Biotech Letter - John Thomas - Mad Hedge Fund Trader

A 'Boring' Business Resisting the 'Amazon Effect'

The healthcare market is under attack.

Amazon (AMZN) is invading the healthcare sector, wielding its far-reaching online presence and countless distribution warehouses to dominate the market.

Leveraging its ability to offer quick shipping to practically all locations, Amazon has transformed into a grab-anything-and-everything-possible business.

Now, it has set its sights on the healthcare and prescription sector. In fact, it has been attempting to infiltrate this segment since 2018 when it acquired PillPack.

The only limitation of that deal was that customers still had to get prescriptions from their doctors to avail of the PillPack service.

However, Amazon’s not the only one seeing the potential of this sector.

Following the difficulties it encountered in cornering the market, the e-commerce giant collaborated with fellow Wall Street titans Berkshire Hathaway (BRK.A) (BRK.B) and JPMorgan (JPM). Together, the three companies launched a service they called “Haven.”

Unfortunately, the venture eventually fell apart, and they canceled the deal altogether.

Despite that unfortunate end, Amazon refuses to back down on its vision. Recently, it decided to take another stab at the venture with a rebranding, giving birth to AmazonCare.

The goal is to offer assistance to customers in booking doctor appointments and receiving prescriptions online.

Undeniably, any business endeavor with Amazon’s backing will make waves in any industry. Nonetheless, this new venture could still be a tough sell.

For now, the company's strength is hoping to use the “Amazon effect” to sway members into signing up and using AmazonCare as well.

Surprisingly, Amazon finds itself facing an unlikely challenger in this pursuit: CVS (CVS).

Like Amazon, Berkshire, and JPMorgan, CVS has also recognized the potential of this market.

Unlike Amazon’s partners, CVS has decided to invest to become a frontrunner in terms of dominating the same sector and eventually taking advantage of this rapidly expanding total addressable market.

Instead of following the track of its fellow healthcare providers, such as UnitedHealth (UNH) and Anthem (ANTM), CVS has opted to change its angle of attack in the hopes of gaining more market share and reaping higher profits.

CVS is putting to good use its over 9,900 stores and distributions as means to establish better connections and rapport with customers.

After all, statistics indicate that approximately 80% of American citizens live less than 10 miles from a CVS branch.

This offers CVS a competitive advantage in terms of proximity to its customers. That is, it offers a unique convenience as it serves as the ever-present “corner stores” in practically every city.

Leveraging the locations, CVS has set up about 1,500 branches into “HealthHubs” by the end of 2021.

Basically, HealthHubs serve as emergency care clinics found inside CVS stores, providing customers with easy access to convenient and even cheaper after-hours health checkups.

Aside from this feature, a growing number of CVS stores are starting to get set up to be able to ship medicines or any other products ordered online, while other branches are being eyed as potential UPS drop-off points.

This setup will transform several branches into convenient “mini” distribution centers.

CVS has broken out of its “boring corner drugstore” image following its decision to target a more lucrative and massive healthcare sector.

It started the ball rolling when it acquired Aetna for $69 billion—a decision that so many investors disapproved of at that time.

Until recently, the market has largely ignored CVS because of the debt it incurred from the Aetna deal.

However, the tides had turned when investors finally realized that the drugstore giant had been efficiently and effectively executing a brilliant strategy all this time.

With Aetna under its wing, CVS has been granted access to a multitude of healthcare and managed care benefits availed by more than 23 million members. The sheer number of subscribers transformed the company into the third-biggest health insurer in the United States—next only to decades-long established providers Anthem and UnitedHealth.

Riding this momentum, CVS has been aggressive in revamping its image and expanding its services.

On top of its HealthHubs and Aetna advantages, CVS has recently paired up with Teladoc (TDOC) to leverage its virtual healthcare services to offer even more convenience to its customers.

This is another massive market since CVS already has roughly 35 million digital customers subscribed to its CVS app.

These users are all ordering products and other prescriptions from CVS. Integrating Teladoc’s services to the mix would be a surefire way of boosting its membership and adding a lucrative revenue stream.

Keep in mind that the global market for telehealth services is projected to expand somewhere between $300 billion to $700 billion by 2028—and that’s a conservative estimate.

CVS’ move to use Teladoc software is a positive indication of early technology adoption, positioning the drugstore chain at the forefront of a healthcare revolution.

Overall, CVS can only be described as a company striving to become a unique business that offers a range of products that no one else in the industry provides.

