Biotech Letter - John Thomas - Mad Hedge Fund Trader

A Biotech Stock Poised for a Rebound

Healthcare stocks have experienced an unusual run over the past few years. The sector was nearing scorching hot levels when the pandemic started, only to go ice cold by the end of 2021.

Nonetheless, seasoned investors in the sector know that solid companies will continue to grow at a steady pace despite the decline in their stock prices.

This is where the fun starts for some investors.

After all, we all enjoy a good bargain, especially when it comes to promising stocks. What makes it even more enticing is if the stock has a proven track record and solid prospects in its pipeline.

Based on these criteria, one name that readily comes to mind is Moderna (MRNA).

Since it reached its peak in August 2021, Moderna shares have fallen by over 60%. Despite these losses, the business is still regarded as one of the most promising companies in the sector. This means that the stock can recover soon.

Moderna is a significant mover in one of the hottest markets today: the COVID-19 vaccine sector. Since the pandemic started, the company has been able to generate billions of dollars in profit from its only commercialized product: mRNA-1273.

While the demand has been divided now due to the entry of other vaccine developers, Moderna still expects to earn at least $19 billion from its COVID-19 vaccine.

Before becoming a household name, not many people knew of Moderna’s existence. At that time, most weren’t even confident that the messenger-RNA vaccines would actually work.

In the early stages, Moderna was only rivaled by Pfizer (PFE) and BioNTech (BNTX) in this particular field. Meanwhile, the rest of the world was betting on other companies like AstraZeneca (AZN), Johnson & Johnson (JNJ), and even Novavax (NVAX).

As soon as the results came out, Moderna shares skyrocketed to unprecedented heights. In 2020, the company recorded a 434% growth.

However, recent times have not been as kind to Moderna. Investors now worry that this might be the reality, a.k.a. the post-pandemic sales.

This is far from the truth.

Admittedly, sales from the vaccine would dwindle over time due to competition and possibly even herd immunity.

In preparation for this eventuality, Moderna has been stocking up its pipeline. Recently, the company announced pivotal Phase 3 trials for two of its vaccine candidates.

One is for cytomegalovirus (CMV) and the other is for the respiratory syncytial virus (RSV).

Both candidates hold the potential to become blockbusters.

The RSV market is projected to become larger than initially anticipated, reaching roughly $10 billion. Given the promise of this sector, it comes as no surprise that Moderna has competitors. Sanofi (SNY), GlaxoSmithKline (GSK), and Pfizer are some of the biggest players here.

As for the CMV vaccine, the product has the potential to reach $2 to $5 billion in annual sales. Moreover, this program can be linked to other sectors like oncology and autoimmune diseases.

Other than these, Moderna has been developing its HIV vaccine. It already started with trials, with its first participant queued to receive the first dose of the experimental candidate.

This could be another massive revenue stream for Moderna as the annual spending on HIV is estimated to reach $500 billion globally.

Another candidate is Moderna’s flu vaccination program. However, this might be a more difficult path as the company faces strong challengers, including Pfizer, Novavax, and GSK.

In addition to these, the company is also working on Nipah and Zika vaccines. There are also plans for herpes simplex virus (HSV) and varicella zoster virus to join the roster soon.

Cornering the vaccine market is a good approach since Moderna has a tested and proven product dominating the industry today.

That is, no one is doubting the power and efficacy of mRNA-based strategy in vaccines.

More importantly, there is no question that Moderna is performing well in this field. This is an unshakeable and established strength that Moderna investors should be focusing on.

A seemingly unstoppable stock in the past few years, this company suddenly fell out of favor. Nevertheless, its prospects remain the same and it can still deliver significant revenue—something that’s expected to go on well into the future.

March 22, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 22, 2022
Fiat Lux

Featured Trade:

(THE 800-POUND GORILLA IN THE GENE-SEQUENCING SECTOR)
(ILMN), (A), (TMO), (MRK), (RHHBY)

The 800-Pound Gorilla in Gene-Sequencing Sector

Biotech Letter

I’m a huge fan of the "razor and blades" business strategy, where the pricing and marketing model is designed to generate recurring, dependable income by ensuring that a customer is locked in onto a product or service for a long time.

The COVID-19 pandemic underscored the significance of DNA sequencing in improving and monitoring global health.

Thanks to DNA sequencing, we were able to identify the novel coronavirus and eventually developed vaccines and PCR-based tests. This also played a crucial role in detecting new strains and even transmission tracking.

