Biotech Letter Archives

Ready, Reset, Go

I had to laugh when I saw Johnson & Johnson's (JNJ) Q4 earnings hit my screen earlier this month.

Here we have Wall Street wringing its hands over a slight revenue miss, sending shares down 3.5%, while management is busy plotting its path to pharma industry dominance.

The numbers tell an interesting story.

Q4 revenues grew 5.3% (or 5.7% on an adjusted operational basis) to $22.5 billion. Wall Street got the vapors because earnings came in at $1.41 per share, well below their $2.04 consensus.

Reminds me of the time analysts completely missed Apple's (AAPL) transformation into a services company.

For the full year 2024, JNJ delivered 4.3% sales growth (5.4% operational) to $88.8 billion, with earnings per share landing at $5.79, or $9.98 adjusted after swallowing a $(0.67) hit from acquired IPR&D charges.

Not too shabby for a company in transition.

Looking into 2025, management is guiding for 2.5-3.5% operational sales growth ($90.9-91.7 billion) and adjusted operational EPS of $10.75-$10.95.

That's 8.7% growth at the midpoint, though they're careful to hedge around legal proceedings and acquisition costs.

And here's where it gets interesting.

During last week's JP Morgan Healthcare Conference, CEO Joaquin Duato was practically bouncing in his chair about their drug pipeline. Let's look at what's got him so excited.

Darzalex, their multiple myeloma superstar, raked in $11.67 billion in 2024, up 20%.

The new kid Carvykti exploded 93% higher to $963 million. Tecvayli landed $550 million in its rookie year.

Depression med Spravato jumped 56% to hit the magic $1 billion mark. Tremfya, their Stelara successor, grew 17% to $3.7 billion.

Speaking of Stelara – there's the elephant in the room.

JNJ's crown jewel is losing patent protection, already showing up in Europe with a >12% sequential decline in Q4 to $2.35 billion. Expect a 30% "haircut" this year.

But here's what Wall Street is missing: JNJ saw this coming years ago.

They just dropped $14.6 billion on Intracellular Therapies, mostly debt-funded (they can afford it with only $31.3 billion in long-term debt and $19.98 billion in cash).

This brings them Caplyta, an antipsychotic med with blockbuster potential that's already approved for schizophrenia and bipolar disorders.

The medical device business isn't sitting still either.

Q4 worldwide revenues jumped 6.7% year-on-year. While Surgery was flat at $2.5 billion and Orthopedics grew a modest 2.5% to $2.32 billion, Vision popped 9% to $1.3 billion.

But the real story? Cardiovascular surged 24% to $2.1 billion. Those Shockwave and Abiomed acquisitions are looking pretty smart right about now.

For the year, MedTech grew 4% to $31.56 billion. Operating margins slipped a bit – Innovative Medicines down from 42% to 39.4%, MedTech from 23.7% to 21.6%.

Late-stage pipeline products nearing approval should ease R&D expenses in 2025, just as JNJ gears up for its next growth phase.

The foundation looks rock solid - $19.98 billion in cash, $31.3 billion in long-term debt, 2025 adjusted EPS guidance of $10.75-$10.95, and that reliable $1.24 quarterly dividend.

But forget the current numbers - the real money's in what's coming next.

Here's what the market is missing: JNJ is promising 5-7% compound annual growth between 2025-2030, with ten drugs hitting $5+ billion in annual sales by decade's end.

Sound ambitious? Maybe. But they've got the pipeline to back it up – from immunology stars nipocalimab and icotrokinra to neuroscience contenders seltorexant and aticaprant, plus oncology plays like TAR-200 for bladder cancer.

I've seen this movie before with AbbVie (ABBV), which navigated the loss of $20+ billion Humira without missing a beat.

And JNJ looks even better positioned - their pharma division is targeting $58 billion in 2024 revenues, which would make them the biggest player in Big Pharma, ahead of Pfizer (PFE), AbbVie (ABBV), Roche (RHHBY), AstraZeneca (AZN), Sanofi (SNY) and Novartis (NVS).

