companies like Teladoc (TDOC) and Amwell (AMWL) would need to work overtime to match the resources of the e-commerce giant.

However, Amazon’s move isn’t exactly novel considering that other FAANG companies like Google (GOOGL), Apple (AAPL), and Microsoft (MSFT) have already acquired healthcare companies.

What this move simply indicates is that Amazon has finally turned serious in its bid for a bigger piece of the healthcare market.

This isn’t even the first time Amazon decided to go beyond its retail business. It has a pretty diverse portfolio including Amazon Web Services, a cloud infrastructure service, and even Whole Foods.

However, the decision to aggressively pursue the $800 billion healthcare industry might just be what Amazon needs to really move the needle.

In 2018, Amazon shelled out roughly $1 billion to buy an online pharmacy called PillPack which led to the launch of virtual Amazon Care clinics.

On that same year, the e-commerce company also pursued a joint venture, dubbed Haven, with Berkshire Hathaway and JPMorgan Chase. Unfortunately, that plan didn’t pan out and was eventually shut down.

Buying One Medical at a premium of 77%, Amazon beat other interested bidders including CVS (CVS), Walgreens (WBA), and UnitedHealth (UNH).

It’s still unclear what Amazon plans with One Medical. The e-commerce giant might add it to its Amazon Care brand or let it operate independently.

One Medical is a membership-based platform, which is backed by the Carlyle Group (CG) and managed under 1Life Healthcare.

Like most telehealth companies, it offers virtual healthcare services like virtual visits. What makes it different is that it also provides in-person checkups in accredited medical offices within the US.

One Medical’s app enables clients to schedule appointments, talk with their healthcare provider, and ask for prescriptions.

A key selling point is that the company guarantees that all the appointments start on time. Another notable feature is that users can gift a yearlong subscription to someone for $199.

Like Teladoc and Amwell, the company isn’t profitable yet. This case isn’t shocking for a relatively new field.

However, One Medical’s strategy has led to impressive revenue and membership growth.

The company’s revenue has consistently increased since its 2020 IPO. In 2021, its membership count climbed by 34% to reach 736,000.

In the first quarter of 2022, One Medical’s membership grew again by 28% and revenue jumped 109% to record over $254 million. So far, more than 8,000 companies provide One Medical services to their staff.

For 2022, One Medical projects its revenue to be between $831 million and $853 million.

Admittedly, these figures seem inconsequential when you compare them to the other sectors of Amazon’s business. For example, Amazon Web Services raked in $18.4 billion in sales in the first quarter of 2022.

Actually, One Medical’s revenue and membership growth might even look small and unimpressive compared to Teladoc, which recorded $565 million in the first quarter and has more than 54 million members in the US alone.

Undoubtedly, the healthcare market offers a mouthwatering opportunity for the likes of Amazon. It’s a lucrative industry, one of the handful that can truly make a difference in an already thriving business. Moreover, it has been highly profitable over the years.

Nonetheless, the acquisition of One Medical isn’t a foolproof plan for Amazon’s dominance in healthcare. So far, the e-commerce giant’s track record has been mixed. That doesn’t mean that the deal is a bad move. In fact, it indicates Amazon’s seriousness in making a play for the healthcare market.

Either way, the clear winner would be One Medical. Since the announcement, the stock has risen 70%.

Moreover, even if Amazon falls victim to politicization or anti-trust issues involving the deal, One Medical still has a number of suitors lined up.

Basically, it’s a win-win for this emerging telehealth company.

July 21, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 21, 2022
Fiat Lux

Featured Trade:

(A BAD NEWS BUY HYPE)
(BIIB), (SAGE), (REGN)

A Bad News Buy Hype

Biotech Letter

Even when they’re on the dip, there are some stocks you should avoid. In a bear market, it’s always challenging to determine which stocks are good buys and which ones you should steer clear of at the moment.