To date, the top name in the DNA sequencing community is Illumina (ILMN).

In terms of competitors, the closest to Illumina’s dominance are Agilent Technologies (A) and Thermo Fisher Scientific (TMO). However, neither have developed their platforms enough to be directly comparable to Illumina.

Illumina has a notable installed base comprising approximately 20,000 machines owned by roughly 7,300 clients.

With the rising popularity of DNA sequencing, the demand for the company’s installation base is estimated to continue growing and along with it is the sale of consumables.

This is where the razor and blades business model comes in.

The consumables form a major part of Illumina’s strategy, with the instruments serving as “razors” and consumables as “blades.”

The cost of instruments can fall within the range of $20,000 to $1 million and are essential elements of expanding the company’s portfolio and locking in clients into long-term commitments.

Consumables typically represent 50% or more of the revenue of any DNA sequencing company. For Illumina, the number climbs to 80%.

Considering that the consumables also need repairs, this segment is expected to continue generating profits in services and contracts.

Evidently, 80% recurring revenue is highly indicative of a rock-solid business.

While the business model isn’t unique to Illumina, the company has attracted attention in Wall Street due to its exponential growth over the past years.

In the last five years, Illumina has practically doubled its revenue. During the COVID-induced economic slowdown, the company quickly recovered from a brief slump and accelerated its revenue growth at an even faster pace.

In the fourth quarter report for 2021, Illumina reported about $1.9 billion in revenue or an impressive 25% increase year-over-year.

As for 2022, the company is conservatively anticipating a 14% to 16% growth in its revenue.

Another step towards securing dominance in this field is Illumina’s decision to launch the TruSight Oncology Comprehensive test in Europe.

This is basically a cancer test that uses a single tissue sample to test for a broad range of tumor genes and biomarkers.

The goal is to create a “tumor profile” of patients with rare conditions to find a matching treatment option via precision technology. This doesn’t only cover available cancer therapies in the market but also clinical trials.

While this test focuses on the oncology sector, Illumina and its competitors are presumably working on more sophisticated genetic profile-based diagnostic tools for other conditions.

Although this has yet to be launched on a larger scale, Illumina is reported to seek collaborations with leading oncology treatment providers like Merck (MRK), Bayer (BAYN), and Roche (RHHBY).

Illumina has invested in seven new startups to further expand its pipeline: 4SR Biosciences; B4X; Cache DNA; CRISP-HR Therapeutics; NonExomics; Purpose Health; and Rethink Bio.

These focus on breakthrough therapies, DNA storage, mental wellness, sustainable food, and diagnostics.

Illumina has invested in 68 startups to date. This is a brilliant scheme to continue company growth and pipeline expansion for decades.

The DNA sequencing market was valued at $6.243 million in 2017 and is projected to hit $25.470 million by 2025.

Illumina’s remarkable execution of the razor and blades model, strong profit margins, and proactive profitability initiatives catapulted it to the top of the DNA sequencing sector.

Needless to say, Illumina is the 800-pound gorilla in the gene-sequencing sector—a dominance that is expected to go on for years.

March 17, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 17, 2022
Fiat Lux

Featured Trade:

(A SECURE STOCK TO ASSUAGE YOUR FEARS)
(NVS), (INCY), (ABBV), (VYGR), (PFE), (BNTX), (CVAC), (RHHBY)

A Secure Stock to Assuage your Fears

Biotech Letter

The year 2022 marked the time fear made a comeback to Wall Street.

Since the year began, we’ve been plagued with fears over Russia’s invasion of Ukraine, constant threats of high inflation, and the possibility of a recession.

There’s even the fear of major corrections among overheated stocks that could drag the entire market along with it.

Nevertheless, it’s critical to bear in mind that what we have is a market of stocks rather than a stock market.

Although the S&P has been unstable and the Nasdaq continues to be riddled with corrections, we can still be confident that value stocks and, of course, dividend stocks are faring much better.

Truth be told, that’s hardly surprising since value stocks typically outperform the market even in the most challenging periods.

Moreover, the highest-quality stocks tend to deliver the best performance.

When it comes to high-value stocks, one of the defensive, low volatility names that constantly crops up is Novartis (NVS).

To date, Novartis is considered as one of the Big Pharma companies globally, with a staggering market capitalization of $224 billion.

Recently, Novartis has become more aggressive in diversifying its lineup—a strategy that showed tremendous payoffs.