The only real wildcard? That pesky talc litigation.

JNJ's latest move – spinning the lawsuits into Red River Talc LLC and filing for bankruptcy – could cap the damage at $8.5 billion. They claim 75% of claimants are on board, with a court ruling expected this month.

So, what's my take? I think JNJ's 2025 will be a "reset" year, especially the first half. But just like buying straw hats in winter, there might be an opportunity here for patient investors. Management says the back half will be stronger, setting up 2026 for what could be a very interesting guidance call.

While the market frets about Stelara's patent cliff, smart money is quietly building positions. That's why I'm maintaining my stand to buy the dip.

After all, sometimes the best trades are the ones that make you a bit uncomfortable at first. And if you're worried about patent cliffs, just ask any AbbVie shareholder how that worked out for them.

January 23, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 23, 2025
Fiat Lux

Featured Trade:

(THE HARD TRUTH ABOUT THIS BIOTECH'S PIPELINE THAT WALL STREET DOESN'T GET)

(MRK), (AMGN), (AAPL)

The Hard Truth About This Biotech's Pipeline That Wall Street Doesn't Get

Biotech Letter

Earlier this month, while reviewing my biotech holdings during a layover at Chicago O'Hare, I got an interesting call from a long-time reader.

He was panicking about Merck (MRK) after seeing it trading near its 52-week lows, convinced the pharmaceutical giant was headed for trouble.

"Have you seen what Medicare negotiations did to Januvia?" he asked, referencing the 79% price reduction. "And Keytruda's patent expires in 2028!"

Here's the hard truth about this biotech's pipeline that Wall Street doesn't get: while everyone's fixated on Keytruda's patent cliff, Merck has quietly tripled their late-stage pipeline in just over three years.

We're talking more than 20 unique assets in late-stage development, plus another 50 in early stages.

The last time I saw this kind of pipeline expansion was during the early days of Amgen (AMGN), which turned out pretty well for investors who saw past the obvious.

Actually, Merck's current "crisis" also reminds me of the time I bought Apple (AAPL) right after Steve Jobs announced the iPhone. Everyone worried about the risk, while I saw the opportunity.

Merck just posted Q3 2024 numbers that would make most CEOs envious: revenue up 7% year-over-year to $16.7 billion.

Keytruda, their cancer blockbuster, grew 21% to $7.4 billion. Even their Animal Health division jumped 11%. These aren't the numbers of a company in trouble.

Speaking of investors, they've enjoyed a 126% total return over the past decade with Merck, despite more ups and downs than my last flight through turbulence.

The company's 5-year average Return on Equity sits at 25% (recently climbing to 28%), with Return on Invested Capital steady at 20%.

With a Weighted Average Cost of Capital around 8%, there's plenty of room for growth.

Yesterday, I was discussing these numbers with a former FDA commissioner (who shall remain nameless) over coffee.

He pointed out something fascinating: Merck's R&D spending is increasing alongside revenue growth. That's like a tech company doubling down on product development – exactly what you want to see in pharma.

For dividend hunters (and I know many of you are), Merck offers a 3.3% yield with a 7% five-year dividend growth rate.

The payout looks sustainable too, consuming 68% of earnings and 55% of free cash flow. It's not going to make you quit your day job, but it's better than the 1.4% you'll get from the S&P 500.

Looking at valuation, Merck trades at a P/E of 20.5, below its historical average of 22.3.

My own growth projections suggest a 13% annual rate going forward. Optimistic? Perhaps. But with their robust pipeline and near-term analyst projections, I've seen crazier things work out.

The company just announced a $15 billion share repurchase program, including plans to spend $7.5 billion over the next 12 months. When management puts that kind of money where their mouth is, I tend to pay attention.

Yes, Keytruda's patent cliff in 2028 is real. But so is Merck's late-stage pipeline of antibody-drug conjugates (ADCs) – think smart missiles in the war against cancer.

And unlike some biotechs, Merck has the financial muscle to weather any storm, with decreasing net debt and a solid cash position.

Remember what I always say about buying straw hats in winter? Merck right now is like finding a premium pharma stock in the discount bin.

