Biotech Letter - John Thomas - Mad Hedge Fund Trader

A Pick and Shovels Business Poised to Explode

There’s never a wrong time to begin investing. In 2021, the markets generated positive buzz when things started to heat up again.

That same optimism has recently transformed into bearishness following the decline in share prices.

Nevertheless, there’s still good news.

Given the lower valuations, investors can now get more bang for their buck.

In the past two years, we’ve experienced so many unprecedented events. Among the most heavily affected by the pandemic is the life sciences sector.

One of the biggest names in this field is Thermo Fisher Scientific (TMO).

With a market capitalization of roughly $200 billion, it’s no longer accurate to describe this as an under-the-radar company. TMO has received minimal fanfare among investors despite its massive size for decades.

A key reason for this is its lowkey steady execution of a well-established or tried-and-tested strategy.

Although it lacks the pizzazz of more exciting companies these days like CRISPR Therapeutics (CRSP), Moderna (MRNA), and BioNTech (BNTX), TMO has rewarded its investors with substantial returns.

Over the last 40 years, TMO has recorded an annual growth rate of 16.5%, hitting a 27,000% return in total by 2021.

In fact, TMO came off a strong 2021.

Its sales grew by 22% from 2020 to report $39.2 billion. While acquisitions played significant roles in the company’s growth, the 17% organic revenue growth of TMO served as its primary growth driver behind its solid numbers in 2021.

Even its COVID-19-related sales, particularly its testing products, contributed to reach $9.2 billion.

Looking at TMO’s business model, it’s evident that the company offers investors great exposure to the entire healthcare field via a single investment only.

That is, TMO is a broad business. It covers practically all life sciences solutions, analytical tools, specialty diagnostics, lab items, and even clinical, biotechnology, and pharmaceutical services.

Spanning the entire industry, such portfolio of products and services allow TMO to confidently go toe-to-toe against industry heavyweights like Agilent Technologies (A), Danaher (DHR), and Illumina (ILMN).

Actually, all of its segments grew last year, with TMO showing off quicker revenue increases than its competitors in the previous five years.

Hence, it is no surprise that TMO expects its numbers to climb in 2022. For this year, the company’s projected revenue is estimated to rise by at least 7% to reach $42 billion.

TMO strategically leveraged more significant acquisitions to build its diverse and deep portfolio today.

In 2011, the company spent $3.5 billion to buy Sweden’s blood-testing firm Phadia and cleverly maneuvered a relatively cheap deal to also grab chromatography company Dionex for only $2.1 billion.

In 2013, TMO bought a fast-growing genetic testing company called Life Tech for $13.6 billion.

At that time, Life Tech was the leader in this field and already possessed the technology to become a front-runner in the personalized medicine space.

In 2016, it shelled out $4.2 billion for electron microscopy company FEI and dropped another $7.2 billion in 2017 to buy pharmaceutical contract manufacturer Patheon.

To date, TMO’s most substantial deal is its $17.4 billion acquisition of contract research business Wilmington’s PPD.

This particular deal created a gateway between the biopharma giant and other drug developers, with TMO boosting its services segment focused on its biotechnology and pharmaceutical clients.

Between 2019 and 2021, the pharmaceutical and biotechnology market has experienced a promising over 20% growth.

This field is expected to grow to an additional $20 billion in 2022, following the growing interest in the industry in this post-pandemic era.

There is another emerging sector within the pharmaceutical and biotechnology market: the precision medicine and gene sequencing field.

Taking into consideration the growing demand for the products and services from this space, this market is estimated to reach roughly $1.6 trillion by 2030.

This makes TMO’s PPD acquisition timely, as it would allow the company to gain a bigger market share and expand its reach across the globe.

Furthermore, the previous acquisitions would bolster the company’s hold on the current market and ensure its position as a first-mover in potential groundbreaking innovations in the biotech and pharma sector.