After all, one of the competitive edges of Novartis is its solid profitability compared to its peers, which is primarily driven by the company’s well-balanced portfolio.

For years, the company has been widely known for its oncology treatment portfolio, which was strengthened by its eventual collaboration with Incyte (INCY).

Apart from cancer, it has so far succeeded in developing treatments for cardiovascular, immunology, and even blood disorders.

Its current portfolio of drugs generated impressive revenue despite the economic slowdown over the past months.

For example, psoriatic arthritis drug Cosentyx, which is AbbVie’s (ABBV) top-selling Humira’s biggest competitor, raked in $3.5 billion in sales last year, showing off a 20% increase year-over-year, while myelofibrosis treatment Jakavi reported a 23% jump to reach $1.2 billion.

Meanwhile, heart failure treatment Entresto recorded an impressive 46% climb year-over-year to reach roughly $3 billion.

Aside from these, Novartis has a promising pipeline. Thus far, it has 54 programs queued for Phase 3 trials.

Even if we assume that the company only achieves a 50% success rate, these new products could still add substantial revenue streams within the next few years.

Further leveraging its size and capital, Novartis has been searching for avenues to expand its in the biotechnology market.

Its latest move towards this direction is a license option agreement with Voyager Therapeutics (VYGR).

Novartis has long been on a perennial search for revolutionary therapies to take under its wing, and this deal with Voyager appears to be an excellent opportunity for both companies.

In a nutshell, the two companies have agreed to collaborate on gene therapy programs for adeno-associated virus capsids.

This biobucks deal sees Novartis paying Voyager $54 million upfront, with the possibility of shelling out up to $1.7 billion in several milestone payments and royalties.

The agreement covers three programs targeting the central nervous system plus potentially two more after 12 months.

In addition, Novartis will be granted access to Voyager’s proprietary RNA-based screening platform used to deliver the payload in gene therapy-based treatments.

Another biotechnology-related venture for Novartis is its deal with Carisma Therapeutics.

Following its success with the COVID-19 vaccine production for Pfizer (PFE) and BioNTech (BNTX), the Big Pharma company entered another contract manufacturing agreement with Carisma Therapeutics.

In this deal, Novartis will handle the manufacture of Carisma’s HER2-targeted CAR-M cell therapy, which is under development for the treatment of solid tumors and is slated to be submitted for approval in 2023.

Other than Carisma, Novartis also signed an initial manufacturing deal with CureVac (CVAC) and Roche (RHHBY) in 2021.

Overall, this makes Novartis a relatively safe and low-risk play in the biotechnology and healthcare sector.

March 15, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 15, 2022
Fiat Lux

Featured Trade:

(AN UNDER-APPRECIATED STOCK WITH A BOATLOAD OF CASH)
(BMY), (CRSP), (VRTX), (BLUE), (GILD), (NVS)

An Underappreciated Stock with a Boatload of Cash

Biotech Letter

Warren Buffett is nothing but a dyed-in-the-wool type of investor. A key strategy in his success is to target companies with notably solid fundamental businesses but with shares trading at a bargain or at least a discount in relation to their intrinsic value.

Needless to say, this value-oriented tactic has worked well for roughly six decades, with Berkshire’s stock delivering total returns of 6,450% on its capital.

Taking a cue from the Oracle of Omaha’s playbook, let’s take a look at one of the cheapest biotechnology and healthcare stocks in Berkshire’s portfolio to date and see how it has been performing.

At a hair below eight times its forward earnings, Bristol Myers Squibb (BMY) comes out as Berkshire’s third-cheapest stock holding overall.

This pharmaceutical giant, which has a market capitalization of $144 billion, is the sixth-biggest in the list of what is informally called the “Big 8” US pharma firms.

However, BMY’s stock had fallen by -2% in the past 12 months after experiencing some genuine momentum in 2021 when it reached $69 in August. The share price fell to $54 in December. It has since recovered and is now at $65.

A primary reason for investors snubbing this pharmaceutical giant is the impending loss of market exclusivity of three of its best-selling treatments, Revlimid, Opdivo, and Eliquis.

Although it’s reasonable to be anxious over these patent expirations, BMY has developed a great plan to not simply offset the future decline in sales but also to sustain the momentum of its top line all the way until 2030.

Basically, BMY has lined up multiple new drug launches spaced in the following years, with a number of these candidates expected to become potential blockbusters.

Another key part of the company’s growth strategy is acquisitions.

