Mad Hedge Biotech and Healthcare Letter
January 11, 2022
Fiat Lux
Featured Trade:
(A GOOD STOCK TAINTED WITH CYNICISM)
(BIIB), (LLY), (RHHBY), (SAVA), (PRTA), (SAGE)
Last year, talks that Samsung was in the process of making a $42 billion buyout bid for Biogen (BIIB) brought about a mixture of cynicism, hope, intrigue, and excitement over a potential agreement.
It was especially intriguing since the reported offer was roughly 20% more than Biogen's expected $35 billion projected value.
Eventually, this report was proven to be false.
But the mere fact that it garnered such traction and interest only highlighted Biogen’s seemingly debilitated state following their failure to deliver on a promised unprecedented motherlode following the controversial Alzheimer’s drug approval and lukewarm reception.
If you recall, experts expected Biogen’s Alzheimer’s drug, Aduhelm, to generate double-digit billions in sales considering its list price of approximately $50,000 annually and the roughly 5.8 million individuals diagnosed with the condition in the US alone.
Theoretically, Aduhelm’s addressable market was projected at $325 billion.
At that time, Aduhelm was anticipated to rake in at least $50 billion per annum—a projection that was reflected in the 55% increase in the company’s share price.
However, things didn’t go according to plan. Aduhelm’s accelerated FDA approval caused so much uproar that it eventually affected the drug’s marketability as well.
In an attempt to temper the protests, Biogen cut the cost of Aduhelm to almost half, with the drug priced at $28,000 annually instead of its original $50,000.
Despite this, the projected mega-blockbuster’s sales continued to disappoint, with its third-quarter earnings in 2021 only reaching a measly $300,000.
This January, though, Aduhelm might have a shot at saving redemption courtesy of a potential Medicare reimbursement scheme.
Ultimately, however, the decision to offer any form of reimbursement scheme will not only affect Biogen but all the Alzheimer’s disease treatments in the future.
This is actually one of the critical points that many people missed when Aduhelm gained approval.
In focusing too much on the share price of Biogen, they appeared to have misinterpreted the true purpose of the FDA’s decision.
Granting an accelerated approval for Aduhelm did not mean that the FDA was handing the company a chance to generate double-digit billions in sales.
What the agency intended was to demonstrate support for Biogen's thesis regarding a potential Alzheimer’s therapy.
That is, you can slow down the patients’ cognitive decline by aiming to reduce the amyloid-beta levels in their brains.
The FDA’s decision has, in effect, opened the floodgates not only for Biogen’s Aduhelm, but for all the other biotechnology companies working on the same idea.
To date, the companies developing their own Alzheimer’s disease treatment include Eli Lilly (LLY) with Donanemab and Roche (RHHBY) with Gantenerumab.
Both are expected to release results within the year or early 2023.
Other names are Anavex Life Sciences (SAVA) and Prothena (PRTA).
Outside its Aduhelm efforts, Biogen has also been developing new treatments, as demonstrated by the $4 billion investment it made on its R&D last year.
One promising candidate that can deliver blockbuster sales is its major depressive disorder treatment Zuranolone, which is a collaboration with Sage Therapeutics (SAGE).
Meanwhile, Biogen is also working with Ionis (IONS) to develop a successor for its spinal muscular atrophy treatment Spinraza.
Since this top-selling drug is expected to lose patent protection in 2023, the company has spent $60 million to come up with a new and more potent version: BIIB115.
For context, Spinraza recorded more than $2 billion in sales in 2021.
At this point, investor sentiment on the company has stooped at an incredibly low level. Unfortunately, the weak rollout of its Alzheimer’s treatment has planted suspicions regarding Biogen’s entire pipeline.
However, I think this kind of pessimism is quite misguided.
While the reality is that Aduhelm may never achieve the mega-blockbuster status it was once believed to reach, the situation shouldn’t necessarily diminish the truth that Biogen is actually performing quite well—and it will continue to do just fine.
Mad Hedge Biotech and Healthcare Letter
January 6, 2022
Fiat Lux
Featured Trade:
(A WONDERFUL COMPANY AT A FAIR PRICE)
(ABBV), (BRK.B), (GILD), (AMGN), (PFE)
Another year, another set of challenges and opportunities for investors. How can you make sure that you’re starting the year right?
If you’re looking to dip your toe in the biotechnology and healthcare sector, it won’t hurt to look at what the experts, such as Warren Buffett, are doing.