Considering its expansion strategies and growth history, TMO doesn’t seem to be stopping anytime soon.

While the environment for mergers and acquisitions did become a bit more restrictive these days, there are still several potential buyout targets that could deliver favorable returns. So, we might hear about another TMO-linked acquisition sometime soon.

Overall, TMO is a healthcare stock offering robust and stable growth and a promising future regardless of economic downturns.

Moreover, its pick-and-shovels play makes it an excellent stock that looks poised to sustain its momentum and is well-positioned for global expansion. Hence, it would be wise to buy the dip.

April 26, 2022

Biotech Letter

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

Featured Trade:

(SLOW AND STEADY WINS THE RACE)
(GILD), (BMY), (GILD), (MRK)

Slow and Steady Wins the Race

Biotech Letter

Gilead Sciences (GILD) has been primarily ignored by investors who have focused more on other biotechnology and healthcare companies, particularly those that made a significant impact in the fight against COVID-19.

Reviewing the recent performance of its share price, Gilead can be best described as the ugly duckling among the Big Pharma companies in the US.

The lack of significant catalysts in the past months makes Gilead incomparable to the big movers with diversified portfolios in the space, such as Bristol Myers Squib (BMY), Johnson & Johnson (JNJ), and even Merck (MRK).

Nonetheless, I consider Gilead one of the most undervalued biopharmaceutical names in the sector.

Founded in 1987, Gilead started as a biopharma geared toward researching and developing drugs for severe and rare diseases.

Fast forward to today, it now has roughly $80.57 billion in market capitalization.

It is also widely considered the undisputed market leader for HIV treatment, with much of its revenue coming from this segment.

In its 2021 annual report, $16.3 billion of Gilead’s $27.3 billion entire revenue came from its HIV program. That’s approximately 59.7% of the total.

Globally, the market for HIV treatments reached a total of $30.46 billion in 2021.

This translates Gilead’s market share to more than 53% worldwide, with the company producing 6 of the top 10 leading products targeting the disease.

The global HIV market is expected to reflect long-term growth and is projected to reach $45.5 billion by 2028.

If Gilead sustains its market share of over 50%, it can comfortably rake in $23 billion in annual revenue from this segment alone.

While being a leader in a sustainable and stable market is definitely a good thing, Gilead has been working on diversifying its portfolio to avoid becoming too dependent on a single program.

Indicative of this plan was its efforts in 2020 when Gilead went through with 11 acquisitions and partnerships focused on oncology.

This move dramatically boosted its pipeline by 50%, with 10 drugs already queued in Phase 3 clinical trials for cancer treatments.

More importantly, this expansion to the oncology segment has also generated revenue with promising growth figures.

In fact, Gilead’s decision to focus on T-Cell therapies appears to be paying off as the company developed groundbreaking treatments with impressive efficacy rates.

In April 2022, Yescarta received the FDA's green light as the first ever CAR-T cell therapy targeting large b-cell lymphoma (LBCL).

This is an exciting update, with Gilead disclosing that 40.5% of patients who received just a single infusion of Yescarta experienced no disease progression or need for any additional cancer treatment for two years.

This is a 2.5x improvement over the current standard of care rate at 16.3%.

Yescarta’s success also serves as a promising sign for another oncology treatment, Tecartus, which targets mantle cell lymphoma (MCL).

Yescarta and Tecartus are indubitably great lucrative revenue streams in sales growth and market sizes.

The MCL market is estimated to be roughly $7 billion this year, with an annual growth rate of 7% through 2027.

In 2021, Tecartus generated $276 million in sales, accounting for 2.5% of the market share.

While that may not be an eye-popping figure, the number is actually up by 68% year-over-year, which means Gilead is slowly absorbing more and more of the MCL market share.

Notably, MCL is also quite rare, affecting only 0.5 individuals out of 100,000.

Given the figures, though, Tecartus is still well on its way to contributing more than $1 billion in sales in the following years.