Just like my friend who panicked and sold everything after the November 8 election (and missed the subsequent rally), sometimes the best opportunities come disguised as problems.

As for me, I'm looking at Merck as a potential long-term hold. The company's fundamentals remind me of other great turnaround stories I've traded successfully over the years.

With the healthcare sector currently out of favor and Merck trading near its 52-week lows, this might be one of those moments we look back on and wish we'd bought more.

And speaking of patents, maybe I should patent my strategy: “Buy great companies when everyone else is afraid.” Though I suspect Warren Buffett already beat me to that one.

January 21, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 21, 2025
Fiat Lux

Featured Trade:

(THE ONLY TIME FIGHTING YOURSELF MAKES MONEY)

(ABBV), (AMGN), (SDZNY), (CHRS), (PFE), (JNJ), (ALVO), (TEVA), (SNY), (BMY)

The Only Time Fighting Yourself Makes Money

Biotech Letter

If I had a dollar for every time someone told me the biotech sector was overvalued, I'd have enough to fund my own drug development program.

Yet here we are, watching the global immunology market rocket from $55 billion to $166 billion in just a decade, with the sector projected to hit $192 billion by 2028.

If you're wondering why big pharma keeps pouring billions into autoimmune research - and believe me, this question came up in every meeting last week - the answer is simple: we've barely scratched the surface.

Despite thousands of PhDs burning midnight oil in labs from Boston to Basel, we still don't have effective treatments for systemic lupus erythematosus, scleroderma, or even something as visible as vitiligo.

Want to see where the smart money is going? Look no further than the biosimilar stampede into AbbVie's (ABBV) Humira territory.

Like bargain hunters at a Black Friday sale, everyone's getting in line: Amgen (AMGN) with Amjevita, Sandoz (SDZNY) with Hyrimoz, Coherus (CHRS) with Yusimry, and Pfizer (PFE) with Abrilada.

And just when you thought the party was over, here comes Amgen's Wezlana challenging Johnson & Johnson's (JNJ) Stelara, followed by Alvotech (ALVO) and Teva's (TEVA) Selarsdi.

But here's where it gets interesting. I've identified four companies that are trading at valuations that would make Benjamin Graham smile.

First up is AbbVie, trading at 15.96x earnings (11.9% below sector median), with projected EPS growth to $15.21 by 2027.

Their dynamic duo of Rinvoq and Skyrizi is performing like a biotech version of Batman and Robin.

Rinvoq sales hit $1.61 billion in Q3 2024, up 45.4% year-over-year, while Skyrizi broke $3 billion, thanks to its mid-2024 FDA approval for ulcerative colitis.

As for Sanofi (SNY)? Now we're talking value. At 11.7x earnings - 35.39% below sector median and 1.3% below its 5-year average - it's like finding a Ferrari priced like a Fiat.

Their star player Dupixent raked in 3.48 billion euros in Q3 2024, up 22.1% year-over-year and 5.2% quarter-over-quarter.

Then, there’s Teva Pharmaceuticals. Trading at a P/E ratio of 7.88x - that's 56.5% below the sector median - while projecting non-GAAP EPS growth to $3.6 by 2028.

But here's the kicker: their clinical trial data reads like a biotech investor's dream. Their new drug duvakitug achieved 47.8% clinical remission in ulcerative colitis patients versus 20.45% for placebo (p=0.003).

In Crohn's disease? Even better - 47.8% endoscopic response compared to 13% for placebo (p<0.001).

Finally, there's Bristol-Myers Squibb (BMY). Yes, it's trading at 47.5x earnings (162.1% above sector median), but here's where patience pays off - their P/E ratio is expected to drop to 8.82x by 2027.

Meanwhile, Zeposia sales jumped 19.5% year-over-year to $147 million in Q3 2024, while Sotyktu showed consecutive quarterly growth.

The cherry on top? These companies are paying you to wait. We're talking dividend yields from 3.8% to 4.41% - try getting that from your savings account.