With a 55-year track record of 21% in annual returns for its Berkshire (BRK.B) investors, I’d say the Oracle of Omaha definitely knows his craft.
One of his most famous pieces of advice is to buy “wonderful companies at fair prices,” and I think this pearl of wisdom perfectly fits Buffett’s favored high-yield aristocrat: AbbVie (ABBV).
More interestingly, AbbVie is currently undervalued primarily due to overblown fears of patent loss for its top-selling drug Humira in 2023 and another in 2026 for Imbruvica.
Admittedly, the anxiety of investors is not entirely unfounded.
After all, AbbVie must replenish roughly $20 billion worth of annual revenue from Humira alone in the following years as the drug loses its patents and faces declining sales.
Obviously, losing revenue from a primary growth driver could be a massive problem for any company.
It could even lead to stagnating numbers in the next couple of years — a situation that the likes of Gilead Sciences (GILD), despite its $90.58 market capitalization, have become all too familiar.
Nevertheless, AbbVie isn’t simply twiddling its thumbs, waiting for the inevitable patent loss to happen.
The company has been busy preparing for the Humira and Imbruvica patent cliffs. In fact, it has been working to diversify its portfolio steadily.
One of the steps it undertook was to leverage its cash flow and $238.35 billion market capitalization to boost its R&D.
This led to AbbVie holding one of the industry’s most robust pipelines to date.
Some of the most promising products in its portfolio are Humira successors Skyrizi and Rinvoq.
Together, these two treatments are estimated to generate more than $15 billion in sales by 2025.
And AbbVie isn’t done yet.
Following its wildly successful formula in Humira, AbbVie is also looking into expanding the indications for the drug’s successors.
So far, Rinvoq has been able to deliver on this promise. Recently, this Humira successor has received FDA approval as a second-line treatment for psoriatic arthritis.
With this second indication, more and more investors are starting to believe that AbbVie has yet another blockbuster in the making.
Let’s look at the market for Rinvoq’s latest indication.
In the US alone, there are approximately 1 million to 2 million patients of psoriatic arthritis. For simplicity’s sake, let’s just say that there are 1.5 million patients in the US.
Generally, the first-line of treatment typically fails for 20% of psoriatic arthritis patients. That leads to roughly 300,000 patients who would be in need of second-line treatment.
For the sake of accuracy, it’s vital to point out that there are already a number of psoriatic arthritis treatments available in the US, such as Otezla and Enbrel from Amgen (AMGN). Moreover, JAK inhibitors are still facing potential restrictions from the FDA, thanks to the issue with Pfizer (PFE).
So, we can conservatively say that AbbVie’s Rinvoq might only be able to capture an estimated 7% of the psoriatic arthritis market share.
This translates to approximately 21,000. The annual list price for Rinvoq is at $63,000.
Taking into consideration the negotiation tactics of health insurers for price adjustments, the drug might go down to an annual list price of $44,000 instead.
Based on these conservative assumptions, Rinvoq would rake in sales of over $900 million—falling only slightly below the $1 billion blockbuster mark.
While this only hits less than 2% of AbbVie’s anticipated $56.2 billion annual revenue, this trajectory is a massive success for Rinvoq.
Bear in mind that this Humira successor has been on track to generate over $1.5 billion in sales in 2021.
Hence, adding $900 million from its psoriatic arthritis indication would offer a whopping more than 60% jump in its annual revenue.
Considering its history and trajectory, AbbVie is expected to continue to outshine its rivals in the industry.
Actually, the growth consensus for this stock is at 4% to 6.5%.
While that does not sound very impressive, it’s important to remember that the long-term growth rate for the whole industry is only 4%.
That easily puts AbbVie ahead of at least 63% of its peers in terms of growth.
Aside from the fact that this blue-chip stock is an excellent way to enjoy a solid 4.3% yield these days, the company is proving to be effective in ensuring that it delivers market-beating returns in the long run.
Needless to say, AbbVie qualifies as a classic “wonderful company at a fair price.”
Mad Hedge Biotech and Healthcare Letter
January 4, 2022
Fiat Lux
Featured Trade:
(A BIOTECH DIAMOND IN THE ROUGH)
(BDSI), (TEVA)
Small-cap names tend to have a terrible reputation. However, the possibility of discovering a diamond in the rough pulls traders back in the game over and over.
Fortunately, applying a bit of critical thinking in sifting through the seemingly endless lists of small-cap companies can yield a handful of names worth consideration.