Shares of biotechnology giant Biogen (BIIB) have plummeted by 40% in the past 12 months, clearly underperforming the broader market over the same period. While there are a lot of factors to consider, the drugmaker’s decline could be attributed to the controversial Alzheimer’s treatment Aduhelm.

Although Biogen’s shares are currently on sale, it doesn’t necessarily follow that the stock is a buy. So far, the company’s future still looks quite grim.

Admittedly, Aduhelm’s approval was an incredible milestone for the biotechnology industry. It was the first-ever FDA-approved Alzheimer’s disease therapy since 2003.

Unfortunately, it failed to live up to its potential. Actually, it didn’t even get close to fulfilling its promise.

Recapping the whole Aduhelm saga would take up more space than necessary, so here’s a quick rundown of the key events involving the controversial drug.

In June 2021, the FDA approved Biogen’s Aduhelm as an Alzheimer’s treatment.

The green light was a shock, especially since the FDA’s committee of experts adamantly voted against the drug, and the agency typically adheres to the group’s recommendations.

To appease the public, FDA required the biotech company to perform a post-approval study to re-confirm Aduhelm’s efficacy and safety. If the treatment fails, it must be taken off the market.

While Aduhelm became available commercially across the US by the second quarter of 2021, the drug failed to deliver on sales expectations. It only racked up a disappointing $3 million in revenue then.

By April 2022, the US Centers for Medicare and Medicaid Services (CMS) disclosed its coverage plan involving Aduhelm. It was limited to Alzheimer’s patients with mild cognitive impairment enrolled in clinical trials approved by CMS.

Biogen announced in May 2022 that it would drastically reduce its spending on commercial infrastructure focused on Aduhelm, owing in part to the CMS' limited coverage and possibly as a cost-cutting strategy. This move, which saved the biotech approximately $1 billion, reflects the company's loss of faith in Aduhelm and potential plans to abandon the project entirely.

Despite the Aduhelm fiasco, Biogen is still looking for Alzheimer's treatments.

The biotech completed a rolling submission to the for lecanemab in the same month it announced its decision to cut costs on Aduhelm infrastructures.

Lecanemab, which Biogen is developing alongside Esai (ESALY), is another Alzheimer’s therapy.

Lecanemab also works by getting rid of the beta-amyloid plaques in the brain. Understandably, it’s difficult to be too optimistic since it essentially has the same concept as Aduhelm.

Hence, Biogen needs a strong candidate to pull the company from this slump. Its revenue fell 6% year-over-year to $2.5 billion in the first quarter of 2022.

Biogen’s net income for the same period was $303.8 million, down from the $410.2 million it raked in the first quarter of 2021.

Most of Biogen’s revenue comes from its multiple sclerosis (MS) treatments. However, Tecfidera’s loss of exclusivity has allowed generic competition to chip away at their market share.

For context, the company’s total revenue from this segment in 2021 was $6.1 billion, which is 29% lower from 2020.

Meanwhile, Spinraza, another MS drug, hasn't experienced much growth either. In 2021, Spinraza recorded $1.9 billion in sales, falling by 9% from the $2.1 billion it reported in 2020.

Aside from its efforts in the Alzheimer’s and MS segments, Biogen also has other programs. It currently has 9 treatments queued for Phase 3 trials and several candidates for early-stage studies.

One promising prospect is its collaboration with Sage Therapeutics (SAGE). The two are working on zuranolone, which is a major depressive disorder treatment. The goal is to file for an NDA before 2022 ends and another NDA for postpartum depression by 2023.

Another prospect is its work on a biosimilar for Regeneron’s (REGN) top-selling macular degeneration therapy Eylea. This could lead to a lucrative market for Biogen since Eylea rakes in an average of $2.5 billion in revenues.

Needless to say, Biogen has so much riding on its pipeline programs. After all, it could no longer afford another spectacle like the Aduhelm episode. This is a critical reason that the stock is not looking attractively valued, particularly given the headwinds it’s facing.