Meanwhile, Yescarta offers a more promising growth story since the LBCL segment is practically 14x the size of the MCL space, as it affects 7 out of 100,000 people annually.

In 2022, the LBCL market is projected to reach $4.3 billion, with a CAGR growth rate of 15% from this year to 2030. In 2021, Yescarta raked in $695 million in sales, showing off a 41% increase year-over-year and taking over roughly 16.2% of the market share.

Given the present growth rates of both Yescarta and the LBCL market, it’s feasible for Gilead to capture at least 50% of the market by 2027.

Another notable oncology asset is Trodelvy, a metastatic triple-negative breast cancer (MTNBC) and metastatic urothelial cancer (MUC) treatment.

Like Yescarta and Tecartus, this is another potential blockbuster.

For 2022, the MTNBC market is estimated to be approximately $606 million, while the MUC market is at $1.189 billion. The growth rates for these are 4.7% and 17.9%, respectively.

In 2021, Trodelvy captured 21% of the market share with $380 million in revenue.

However, what’s more promising is that this figure indicates an 84% increase year-over-year, which shows the massive potential of Trodelvy and its ability to become a billion-dollar revenue stream in under two years quickly.

Although Gilead still has a number of therapies and drugs in the works, Tecartus, Yescarta, and Trodelvy are the frontrunners in becoming blockbusters within the next five years.

This should give the company some time to develop more treatments to boost and diversify its portfolio.

The biopharma industry is highly competitive, but Gilead appears to be healthy and attractive.

While the company continues to focus on growing its HIV segment, what makes it promising these days is expanding its oncology program, particularly its revolutionary T-Cell therapies.

Admittedly, Gilead is not as exciting as the other names on the Big Pharma list. However, its slow and steady approach to dominating massive and lucrative markets looks like an excellent winning strategy.

April 21, 2022

Biotech Letter

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

Featured Trade:

LET’S GET READY TO RUMBLE)
(MRNA), (PFE), (BNTX), (AZN), (ABBV), (MRK), (BMY), (TAK), (GILD),
(SNY), (ALNY), (NVS), (REGN), (IONS), (GSK), (BIIB), (CRSP)

Let's Get Ready to Rumble

Biotech Letter

As we gradually reach the pinnacle of biotechnology formation, a war is brewing in the life sciences world.

This can be one of the most exciting times for medical innovations for patients. Meanwhile, investors can be picky when picking where to put their money.

Even up-and-coming scientists can seize the opportunities to lay the groundwork for their own dream organizations.

At the same time, those aspiring to climb the corporate ladder have better chances at becoming CEO without the need to slog through the biopharma sector and scramble for whatever opening is available.

However, as more and more companies launch practically every day, claiming to offer groundbreaking and revolutionary breakthroughs, it’s critical to keep in mind that not all biotechs will succeed.

Actually, the number of biotech companies has been steadily rising since 2015.

In that year, 177 firms were formed, with biotech birth rates breaching the 200-per-annum mark by 2017 and 2018.

Seeing as many more have emerged even during the pandemic, it looks like the biotech world won’t be slowing down anytime soon.

Even funding hasn’t been deterred by economic downturns.

From 2015 to 2018, the total funding for biotech companies averaged between $68.6 million to roughly $90.2 million.

After a bustling, record-breaking 2020, the bar leading to 2021 was expectedly high.

Surprisingly, 2021 blew those figures out of the water as private investors opted to raise the bar even higher.

It’s the type of climb that’s truly hard to believe.

Biotechs raised over $22 billion in private funds in 2020 following a sluggish 2019. In 2021, that figure rose to $28.5 billion.

The top earner in these funding rounds last year was China’s Abogen, which took $1 billion in private investors’ money across two rounds.

Abogen is an mRNA-centered firm that’s currently working on a COVID-19 vaccine.

What makes its product different and possibly better than Moderna (MRNA), Pfizer (PFE), BioNTech (BNTX), and AstraZeneca (AZN) is that it would be thermostable. That is, it could be used in areas without access to refrigeration.