In the biotechnology and healthcare sector, one name that holds the potential is BioDelivery Sciences International (BDSI).
While it’s understandable if you’ve never even heard of BDSI, this company has actually been making waves in the field of severe pain management.
To date, it has three drugs out in the market and holds the patent for a slow-release biofilm technology used to administer these medications. Simply, BDSI is proving to be a profitable and fast-growing company.
The company’s main product is Belbuca, an opioid medication targeting chronic severe pain.
The competitive edge of Belbuca against other drugs is that it’s not an oral pill. Instead, it’s a tiny film that patients keep in their cheeks. This film then slowly dissolves, offering more potent pain relief over time.
Moreover, Belbuca is more difficult to abuse, making it a more attractive option for physicians to prescribe.
At the moment, Belbuca has a 4.7% market share of the long-acting opioid treatment segment.
While that sounds like an unimpressive number, this achievement becomes more pronounced when you find out that Belbuca only held 0.5% of the market when it launched in the fourth quarter of 2017.
By the first quarter of 2021, its market share expanded by 25% year over year, indicating that segment penetration is moving forward swimmingly despite the pandemic.
In fact, Belbuca’s revenues increased by over 95% in the last 3 years.
It also reported that its trailing-12-month earnings since the first quarter of 2020 have skyrocketed to a jaw-dropping 233%.
More excitingly, BDSI successfully defended its patent exclusivity against competitors.
Recently, it managed to ward off attempts from more prominent names like Teva Pharmaceuticals (TEVA), which hoped to gain access to BDSI’s slow-release biofilm technology.
Bolstering its hold on the pain management market, BDSI has also been successful in marketing Symproic.
This prescription medication, which targets opioid-induced constipation therapies, has seen a steady rise in market share over the past 2 years.
By the first quarter of 2021, Symproic has managed to take hold of 12.6% market share, making it a promising partner to the company’s major growth driver, Belbuca.
Highly aware of the growing competition in the opioid market, BDSI has decided to venture into other segments as well.
In September 2021, the company acquired the rights to acute migraine pain medication Elyxyb for $15 million.
Elyxyb is the first-ever FDA-approved, ready-to-use oral drug aimed to treat acute migraine. In terms of peak sales, BDSI is projected to rake in $350 million to $400 million from this acquisition.
BDSI plans to launch its own take on Elyxyb by the first quarter of 2022, with the goal of adding another catalyst in its growth story and a new revenue stream.
Looking at its history and trajectory, it’s evident that things are heading towards a bright future with BDSI.
This small-cap company managed to sustain the expansion of its market share and boost its sales growth despite the pandemic and the patent challenges from bigger rivals.
Moreover, its balance sheet looks solid. Its margins and cash flow have been exhibiting notable improvements as well.
Simply, there remains no identifiable business concern that might cause it to tumble in the future.
Overall, BDSI’s long-term risk-reward outlook still appears to be attractive regardless of the market’s less-than-stellar reaction to the stock in 2021.
Needless to say, BDSI’s remarkable performance hasn’t been convincing enough for investors to believe that the stock is worth their money.
That turns this promising $315.16 million market cap biotechnology company into an exciting opportunity for deep-value investors searching for diamonds in the rough and an astoundingly cheap growth play.
Mad Hedge Biotech and Healthcare Letter
December 30, 2021
Fiat Lux
Featured Trade:
(“WHOLE-PERSON CARE” IS THE FUTURE OF HEALTHCARE)
(TDOC), (PFE), (BNTX), (MRNA)
Alongside the likes of Pfizer (PFE), BioNTech (BNTX), and Moderna (MRNA), another name stood out during the pandemic: Teladoc (TDOC).
This telehealth company was one of the biggest breakout stars amid the worst periods of the COVID-19 pandemic, with its shares skyrocketing 138%—a feat sustained throughout 2020.
However, Teladoc’s narrative faltered in 2021.
The change wasn’t in terms of the company’s financial future. If anything, the company had been consistent in recording increasing revenues and visits. Teladoc actually even boosted its earnings guidance this year.
Despite all these, the stock fell by roughly 50%.
Looking at the reasons for this baffling fall, it became evident that investors started to fret over the gradual reopening of the economy and the return of people to offices.
They believed that these would result in patients abandoning virtual health consultations and opting to go back to their doctor’s clinics.
As far as we can see, though, that has not happened yet.