One of the significant moves BMY executed in recent years is its whopping $74 billion acquisition of Celgene in 2019, which is expected to bolster its immunology and oncology sectors. This was immediately followed by a $13 billion buyout of MyoKardia in 2020, which would expand its cardiovascular roster.

Celgene's deal granted BMY a valuable collection of pipeline assets, which the company has been leveraging in preparation for the patent cliffs.

Aside from the added $15 billion in annual revenue stream from Revlimid, which BMY used to boost its cash flow and pay off some debts, the company also inherited Reblozyl.

Since the acquisition, Reblozyl has gained approval for beta-thalassemia and anemia patients.

While this is not as groundbreaking as the gene therapies offered by CRISPR Therapeutics (CRSP), Vertex (VRTX), and even bluebird bio (BLUE), this treatment can still reach peak sales of $2 to $4 billion annually.

Another Celgene candidate poised to become an additional revenue stream for BMY is Inrebic, a JAK2 inhibitor created for myelofibrosis and polycythemia vera. This is projected to rake in $400 million in peak sales.

Zeposia, a treatment for autoimmune conditions, has already gained approval for multiple sclerosis and is queued for clinical trials for Crohn’s disease and ulcerative colitis.

If it receives the green light for all three, this is another $3 billion opportunity for BMY.

The inherited assets from Celgene are Breyanzi, a CAR-T therapy approved for large B-cell lymphoma, and Abecma, which is also an approved treatment for multiple myeloma.

These last two treatments are potential blockbusters as well.

Breyanzi’s list price is $410,000, with the therapy estimated to reach $3 billion in peak sales. Meanwhile, Abecma is listed at $491,500 and is projected to peak at $1 billion.

By 2029, BMY expects to develop new revenue streams worth $25 billion from its current portfolio and growing assets.

Looking at the above assets, BMY’s strategy becomes evident.

When BMY acquired Celgene for an exorbitant amount three years ago, the bigger company’s management team showed just how prepared they were to take the hit in the form of substantial debts in exchange for massive steps forward.

Adding to its expansion efforts, BMY has recently completed a deal with Century Therapeutics.

This marks BMY’s major foray into the promising cell therapy space.

While BMY has not concentrated on this sector before, it already has promising candidates in the form of its Celgene assets, Breyanzi and Abecma.

So far, Century and BMY have agreed to develop four different CAR-T cancer therapies on top of expanding the indications for Breyanzi and Abecma.

At the moment, the big pharma names focusing on this sector include Gilead Sciences (GILD) and Novartis (NVS).

This means BMY has a fighting chance to dominate in this market following its strategic collaboration with Century.

If all goes according to plan, BMY’s work with this cell therapy company might even turn out to be as lucrative as its deal with Celgene acquisition.

Overall, BMY has proven itself to be a reliable money-making titan in the biotechnology and healthcare industry.

BMY is a growth machine that consistently comes up with ingenious plans to grow over the years.

From $20.8 billion in 2017, its profits skyrocketed to an impressive $46.4 billion in 2021, indicating a remarkable 123% increase.

Moreover, the company anticipates that its free cash flow will surpass $50 billion by 2024, implying that it’s not worried over the impending loss of patent exclusivities and flexing its ability to generate a boatload of cash to complete even more collaborations and acquisitions.

March 10, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 10, 2022
Fiat Lux

Featured Trade:

(COULD THIS BE THE NEXT BIOTECH BUYOUT CANDIDATE?)
(BLUE), (AZN), (ABBV), (BMY), (VRTX), (CRSP)

Could This Be the Next Biotech Buyout Candidate?

Biotech Letter

What is the common denominator of giant drugmakers AstraZeneca (AZN), AbbVie (ABBV), and Bristol Myers Squibb (BMY)?

Aside from being three of the biggest healthcare companies across the globe, all three have also completed high-profile acquisitions amid the pandemic.

AstraZeneca acquired Alexion Pharmaceuticals for $39 billion in December 2020.

Meanwhile, AbbVie wrapped up its whopping $63 billion acquisition of Allergan in May 2020.

As for BMY, this biopharma titan followed its jaw-dropping $74 billion acquisition of Celgene with a $13 billion merger with MyoKordia.

Since then, these deals have bolstered the lineups and deepened the pipelines of all three drugmakers, helping them secure their dominance in the healthcare space.

As for the acquirees, they also benefited from the transactions, particularly those struggling to get through tough situations prior to getting bought out.