Another big winner in 2021 is Massachusetts-based biotech ElevateBio, which aims to be a one-stop shop for cell and gene therapies.

The idea is to develop a technology that fuses its gene-editing platform, cell engineering structure, and manufacturing warehouse into one system to ease and accelerate the drug development process.

Although not entirely the same, this plan has similarities with the strategies of Big Pharma names like AbbVie (ABBV) and Merck (MRK).

Amid the growing number of biotechs, a key challenge is how to stand out among companies that target the same disease areas. This kind of competition could hamper innovation.

The clearest indicator of success would be receiving approval and being able to launch the products commercially.

Ultimately, the goals are to offer safe and effective treatments and provide value to their shareholders.

Unfortunately, the reality is only a handful of startups do make it all the way to the top.

The more feasible scenario is that bigger businesses would acquire these companies—and that seems to be the case these days.

Alongside the booming biotech formation rate are the increasingly aggressive biotech buyout deals.

We’ve seen this before.

It started in 2019, with Bristol Myers Squibb (BMY) buying Celgene, followed by AbbVie splurging on Allergan and Takeda (TAK) merging with Shire.

In 2020, AstraZeneca bought biotech superstar Alexion Pharmaceuticals while Gilead Sciences (GILD) snapped up Immunomedics.

Meanwhile, Sanofi (SNY) stacked its deck with the $3.2 billion acquisition of Translate Bio. As for Merck, this biopharma sneaked in a massive win with an $11.5 billion buyout of Acceleron.

For this year, several names have already been eyed by Big Pharmas.

There’s Alynlam Pharmaceuticals (ALNY), an RNA-centered company, which seems to be the target of both Novartis (NVS) and Regeneron (REGN).

Another RNA-focused company, Ionis Pharmaceuticals (IONS), appears to be a key target as well, with the likes of GlaxoSmithKline (GSK), Bayer, and even Biogen (BIIB) waiting for an opportunity to pounce.

After all, acquisitions form an integral lifeline of the biotech world. Huge businesses with the resources swoop up promising buyout candidates to bolster their own pipelines.

However, M&A isn’t the only option for biotechs. There’s also the path where they can seek companies with similar focus and consolidate to become larger and more competitive entities.

This has been the expected plan for CRISPR Therapeutics (CRSP) for a long time. Hence, it is no surprise if other biotechs with their own groundbreaking technologies decide to follow the same route.

Overall, the biotech industry is booming amid its recent struggles with the market.

The faster growth rate of companies can be attributed to more investors seeing the industry's potential and, of course, better access to technology and scientific advancement.

Moreover, the world has become more interested in the biotech world and what the industry can offer due to the pandemic.

COVID-19 has shone a light on this sector following the quick and effective results of the vaccines and treatments.

That is, people have finally caught on to the idea that there is an incredible opportunity in biotech.

While a correction is to be expected at some point, the critical thing to bear in mind is that great ideas will always generate funding no matter what.

April 19, 2022

Biotech Letter

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

Featured Trade:

(A BUDDING UNDERDOG TO DOMINATE THE ALZHEIMER’S BATTLE)
(SAVA), (BIIB), (LLY), (RHHBY), (ABBV), (AMGN)

A Budding Underdog to Dominate the Alzheimer's Battle

Biotech Letter

One of the most significant unmet medical needs worldwide is the treatment of Alzheimer’s Disease (AD).

With over 6 million people affected in the US alone and roughly 40 million globally, this number is projected to double by 2050 as the population ages and more individuals live longer lives.

That’s why it comes as no surprise that even though the Centers for Medicare & Medicaid Services decided to limit the coverage of Biogen’s (BIIB) AD drug, Aduhelm, more and more drugmakers continue to move forward with their own candidates.