Looking at these numbers reminds me of the tech sector in the late 1990s, but with one crucial difference - these companies are actually making money, lots of it.

They generate significant cash flow and have strong balance sheets, unlike many of the high-flying tech companies of the dot-com era that were burning through cash with no clear path to profitability.

While others are chasing the next meme stock or crypto moonshot, smart investors are quietly positioning themselves in companies that are literally changing the face of medicine.

Remember, buying umbrellas in the summer heat has always been my style.

Right now, the immunology sector is experiencing its own kind of summer, and these four stocks are your umbrellas.

The forecast? Growth storms ahead.

January 16, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 16, 2025
Fiat Lux

Featured Trade:

(THE EYES HAVE IT)

(REGN), (SNY), (PFE), (BMY)

The Eyes Have It

Biotech Letter

Last week, while waiting for my annual eye exam, I couldn't help but notice the parade of elderly patients shuffling in for their regular Eylea injections. My optometrist tells me these folks show up like clockwork every 4-8 weeks, rain or shine.

That's about to change, and therein lies a multibillion-dollar story.

You see, when Regeneron reported Q3 earnings on Halloween, boy, they sure had some treats for investors. Revenue hit $3.72 billion, up 11% YoY, with EPS coming in at a sweet $11.54.

But here's what really caught my attention: their cost of revenue was $1.762 billion, while R&D and SG&A expenses ran $1.271 billion and $714.4 million respectively.

Net income? A cool $1.34 billion. Not too shabby for a company whose main product is under siege from copycats.

Speaking of copycats, let's talk about Eylea. The original formula saw revenues drop 21% YoY to $1.145 billion – that's what happens when biosimilars crash your party.

This is where it gets interesting though: Eylea HD (think of it as Eylea's muscled-up big brother) jumped from a mere $43 million to $392 million YoY.

Sure, about $40 million of that came from wholesalers stocking up like it's Black Friday at Costco, but still – that's what I call a growth story.

I've been watching Regeneron since they were just a gleam in Wall Street's eye, and they've always had a knack for turning scientific breakthroughs into cold, hard cash.

Take Dupixent, their inflammation blockbuster co-developed with Sanofi (SNY). It just got FDA approval for COPD with an eosinophilic phenotype.

Why does this matter? Because we're talking about a $6 billion market opportunity here, folks.

About 36% of COPD patients have this particular flavor of the disease and trust me, there are more of them than you'd think still wheezing away on their old inhalers.

Want to know what else is cooking in their labs? They're working on antibodies that could make blood clots a thing of the past – think better than Eliquis, which pulls in $10 billion annually for Pfizer (PFE) and Bristol Myers Squibb (BMY). Their secret? Something called Factor XI, which could be a game-changer for the 1 in 5 patients at high risk for bleeding.

And because no self-respecting biotech can resist the siren call of the obesity market, they're also cooking up their own weight loss cocktail. Results won't drop until late 2025, but if they crack the code on keeping weight off AFTER stopping treatment, they'll have something Wegovy and Zepbound can't match.

The financials are rock solid, too: $2.012 billion in cash, $7.785 billion in marketable securities, and current assets of $19.334 billion versus current liabilities of just $3.661 billion.

They've generated $3.158 billion from operations in the first nine months of 2024 alone.

Yes, there's $1.984 billion in long-term debt, but with cash flow like that, it's about as worrying as a paper cut.

I've already started nibbling at Regeneron, and I'm looking to add more if it dips further. After all, this is a company that's proven it can grow revenues at upper single digits year over year while maintaining 25% free cash flow margins - the kind of numbers that make a value investor's heart skip a beat.

Sure, there are risks lurking around every corner – biosimilars nipping at Eylea's heels, Medicare negotiations that could squeeze margins, and clinical trials that might go sideways.

But with multiple growth catalysts and a pipeline that reads like a wish list for modern medicine, Regeneron's got more upside than my daughter's college tuition bills.

As my optometrist likes to say - in the land of the blind, the one-eyed man is king. But in the land of biotech, Regeneron's got a 20/20 vision for what's coming next.