Although it’s improbable that it’ll sustain a monopoly in these services, CVS has been gradually transforming and growing into an almost unbeatable force in the industry by leveraging its strengths in an effective and logical method.

Moreover, it has evolved from a stodgy drugstore into an early tech adopter and a revolutionary business that can stand to challenge the likes of Amazon.

February 1, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
February 1, 2022
Fiat Lux

Featured Trade:

(A SHIFT IN NEUROSCIENCE BIOTECH)
(BIIB), (AXSM), (PFE), (BMY), (MRK), (NVS), (ABBV), (GSK), (JNJ), (LLY), (RHHBY), (TAK)

A Shift in Neuroscience Biotech

Biotech Letter

Industry experts typically describe mergers and acquisitions as the life force that propels the biotechnology and healthcare sector forward.

Based on that description, it’s safe to say that the segment’s health has plummeted, considering the sluggishness observed last year.

In 2021, the M&A of this industry had fallen to one of its lowest recorded levels in history.

During this period, the deals only amounted to $108 billion for the entire year. This number was approximately 40% of the total recorded in 2019.

Despite the sluggishness in 2021 and the relatively slow start in 2022, this year is still projected to push the would-be buyers into more aggressive action.

After all, several key products are facing patent expiration before this decade ends.

The list includes Big Pharma players like Pfizer (PFE), Bristol Myers Squibb (BMY), Merck (MRK), and Novartis (NVS).

This means that a massive deal might be on the horizon, pretty much when AbbVie (ABBV) executed its jaw-dropping $63 bill acquisition of Allergan in 2019 following its problems with generics competing against its blockbuster drug Humira.

Aside from patent protection concerns, another factor in play is the intense competition in lucrative research sectors such as immunology, neurology, rare diseases, and oncology.

Add to this the constant pressure of Congress to pull down drug prices, and it becomes apparent why companies—big or small—turn to mergers and acquisitions for survival.

Simply put, biotech and healthcare companies have no other choice but to be aggressive in looking for external innovation to secure the continuous transformation of their businesses.

On that note, I think there could be major acquisitions to be announced in 2022.

One deal I’m looking forward to is Biogen’s (BIIB) potential acquisition of Axsome Therapeutics (AXSM).

To remain competitive in the neuro stage, Biogen must keep up with the times—and a deal with Axsome might just be the solution.

Axsome’s size and price, with a market capitalization of $992 million, appear to be just the right fit for Biogen to gobble up.

More importantly, its portfolio is an excellent fit for Biogen. Both focus on neurological diseases, making their pipelines complementary to each other.

So far, Axsome has several leading candidates in the clinical stages.

One is AXS-05, which is a treatment for major depressive disorder (MDD).

Apart from MDD, this candidate is under late-stage review to target Alzheimer’s disease agitation.

In addition, Axsome is looking to advance AXS-05 in late-stage trials for smoking cessation therapy.

Needless to say, AXS-05 would go hand in hand with Biogen’s own approved, albeit controversial, Alzheimer’s drug Aduhelm.

Another promising candidate is AXS-07, a potential competitor of Pfizer and Novartis’ migraine medication. This drug has been submitted for FDA approval and might be launched by the second quarter of 2022.

There’s also AXS-12, which is a narcolepsy treatment candidate, and AXS-14, which is geared towards fibromyalgia. Both candidates are slated for FDA review by the third or fourth quarter of 2022.

For over 20 years, even the biggest and most powerful drug companies have stayed away from working on treatments specifically for the brain and central nervous system (CNS).

That’s not surprising considering the sheer number of failed programs in neuroscience, pushing drugmakers to believe that we still don’t have sufficient data on the subject, so the money might be better spent elsewhere.

Nowadays, though, the CNS landscape is starting to shift.

GlaxoSmithKline (GSK) recently embarked on reviving its CNS program by striking a $700 million deal with a smaller biotechnology company called Alector.

Meanwhile, Pfizer and Novartis reached an agreement with Biohaven Pharmaceuticals for the latter’s migraine treatment and Parkinson’s drug.

Aside from these, Johnson & Johnson (JNJ), Eli Lilly (LLY), Roche (RHHBY), and Takeda (TAK) are anticipated to secure CNS-centered deals soon.

Despite the lower number of M&A deals last year, the volume of strategic collaborations in the neuroscience sector climbed by about 50% in 2021 compared to its 2020 performance.

By 2022, this space is projected to become even more investable, considering the number of biotechnology companies focusing on CNS. Watch out for blockbuster deals in this sector.