Eli Lilly (LLY) continues to work on Donanemab, which could be available for review by mid-2023. Meanwhile, Roche (RHHBY) is anticipated to release data on Gantenerumab by the end of 2022.

Among the drugmakers pursuing this field, one name continues to rake in positive reports: Cassava Sciences (SAVA).

Cassava’s lead AD drug candidate is Simufilam, a small oral pill. Thus far, this has shown no safety issues and even released the best clinical AD data.

Notably, this is the only treatment that demonstrated tangible cognitive improvement for longer than 6 months in the clinical studies for AD.

The fact that Cassava’s candidate bested Donanemab and Gantenerumab, which both received breakthrough designations, and Aduhelm, which got an accelerated approval, indicates its candidate’s strong potential.

Between their promising results, convenient storage of the pill, easy dosing method, impressive safety data, and the vast unmet medical market, Simufilam could very well be hailed as the best-selling AD treatment the moment it gains approval.

Another indicator of Simufilam’s promise is the lack—or even absence—of insider trading within Cassava in the past years.

Typically, company insiders know more about the projects than anyone else. Strong insider selling is generally followed by a fall in a company’s stock price.

This has not been spotted anywhere in Cassava, with multiple insiders taking on very big stakes in the company.

However, the strongest indicator for Cassava’s impending win is Simufilam being in clinical progression. In fact, it’s already dosing in Phase 3 trials.

While other drugmakers working on an AD treatment may have promising options, the earlier a candidate is in the clinical trials, the higher the risk of failure and the longer it’ll take to be commercialized.

Each step forward in clinical trials is basically a way to “de-risk” the candidates, which leads to an increased value of the company.

Naturally, one of the questions raised when dealing with a biotech not as large as AbbVie (ABBV) or even Amgen (AMGN) concerns financial health.

Cassava’s recent financial filings showed that the company has roughly $240 million in cash and $0 debt.

Looking at their workflow, Cassava typically burns about $9 million every quarter.

As they ramp up their Simufilam trials, this is obviously expected to change.

After all, Phase 3 trials tend to cost more. So, the company anticipates a bump in spending to reach $12.5 million to $15 million per quarter this 2022.

While this is a substantial increase in capital expenditure, the jump remains within reasonable projections of the price of Phase 3 trials.

Taking into consideration the higher burn rate of roughly $15 million every quarter, Cassava would still have sufficient cash to operate for 16 quarters or 4 years without the need to resort to any additional financing rounds—at least for Simufilam.

If it fails, investors would already know whether Simufilam was a success.

That means if Cassava does pursue financing efforts, it would be for new projects and not for this particular AD treatment.

The market has not been kind to the biotechnology sector lately. It’s because the market tends to overreact to negative news.

Farsighted investors who recognize the enduring potential of a company—even at its vulnerable periods—can sometimes reap outsized returns if they turn out correct.

However, a successful strategy for some investors is to bet on companies that other investors are afraid to touch.

Nevertheless, it’s still prudent to keep in mind that investing in a roller coaster like Cassava means preparing yourself for an unexpected and possibly wild ride.

April 14, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 14, 2022
Fiat Lux

Featured Trade:

(A BIOPHARMA STOCK BENT ON REDEMPTION)
(MRK), (BMY), (ABBV), (ORGN), (PFE), (VTRS), (MRNA), (BNTX), (CRSP), (VRTX), (BLUE), (BIIB)

A Biopharma Stock Bent on Redemption

Biotech Letter

It looks like we’re about to bear witness to a redemption journey.

Once upon a time, Merck (MRK) was a major player in the cardiovascular sector. Over the years, it has gradually diminished to a minor league name.

However, Merck has plans to reverse this fortune and reclaim its dominance in the cardio market. To date, it has eight new drug approvals and a slew of expanded labels queued in the next couple of years.

This decision is evident in Merck’s move to outbid Bristol Myers Squibb (BMY) in the auction for Acceleron Pharma, shelling out a whopping $11.5 billion to boost its cardio pipeline considerably.