Therefore, investors would be better off looking elsewhere right now. Declining revenues and earnings, exclusivity losses, growing competition, and no feasible catalyst on top of a struggling new product do not make any company—no matter how tumultuous the market—very attractive. Biogen may look cheap compared to other biotech and healthcare stocks, but it appears to have all the makings of a value trap.

July 19, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 19, 2022
Fiat Lux

Featured Trade:

(A RECESSION-PROOF STOCK)
(UNH), (CVS), (LHCG)

A Recession-Proof Stock

Biotech Letter

The economy isn’t built to be recession-proof. Generally, it follows a relatively predictable albeit irregular pattern called the economic cycle.

Some periods of growth can typically last for several years before reaching its peak. What comes after is a period of contraction—aka a recession—before the economy once again moves towards another expansion.

Needless to say, periods of recession can be really brutal for investors. During this time, cyclical stocks or businesses that are highly sensitive to the economic cycle tend to be hit the hardest.

Meanwhile, certain stock market segments are relatively immune to these cycles. These companies provide investors with stocks that are nearly recession-proof, allowing them to buy and hold while awaiting the end of economic turmoil.

Among these companies, healthcare stocks are some of the most recession-proof options for investors.

After all, people can’t exactly suspend most healthcare needs. When you are sick, you have no choice but to visit the doctor and purchase medication.

Within the healthcare sector, health insurers appear to be beating the market recently.

When the pandemic began, health insurers had to adjust some aspects of their operations.

Reduced spending on non-essential medical care is an obvious change. However, this was counterbalanced by the increased costs of other procedures. These changes brought about by the pandemic greatly benefited the health insurance industry.

The emergence of more technological innovations and inflation are the primary reasons behind the increase in healthcare spending.

As these costs continue to accumulate and rise, an increasing number of clients will rely on health insurance companies as a hedge.

This is one of the key factors why the health insurance market worldwide is projected to grow by 4.6% annually from $2.8 trillion in 2020 to an impressive $3.9 trillion by 2027.

With a market capitalization of roughly $483 billion, UnitedHealth Group (UNH) is considered the largest health insurer across the globe.

For comparison, the second biggest health insurer is CVS Health (CVS) with a market capitalization of $123 billion, or about one-fourth the size of UNH.

Thanks to UNH’s sheer size and the positive industry outlook, the health insurance company is estimated to deliver 14.6% earnings growth annually over the next five years.

In its second-quarter earnings report, the company topped estimates of $5.21 per share and delivered $5.57 instead.

Its revenue of $80.3 billion was also above the earlier forecast of $79.7 billion.

This promising growth potential could be the main reason UNH announced a 13.8% per share rise in its quarterly dividend during its last earnings report.

Riding this momentum, UNH is expected to move forward with the $5.4 billion acquisition of LHC Group (LHCG) within the year.

As the first company within its segment to post earnings this quarter, UNH will be the “bellwether for the group.”

Although there’s a possibility that this health insurer’s report could be the best news in the sector, the overall outlook for its peers still remains positive.

It can be stressful and unnerving to even consider investing in the stock market at the moment. Considering that the S&P 500 is down 18% this year, it feels like a terrible time to buy stocks. But, that couldn’t be further from the truth.

Despite the fact that there are unquestionably some weak businesses in existence, there are also a great number of strong businesses with the capacity for long-term expansion and growth.

Accumulating shares of quality companies during a recession can position you for substantial long-term returns.

UNH’s performance is aligned with recent observations: the healthcare sector has been largely outperforming the market in 2022.

Amid the turbulent macroeconomic climate, this industry has managed to survive and even thrive.

While health insurers are not exactly risk-free, UNH's diversified business model enables it to withstand any economic downturn. Therefore, it would be prudent to buy the dip.

July 14, 2022

Biotech Letter

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)

Goodbye Big Pharma, Hello Big Biotech

Biotech Letter

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.

pharma