January 27, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 27, 2022
Fiat Lux

Featured Trade:

(A BLUE-CHIP STOCK POISED FOR MORE GROWTH)
(BMY), (SGEN), (IPSC), (PFE)

A Blue-Chip Stock Poised for More Growth

Biotech Letter

What I’m about to share with you isn’t the most pleasant news, but it’s the truth.

You need to prepare for a stock market crash or a steep correction in the near future.

Since the early 1950s, the S&P 500 benchmark has experienced a total of 38 double-digit percentage declines.

While Wall Street doesn’t necessarily follow these trends, it’s vital to understand and accept that crashes and corrections will always be staples of the investing cycle.

On the flip side, these kinds of dips in the market also offer remarkable opportunities to buy high-quality businesses at a discount.

One of the wisest decisions you can make if the stock market does crash soon is to pick up shares of biopharmaceutical company Bristol Myers Squibb (BMY).

The allure of most healthcare and biotechnology stocks is that they make for good defensive investments.

We can never really fully control or even predict when we’ll get sick or what kinds of diseases we’ll develop.

That means that the volatility of the stock market or even the broader economy tends to have minimal effect on the demand for prescription treatments, medical devices, and healthcare plans.

This type of assurance offers a steady cash flow to the likes of BMY.

However, the healthcare industry continues to evolve. That also requires adjustments from companies regardless of their size and history.

Recently, there have been talks of BMY acquiring Seagen (SGEN), with investors hoping this could lead to an added revenue stream. After all, company executives have been hinting at plans to do some “shopping” this year.

While BMY has never shied away from massive acquisitions, it looks like it plans to expand its portfolio more conservatively as opposed to making splashy deals.

The latest move from BMY towards that direction is its licensing agreement with Century Therapeutics (IPSC).

According to the agreement, BMY will pay Century $100 million upfront and invest an additional $50 million to gain access to four of the smaller company’s off-the-shelf cancer therapies.

Potentially, Century could receive up to $3 billion from BMY in milestone payments on top of double-digit royalties.

Although not a splurge by any means, this deal would actually be an excellent addition to BMY’s cell therapy portfolio.

One potential treatment that would benefit from this licensing agreement is lymphoma therapy Breyanzi, which is estimated to get a list price of $410,000 and peak sales of roughly $3 billion.

Another is multiple myeloma treatment Abeam, which is expected to be listed at $419,500 and reach peak sales of approximately $1 billion.

Besides being a top-quality defensive play, BMY is excelling at taking advantage of its plan to combine organic with acquisition-based expansions.

In terms of organic growth, a good example is its blood-thinning treatment Eliquis, which BMY developed with Pfizer (PFE). In 2021, this drug raked in an impressive $10 billion in sales.

Another example is its cancer treatment Opdivo, which contributed $7 billion in 2020 and holds the potential to exceed $10 billion in annual sales given the continuous expansion of its applications.

In terms of acquisitions, BMY’s last huge acquisitions are the $13.1 billion deal with MyoKardia and, of course, the jaw-dropping $74 billion agreement with Celgene.

Looking at how the acquisitions helped BMY, saying that the company landed a whale when it acquired Celgene is an understatement.

Considering that Celgene’s Revlimid is the highest-grossing drug in BMY’s portfolio today, it’s apparent that these deals have proven to be a fast, albeit costly, strategy to guarantee that the company will continue to hold a diverse lineup of proven products with the capacity to provide consistent revenues and boost R&D.

Since that 2019 deal, the company has enjoyed the perks of Celgene’s blockbuster drugs like Revlimid, which has a proven track record of double-digit growth in annual sales and has recorded $15 billion in yearly revenue.

More importantly, Revlimid is protected from generics until 2026, offering BMY a lot of elbow room to take more advantage of the cash flow coming from this drug

Celgene has also provided an extremely valuable lineup of pipeline assets, apart from its blockbusters.

For instance, beta-thalassemia treatment Reblozyl holds the potential to bring in $2 to $4 billion in annual sales, while autoimmune medication Zeposia is projected to add $3 billion in yearly sales.

To date, it’s clear to see that BMY welcomed 2022 with promising momentum, and the healthcare stock should be anticipated to perform well in the first six months of the year.

Given its track record and projected trajectory, it won’t come as a surprise if this blue-chip stock soars above its competition this year.