Moreover, the recent events and predictions about the future all but guarantee that these fears are baseless. Now, this raises the question of whether or not Teladoc is set to rebound in 2022.
It’s sort of obvious that the company has been moving alongside the COVID-19 headlines, but this doesn’t necessarily mean that Teladoc’s long-term plans depend heavily on the pandemic.
The vital thing we need to understand is that telehealth is here to stay. The pandemic merely accelerated the adoption of this groundbreaking technology.
There’s actually a widespread misunderstanding of Teladoc’s goal over the long term. Some investors seem to assume that the company aims to replace physical healthcare services.
This is extremely far from the truth.
What Teladoc wants to do is simply provide a complementary platform for the physical system.
That is, the company aims to virtualize all the things that can be virtualized and serve as the front door to the actual physical care.
Doing so will offer a more convenient option for patients and for the entire healthcare industry because this new and improved system can generate savings and better allocate resources in one of the most woefully managed and inefficient sectors across the globe.
Our current traditional healthcare system is extremely fragmented. Patients visit an average of 19 doctors in their lifetime, and every new doctor typically necessitates a new practice, a new professional relationship, and another set of medical records.
To get rid of the stress, prevent “wasting time” in waiting rooms, and sometimes receive unsatisfying experiences, which can even lead to unresolved or undetected health issues, Teladoc has come up with a comprehensive system.
It built Primary360, which it dubbed as the “whole-person care” platform.
The idea behind “whole-person care” is to bring all the services, including mental health, primary healthcare, and even treatments for chronic conditions, in one virtual package. This can then be easily accessed via the patient’s phone.
Teladoc integrates data and analytics to develop personalized healthcare experiences for its users, which became even more accurate and comprehensive thanks to its $18.5 billion acquisition of Livongo.
Another advantage in acquiring Livongo is its ability to work with AI.
Virtual care has the ability to offer more proactive solutions as opposed to reactive treatments.
Having a massive set of data, Teladoc can provide proactive measures to manage or prevent symptoms instead of mitigating them when they manifest.
After all, what would patients want more?
Their doctors informing them that they have a high risk of a heart attack in the following month if they fail to receive treatment or wait until it actually happens?
Wearables, such as smartwatches and Oura rings, can send data to Teladoc, which can then be used to prevent these kinds of health crises from arising.
Aside from Livongo, Teladoc has also acquired BetterHelp in 2015 for $4.5 million to form part of its “whole-person care” platform.
This acquisition, which has been on track to rake in $100 million in revenue in 2021, is geared towards mental health services.
Teladoc’s earnings reports in 2021 have been reassuring. In the third quarter, for instance, the company’s revenue skyrocketed 81% while patient visits rose 37% to reach over 3.9 million.
Meanwhile, the company estimates the “whole-person care” to be worth roughly $75 billion within its current client base.
Moreover, the National Labor Alliance of Health Care Coalitions, the largest organization of labor groups, announced that it will make Teladoc’s complete set of services available to all its members.
For context, these members pay for the health services of over 6 million individuals.
Going back to the question of whether Teladoc shares will bounce back in 2022, I think it’s clear that it can easily recover given its current trajectory.
In 2020, the telehealth industry was valued at $62.45 billion. By 2030, the telemedicine segment worldwide is projected to reach more than $431 billion.
Meanwhile, the compound annual growth rate (CAGR) from 2021 until 2030 is estimated to be at 26%.
Given Teladoc’s pioneering status, the company may even surpass the expectations from the industry. At a target 2022 revenue of $2.6 billion and $4 billion by 2024, the company’s projected CAGR is at 25% to 30% in the next three years.
Undeniably, Teladoc has fallen out of favor this year. However, the company is far from underperforming.
In fact, it has been doing an excellent job at sticking to its long-term objectives.
Looking at its low valuation at the moment, Teladoc holds the potential to become a highly rewarding venture for long-term investors who are capable of focusing on the fundamentals instead of the short-term noise.
Mad Hedge Biotech and Healthcare Letter
December 28, 2021
Fiat Lux
Featured Trade:
(ANOTHER VICTIM OF OVERBLOWN FEARS)
(BMY), (PFE), (BNTX), (MRNA), (MRK)
Inflation is one of the primary concerns of investors these days, and rightly so.
Just last month, the consumer price index (CPI) climbed at an astonishing 6.8% year over year — the highest increase ever recorded in almost four decades.
In response, many investors have decided to focus their attention on stocks that protect their portfolios from inflationary pressures.