While the deal may seem like a massive risk, Merck is confident that this deal holds the potential to open up the path to single-product peak sales reaching $10 billion by the mid-2030s.

In fact, there’s no need to wait for long to see some solid proof of Merck’s multibillion-dollar bet, as Acceleron already has a candidate set to be put on display by the end of 2022 or early 2023.

This Acceleron acquisition forms part of the “New Merck” touted when the company welcomed a new CEO and came on the heels of the success of the leadership that brought the mega-blockbuster cancer drug Keytruda.

It also signifies Merck’s conscious efforts to ease their heavily criticized over-dependence on Keytruda.

While the drug will lose patent protection after 2028, Keytruda still holds a significant portion of Merck’s sales. The treatment accounted for roughly 35% of the company’s total revenues last year.

The patent loss of a significant moneymaker is a typical problem for virtually every Big Pharma company, with AbbVie (ABBV) and Bristol Myers Squibb coming to mind as the most recent examples.

The go-to solution to this is pursuing mega-money mergers: AbbVie acquired Allergan for $63 billion while Bristol splurged on Celgene at $74 billion.

This quickly bolsters the existing pipelines and portfolios of the companies and assuages the fear of investors over impending revenue losses.

Instead of following this pattern, Merck did the opposite in 2021.

The company decided to downsize and established a spinoff segment: Organon (ORGN). The idea is to offload its biosimilars and other legacy products to focus on its core strengths.

This is reminiscent of Pfizer’s (PFE) move to spin out its Upjohn unit and merge it with Mylan to form Viatris (VTRS).

This move looks to have worked well for Merck and Organon as it allowed the parent company to focus on its blockbuster brands.

For instance, Bridion recorded a 28% year-over-year rise in 2021 to reach $1.53 billion in sales, while ProQuad reported a 14% increase to hit $2.14 billion.

Meanwhile, Gardasil rose to an impressive 44% to contribute $5.7 billion.

Even Merck’s Animal Health sector grew by 18% to record $5.6 billion.

There’s also Keytruda, which is projected to become the highest-selling drug at $24.3 billion by 2026.

These are only some of the blockbuster products in Merck’s portfolio expected to continue increasing revenues this 2022.

In addition, the company expects at least $5 billion from its COVID-19 antiviral drug Molnupiravir.

Looking at the trajectory and growth of the pipeline and existing programs, Merck estimates an additional 17% increase in its year-on-year revenue in 2022 to reach $56.1 billion to $57.6 billion.

Despite the move to establish a spinoff unit, the Acceleron deal hints at the possibility that Merck might be shifting to an open checkbook strategy.

Considering how relentlessly it pursued the deal, there’s a chance that the company would be at the bargaining table for a while in search of ways to protect itself against the pending Keytruda patent loss.

Some contenders for a potentially splashy offer from Merck are Moderna (MRNA) and BioNTech (BNTX), which could bolster the bigger company’s mRNA pipeline.

It can also splurge on gene therapy experts by targeting CRISPR Therapeutics (CRSP) and even Vertex (VRTX).

However, given bluebird bio’s (BLUE) flailing performance as of late, this small biotech could very well be a contender for a bargain deal.

Speaking of discounted stocks, Biogen (BIIB) is also reportedly under consideration simply because of its deeply discounted price following its disastrous Alzheimer’s disease program.

Whatever move it makes, one thing is sure: Merck, with its $208 billion market capitalization, is in a healthy and stable place financially.

More importantly, it has an excellent product portfolio and an exciting pipeline.

It has shown remarkable growth in the past years and impressive efforts to secure a great future, making it a solid stock to buy and hold for a long time.

April 12, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 12, 2022
Fiat Lux

Featured Trade:

(CAN THIS BE THE NEXT 10-BAGGER BIOPHARMA STOCK?)
(PFE), (BNTX), (GSK), (SNY), (AZN)