January 25, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 25, 2022
Fiat Lux

Featured Trade:

(WHAT TO WATCH OUT FOR IN 2022)
(PFE), (BNTX), (AZN), (JNJ), (MRNA), (RHHBY), (RXRX), (TAK), (PSTX), (ZY), (DNA)

What to Watch Out for in 2022

Biotech Letter

The past two years have been focused on finding solutions to end the COVID-19 pandemic.

More have been attempting to join Pfizer (PFE), BioNTech (BNTX), AstraZeneca (AZN), Johnson & Johnson (JNJ), and Moderna (MRNA) in sustaining and even boosting the momentum in terms of vaccine development and launch of new drugs in the market.

While the biotechnology and healthcare industry will still predictably have COVID-19 as one of its priorities, I can see a number of promising developments waiting to be unleashed to the public this year.

One is the expansion of mRNA applications to go beyond its potential as a coronavirus vaccine.

In the first three quarters of 2021, Moderna recorded $10.7 billion in sales for its mRNA vaccine while Pfizer-BioNTech raked in $39 billion—and these numbers are expected to soar even higher for 2022.

However, what’s more promising is that the pandemic revealed an undeniable and irrefutable fact: mRNA-based treatments could be administered safely and successfully to patients.

That discovery appears to have bolstered investor confidence in the technology, as an increasing number of RNA-based drug developers managed to lure hundreds of millions in terms of financing.

China’s Abogen Biosciences received over $700 million in its Series C round last August, while another RNA-focused biotech, Massachusetts-based Laronde, raked in $440 million in a Series B round during the same period.

Another technology on the rise is artificial intelligence (AI).

For years, AI has grown from science fiction tales to real-life applications. Lately, this segment has shown signs of finally coming up with a breakthrough.

In fact, something groundbreaking might arise in the healthcare world courtesy of Roche (RHHBY) and its Genentech subsidiary.

After all, these two became the talk of the industry in December 2021 when they committed roughly $12 billion in exchange for access to the revolutionary operating system of Recursion Pharmaceuticals (RXRX).

Ultimately, the collaboration aims to come up with advanced treatments—40 programs in total—for various conditions, focusing on neuroscience and oncology.

Aside from mRNA and AI, another sector that’s expected to rally this year is the cell and gene therapy segment.

So far, more capital has poured into this area and a growing number of programs are entering Phase 3 trials.

In the first six months of 2021 alone, gene therapy companies raised approximately $6.4 billion in funding and queued 376 trials.

This notably surpassed 2020’s performance, which recorded $2.2 billion and 359 trials.

By the second half of 2021, big money started to come in with billion-dollar partnerships cropping up everywhere.

These included Takeda Pharmaceutical’s (TAK) collaboration with Poseida Therapeutics (PSTX), worth roughly $3.6 billion, as well as Roche’s partnership with Washington’s Shape Therapeutics at $3 billion.

On top of these exciting breakthroughs is another exciting development: synthetic biology.

In the first six months of 2021, the synthetic biology segment attracted about $8.9 billion in venture funding.

To top it off, the sector managed to launch two successful IPOs last year: Zymergen (ZY) and Ginkgo Bioworks (DNA).

Considering the growing momentum in this field, synthetic biology is anticipated to remain on track and achieve full-scale marketing and manufacturing across many applications. These can span from essential medicines to even various foods such as dairy and meat.

Although the biotechnology and healthcare sector struggled in the past months, it’s undeniable that the market still has faith in the industry’s future and potential.

In fact, investors showered the biotechnology segment with a record-breaking $24 billion in terms of venture capital in the first three quarters of 2021, exceeding the $20 billion total generated in 2020.

Throughout the years, biotechnology has transformed from a restrictive academic enterprise into a booming industry with real-world applications.

Looking at the history and trajectory of this sector, I can say that the trend will continue into 2022 and beyond.

January 20, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 20, 2022
Fiat Lux

Featured Trade:

(A NO-BRAINER DIVIDEND CONTENDER UP FOR GRABS)
(AMGN), (ABBV), (GILD), (REGN), (JNJ)

No-Brainer Dividend Contender Up For Grabs

Biotech Letter

To say that biotechnology stocks haven’t been performing well as of late is an understatement.

Over the past 12 months, the SPDR S&P Biotech Exchange Traded Fund (XBI) has recorded an over 30% loss and is anticipated to reach its 52-week low soon.

Investors have been pulling back from biotechnology stocks for several reasons like threats of drug pricing reforms in the US, the ever-increasing interest rates, and of course, the lure of rapid-growth assets such as cryptocurrencies.

Nevertheless, all is still not lost for the biotechnology sector.