While some are looking at cryptocurrencies and, of course, gold as their preferred hedges against inflation, I don’t think it’s wise to ignore dividend stocks.
History dictates that stocks that offer above-average dividend yields have been known to surpass expectations during the difficult periods of high inflation.
An excellent example of this is Bristol Myers Squibb (BMY).
BMY is one of the biggest names in the healthcare sector, with a market capitalization of over $125 billion.
Unfortunately, BMY’s shares have experienced a 9% fall in 2021 to date.
The company has also been underperforming compared to the broad market, which went up by more than 20% during the same period.
While this is unfavorable for investors who bought BMY in 2020, the current situation offers an attractive entry point for those looking to inject new money here.
Looking at the reasons for BMY’s relatively weak performance, one key point to consider is that the company is a major player in an industry that is not particularly sought after at the moment.
This year, most investors poured money on stocks that would benefit firsthand from the reopening efforts of the economy.
Consequently, the dependable, non-cyclical healthcare and biotechnology sectors have been generally disregarded—barring the COVID-19 vaccine stocks like Pfizer (PFE), BioNTech (BNTX), and Moderna (MRNA).
Apart from that, some company-specific issues plagued BMY as it faces impending patent expirations on a few key products in the following years.
Oral cancer drug Revlimid, which generated $12.1 billion in 2020, is expected to face patent loss by 2025.
Meanwhile, blood clot treatment Eliquis, which raked in $9.2 billion last year, will be dealing with the same issue by 2027.
This will be followed by lung cancer medication Opdivo, which recorded $7 billion in sales, in 2028.
Taken together, these key drugs generate roughly $28 billion in annual revenue, which comprises more than half of the company’s $46 billion revenue per year.
While this can be a cause of concern, it doesn’t necessarily mean that these products will generate zero revenues for the company when their patents expire.
In fact, a previous study revealed that top-selling drugs typically lose about 50% of their sales in the 5 years after their patent expiration.
That means that BMY can still expect well above $10 billion each year from these three key drugs through the 2020s.
Moreover, worries over the patent expirations appear to be overblown, considering that these will happen several years from now. Considering that BMY has an extensive list of growth assets and a robust pipeline, I think this situation has been more than accounted for.
The fear of patent expirations is well-founded, though. If companies fail to navigate a patent cliff, it can have serious ramifications for a company
However, a company that’s well-diversified and wisely invests in lucrative growth assets in advance of these impending patent expirations—even the losses of exclusivity of top-selling drugs—can handle the situation easily.
So far, BMY has shown three clear ways in terms of handling patent losses. One is expanding the indications of their newer drugs. Another is launching new products to the market. The third is acquiring new assets through beneficial deals.
The first cluster of drugs that BMY has brought to market and is growing rapidly includes anemia medication Reblozyl, which recorded an impressive 67% increase in its revenue in the third quarter of 2021
This translated to $160 million, or over $600 million in annual sales.
Recently, the FDA has accepted BMY’s collaboration with Merck (MRK) to use Reblozyl as part of the treatment for beta-thalassemia. The approval for this work is anticipated to be released by the second quarter of 2022.
Following this growth rate, it wouldn’t be a surprise to discover in the future that Reblozyl has transformed into a blockbuster drug with yearly sales reaching over $1 billion.
Another potential blockbuster is multiple sclerosis treatment Zeposia, which has boosted its sales 20x since 2020.
While it started from a low base of $2 million, this drug has the ability to reach peak sales of $5 billion annually.
Aside from these, BMY has a deep pipeline filled with drugs holding blockbuster potential in the coming years.
Meanwhile, BMY just hiked its dividend by 10%, pushing its dividend yield to 3.5%—easily doubling what investors can receive from the broad market, with the S&P yielding 1.3%.
In terms of its acquisitions, BMY has been on a buying spree lately. The most massive deal following its $75 billion acquisition of Cologne is its $13 billion deal with MyoKardia.
Simply put, BMY is cheap. At current prices, this healthcare company is trading at only 7.5x this year’s earnings, while the estimates for 2022 look to be even lower.
However, BMY is an impressive company with a remarkable portfolio of assets.
Moreover, the impending patent losses of its top-performing drugs have already been dealt with thanks to the company's solid revenue replacement strategy.
Hence, this issue should no longer sound any alarm bells.
Overall, BMY is an attractive option for the long-term and buy-and-hold type of investors, particularly those aiming for a sizable and steadily growing dividend stream.