With that in mind, it looks like the biotechnology and healthcare sector has another potential high-profile acquisition candidate: Bluebird Bio (BLUE).

Bluebird Bio has recently fallen from investors’ grace following multiple setbacks.

The biotechnology company, once considered a trail-blazer in the gene therapy space, now finds itself without a CFO and left behind by competitors.

Its peers, who were initially eons away in terms of pipeline development, have figured out ways to work around Bluebird’s patents and even managed to outpace the company in launching new gene therapies to market.

Given all these factors, it is no surprise that investing in Bluebird bio has become synonymous with a recycler searching for value in random scraps and parts.

Over the last three years, Bluebird Bio’s shares have plummeted by more than 90%. From a $1.39 billion market capitalization, it is now at roughly $330 million.

That is a horrible performance based on any metric.

Bluebird bio has faced several headwinds that caused its stocks to fall apart.

One problem is the delay in the company’s Biologics License Application in the US for its transfusion-dependent beta-thalassemia treatment, LentiGlobin.

Bluebird Bio initially planned to complete this rare blood disorder therapy’s application by the second half of 2020. However, the company failed to submit some information requested by the FDA.

Another LentiGlobin-related issue is the temporary pause on the clinical trial for sickle cell disease treatment. Eventually, the suspension was lifted, but not before investors scurried away from the stock, following back-to-back concerns over the same treatment.

Other aggravating factors include Bluebird’s move to exit the European market following disagreements over the pricing of some of its gene therapies.

These issues saw Bluebird’s market cap sink, positioning it lower than rival gene-editing companies today.

Needless to say, this deeply discounted value could attract a bigger and expanding biopharma seeking to dip its toes in the gene-editing space.

While Bluebird might be struggling these days, it remains a promising company thanks to its candidates.

This becomes even more exciting since the company announced its plans to concentrate on severe genetic diseases. Although this is a small niche, there’s massive potential in this market.

A strong candidate in its roster is Zynteglo, which gained regulatory approval in 2019 and has yet to reach blockbuster status.

Patients with beta-thalassaemia normally have no other choice but to get blood transfusions regularly. Zynteglo drastically challenges this standard by offering a one-time curative treatment. In fact, saying that this is a life-changing breakthrough is an understatement.

Another potential blockbuster is Skysona, a treatment for a pediatric neurodegenerative disorder called cerebral adrenoleukodystrophy. This neurological disease is extremely rare, affecting only 50 patients in the US annually.

As for its pipeline, Bluebird has three major candidates nearing FDA approval in the US. This means 2022 and 2023 will be critical years for the company.

The first product is Lenti-D, which is similar to Skysona. If things go according to plan, then this treatment might receive the green light by August 2022.

Another product is Beti-cel, which was initially launched as Zynteglo. When this successfully penetrates the US market, this first-ever gene therapy option for beta-thalassemia will rake in roughly $1.87 billion by 2024.

Considering the potential of this market, Beti-cel inevitably finds itself facing off strong competitors in the space.

Thus far, the strongest is Vertex Pharmaceuticals (VRTX), which recently announced an additional $900 million investment in its collaboration with CRISPR Therapeutics (CRSP).

The third candidate is Lovo-cel, which is a sickle cell disease treatment.

This could be a major product for Bluebird, given the over 100,000 patients in the US alone that the company can target.

The goal is to finish the validation process by 2022 and submit Lovo-cel for approval by the first quarter of 2023.

Outside its pipeline candidates and approved products, Bluebird's manageable debt is another thing that makes it attractive for a potential buyout.

After all, cash is king, especially when it comes to biotechnology companies.

At the moment, Bluebird still holds roughly $442 million in the bank, and $46 million of this is restricted.

This indicates unrestricted liquid assets of approximately $396 million—an amount higher than its current market cap.

Consequently, this will allow Bluebird to comfortably weather at least the rest of the year until 2023.

It possesses a relatively solid secure position to hold itself together until its pending candidates start raking in revenues on their own.

Admittedly, Bluebird Bio has had several challenging years. There will still be uncertainties ahead, but it’s undeniable just how promising the company is at this point.

Overall, this stock is worth serious consideration, particularly for companies looking to get a head start in the gene-editing sector.

March 8, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
March 8, 2022
Fiat Lux

Featured Trade:

(A BIOTECHNOLOGY AND HEALTHCARE TRIFECTA STOCK)
(ABBV), (NVO), (CPH), (LLY)