The industry, in its entirety, continues to move forward with unprecedented innovations.

These groundbreaking discoveries, in turn, offer a myriad of untapped, top-value markets that will bode well for long-term investors.

This means that savvy investors would do well to make the most of this broad selloff in a highly promising segment.

One way to determine quality names in this volatile sector is to choose dividend-paying stocks.

After all, dividends are excellent sources of passive income. Apart from that, these can easily boost your portfolio if you plan to reinvest your money.

Basically, regardless of your investment strategy, choosing dividend-paying businesses can be really helpful in reaching your goals.

Among the names in the biotech industry, one that looks promising these days is Amgen (AMGN).

While Amgen’s dividend yield isn’t as high as the likes of AbbVie (ABBV) and Gilead Sciences (GILD), this pioneering biotechnology company is still a promising investment.

Recently, Amgen reported another dividend increase of 10.2%, indicating a rise from $1.76 to reach $1.94 per quarter, with the subsequent dividend expected to be payable by March 2022.

This results in an annual dividend of $7.76 and a respectable dividend yield of 3.41%.

More impressively, Amgen has been paying out dividends since 2011 and boosted its dividend not only annually but with an 11.97% in CAGR over the past 5 years.

Given the company’s history and growth trajectory, Amgen’s earnings growth rate annually in the next 5 years is estimated to be 6%, while its yearly dividend hike rate is projected at 7%.

At first glance, it’s easy to dismiss Amgen’s current standing.

In the third quarter of 2021, the company’s total revenue only reached $6.7 billion, indicating a measly 4% rise year-over-year.

A potential reason for this underwhelming growth is the pending patent cliff for some of its key products and the threat of biosimilars taking over Amgen’s target markets.

For example, cancer medication Neulasta reported a 25% decline in its sales year-over-year to contribute only $415 million in the third quarter.

Needless to say, this kind of disheartening top-line growth is partly responsible for the stock’s sluggish performance in the market lately.

However, other products in the company’s portfolio have reported much better performances than Neulasta.

There’s osteoporosis treatment Prolia, which rose by 15% year-over-year to contribute $803 million in the same period.

Even cholesterol drug Repatha showed off a 33% growth to record $272 million, while arthritis medication Otezla’s sales climbed by 13% to rake in $609 million.

On top of these, Amgen has also succeeded in developing new products that can easily provide additional revenue streams.

One of the most promising recently approved products is advanced non-small-cell lung cancer (NSCLC) treatment Lumakras, which received the US FDA green light last year.

Although there are many approved drugs for this condition, Lumakaras is the first and only treatment that targets specific mutations among non-squamous NSCLC patients.

This translates to 13% of patients suffering from that particular condition.

This is a massive market for Amgen.

Back in 2019, lung cancer was identified as the leading cause of cancer deaths in the United States.

At that time, the total was 139,603 individuals, which made up 23% of all the deaths attributed to the condition. Among the lung cancer deaths, 84% were identified to be of the NSCLC category.

So, if you put everything in perspective, the 13% patient population that Amgen exclusively holds equates to a big opportunity.

In addition, the European Union already approved Lumakras as well. This opens up yet another massive market for the treatment.

In the third quarter of 2021, Lumakras only delivered $36 million in sales. With the recent approvals and broadening of markets, this drug’s revenue is projected to rise quickly.

Aside from these products, Amgen has been working on expanding its pipeline. To date, the company has over 20 ongoing Phase 3 clinical trials.

Moreover, Amgen has decided to take a page out of the books of biosimilar developers.

As the company witnessed its own products get pummeled by biosimilars in the market, Amgen has opted to cannibalize sales of a wide range of treatments that lost their patent exclusivities.

This strategy has already delivered rewards, with the company reporting at least $2 billion in annual sales from its biosimilars in 2021.

For 2022, Amgen has three more biosimilars under development and is looking into poaching the likes of Regeneron’s (REGN) Eylea and Johnson & Johnson’s (JNJ) Stelara as well.

Despite the pandemic, Amgen has managed to extend its dividend growth streak to reach 11 consecutive years. This makes this biotechnology company an impressive Dividend Contender.

Overall, I consider this company a solid buy and an excellent long-term investment. It’s not simply an undervalued pick for value investors but also an outstanding choice for dividend investors.

January 18, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 18, 2022
Fiat Lux

Featured Trade:

(THE PERFECT COUNTERBALANCE FOR A VOLATILE TECH)
(CI), (ANTM), (CVS)