January 14, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 14, 2025
Fiat Lux

Featured Trade:

(THE HEAVIEST HITTERS)

(NVO), (LLY)

The Heaviest Hitters

Biotech Letter

During my morning coffee run yesterday, I couldn't help but notice the transformation of my local café's menu. Where once stood a simple array of pastries, now sits a fortress of "keto-friendly" and "low-carb" options.

The barista told me they could barely keep them in stock. Times are changing, but not fast enough to stem the tide of what's become a global health crisis.

Here's a sobering statistic that explains why two pharmaceutical giants are about to have their best decades ever: In 1975, only 3 out of 100 men were obese. By 2022, that number exploded to 14. Women haven't fared much better, jumping from 6.6 to 18.5 out of 100.

But here's the real kicker – childhood obesity has multiplied TENFOLD since 1975.

Enter Novo Nordisk (NVO) and Eli Lilly (LLY), two companies that have discovered what might be the holy grail of modern medicine: drugs that can shrink waistlines almost as effectively as a year of dedicated dieting, but with considerably less willpower required.

I've been tracking both companies closely, and the numbers are staggering. Eli Lilly's tirzepatide (marketed as Mounjaro for diabetes and Zepbound for weight loss) has achieved what most thought impossible – a 20.80% average weight loss over 72 weeks. That's the kind of number that makes both bathroom scales and Wall Street analysts take notice.

Morgan Stanley certainly has. They're projecting the market for these weight-loss wonder drugs to explode from $6 billion in 2023 to an eye-popping $105 billion by 2030. And here's why I think even that might be conservative.

Last week, I caught up with an old friend who heads one of the largest healthcare investment funds in Boston. He shared an interesting insight: "The biggest problem these companies have isn't competition – it's keeping up with demand." Both Novo Nordisk and Eli Lilly are investing billions just to scale up production. It's like trying to drink from a firehose of opportunity.

Let's break down why these stocks are so compelling:

The market for diabetes medications is exploding. We're looking at 537 million adults with diabetes today, growing to 783 million by 2045. These aren't speculative numbers – they're based on current trends that show no signs of reversing.

Novo Nordisk currently dominates the GLP-1 market with a 66.80% share internationally, while Eli Lilly's tirzepatide holds 17.60%.

In the insulin market, Novo Nordisk's supremacy is even more pronounced, controlling 44.50% of the global market share compared to Eli Lilly's estimated 20-25%.

This is where it gets pretty interesting. Despite Novo Nordisk's market dominance, Wall Street has developed a crush on Eli Lilly.

Looking at the Price/CFO ratio, Novo Nordisk is trading BELOW its 10-year average, while Eli Lilly's valuation has soared to levels that would make a tech startup blush.

For 2025, Novo Nordisk's EPS is expected to hit $3.88. With a reasonable PE ratio of 25x, that suggests a fair value of $97.20 by the end of 2025 – an 11% upside potential.

Meanwhile, Eli Lilly, with an expected EPS of $21.57 and a justified PE ratio of 30x, points to a fair value of $647.10, suggesting it might be overvalued by about 17%.

The biggest risk? A global shift toward healthier lifestyles. But having just driven past my local McDonald's with a line wrapped around the building at 10 PM, I'm not losing sleep over that scenario.

My call? I'm long Novo Nordisk. While both companies are excellent, I prefer buying the market leader at a discount rather than the challenger at a premium. It's like buying beachfront property in Miami – the price might seem high today, but just wait until next year.

So, I'm maintaining a core position in Novo Nordisk with plans to add on any significant dips. The obesity epidemic isn't going away anytime soon, and neither is the demand for these medications.

For those looking to play both sides of this market transformation, a smaller position in Eli Lilly isn't crazy – just be prepared for some volatility given the current valuation.

And, yes, I'm aware there’s plenty of hand-wringing over these stocks' valuations. But the next time someone tells you the market's getting too heavy, just remember - in this case, that's exactly the point.

January 7, 2025

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 7, 2025
Fiat Lux

Featured Trade:

(CELLS OF THE CENTURY)

(LCTX), (ATHX)