Mad Hedge Biotech and Healthcare Letter
December 23, 2021
Fiat Lux
Featured Trade:
(A BIOTECH STOCK POISED FOR REDEMPTION)
(VRTX), (ABBV), (CRSP), (MRNA)
It’s the season to start some holiday shopping, and you don’t have to limit yourself to gifts for friends and family.
You might want to expand your shopping list to include a few bargain stocks as well.
These names typically have solid fundamentals but have seen their share prices tumble for one reason or another.
One of them is Vertex Pharmaceuticals (VRTX).
Vertex has one of the most exciting growth stories in the biotechnology and healthcare industry.
Sadly, the stock has fallen in the past 12 months despite the continuous rise of the company’s business.
The primary cause was the failure of two of Vertex’s candidates, VX-814 and VX-864. These two drugs were supposed to target rare genetic lung and liver conditions.
More importantly, both were slated as the next growth drivers for the company.
Nevertheless, it looks like Vertex has a number of candidates in its pipeline that can deliver the same if not higher growth in the coming years.
For instance, its Trikafta line appears to be continuously expanding, with its recent approval for patients aged 6 to 11 boosting the company’s quarterly revenue by 29% year-on-year to rake in $1.98 billion—or 6% over consensus.
Turning to Vertex’s core business, it remains a virtual monopoly in the cystic fibrosis treatment sector.
Looking at the market, the company has identified roughly 30,000 more patients with CF who are eligible to seek treatment with Vertex’s drugs.
In terms of sales, that translates to an additional $5.4 billion—or 37% of the current revenues.
It’s even safe to say that Vertex can easily corner this remaining market since Trikafta’s patent protection is valid until 2037.
Aside from that, the closest challenger in this market is AbbVie (ABBV), which has an experimental drug in Phase 2 trials.
If all goes well for the latter, then the results for that stage would be out by the first quarter of 2022.
Even assuming that AbbVie’s candidate succeeds in Phase 2, there’s still the third stage of research, which would take at least a few more years before the drug enters the market.
Meanwhile, Vertex has also been amping up its CF pipeline with new experimental CF drugs based on a combination of its already successful products.
Based on preliminary data, these new candidates may turn out to have even higher efficiency than Trikafta.
Speaking of monopoly, Vertex hasn’t forgotten the 10% of CF patients who aren’t eligible for its current therapies.
To completely corner the market, Vertex has partnered with leading gene therapy experts to develop two new drugs for the remaining 10%—and these “experts” are renowned heavyweights in the biotech sector as well: CRISPR Therapeutics (CRSP) and Moderna (MRNA).
Outside its core business, Vertex has been expanding its pipeline to cover other markets.
One of its exciting candidates is CTX001. This is a gene therapy that’s supposed to be a one-time cure for rare conditions B-thalassemia and sickle cell disease. The company plans to apply for regulatory approval by the end of 2022.
If this works out, then Vertex is looking at an addressable market size of 32,000, which translates to $2 billion in annual sales.
Another promising candidate is VX-548, which is an acute pain treatment. While 90% of the prescribed drugs for this condition are generic, this still amounts to a $4 billion market in the United States alone.
Moreover, the average cost for a branded acute pain medicine is roughly $10 daily. That means any highly effective drug has the potential to generate several billion dollars in sales.
Regardless of how some of its candidates turned out, Vertex remains a company with a healthy and promising growth profile.
Hence, it’s not much of a stretch to argue that its current stock valuation looks attractive, especially for long-term investors.
Mad Hedge Biotech and Healthcare Letter
December 21, 2021
Fiat Lux
Featured Trade:
(A BREAKOUT BIOTECH WITH A STRONG STAYING POWER)
(MRNA), (PFE), (BNTX), (MRK), (AZN), (VRTX), (CRSP), (GILD)
The biotechnology and healthcare sector has been ruthlessly hammered in 2021.
In fact, the largest exchange-traded funds that keep track of the biotechnology industry have been in the negative in the past months.
However, the string of bad news doesn’t automatically mean that none of the biotechs can deliver strong returns in the coming days.
An excellent example of a biotech that’s an exception to the general theme of the sector these days is none other than the famous Moderna (MRNA).
Moderna stock has already delivered a 434% gain in 2020. Meanwhile, it has so far recorded a 160% rise this year—a number that’s expected to go higher before 2021 ends.
These gains came after the biotech became one of the market leaders in the COVID-19 vaccine race, alongside Pfizer (PFE) and BioNTech (BNTX).
Considering how COVID-19 catapulted the stock to dizzying heights, some investors fear that Moderna’s performance will decline in a post-pandemic setting.
That’s not necessarily the case.
Viruses present complex problems. Right now, we’re dealing with yet another coronavirus variant, Omicron.
This latest strain appears to be more contagious than the previously discovered Delta variant, which was then reported to be more virulent than the original.
What’s the takeaway here?
COVID-19 isn’t going to disappear anytime soon. Since the vaccines and boosters seem to wane gradually, these are expected to become staples moving forward.
This means everyone will need ongoing protection, which translates to ongoing sales for vaccines and boosters for companies like Moderna.
Moreover, the continuous demand for new and more potent vaccines makes it a no-brainer that Moderna will once again deliver market-crushing performances in the next few years.
For context, the company estimates that Spikevax, its COVID-19 vaccine, will rake in roughly $15 billion to $18 billion in sales in 2021.
Orders for 2022 have been secured as well, with Moderna already locked in for over $22 billion worth of Spikevax doses through advance purchase deals.
This is still expected to rise, considering the vaccines under development for the new variants getting discovered.
But even when the panic and anxiety over the viruses subside, we can still reasonably expect roughly $15 billion in annual sales from Spikevax
After all, the vaccine and boosters are expected to become the norm eventually.
Believe it or not, though, the best reason to buy Moderna isn’t its coronavirus vaccine.
Outside Spikevax, Moderna has a long list of promising pipeline candidates under development—the majority of which are based on the mRNA technology that’s behind its potent COVID vaccine.
While that does not guarantee that all the candidates will gain approval, the fact that the technology has been proven to work on humans presents a bright future for these candidates.
The company has been actively advancing its programs using its cash on hand, with over half a dozen queued in Phase 2 trials.
A potential blockbuster is its cytomegalovirus (CMV) vaccine candidate.
CMV, a virus that can be deadly to unborn babies and individuals with compromised immune systems, currently has no vaccine.
This represents an untapped market with high demand. Conservatively speaking, Moderna can generate roughly $2 billion to $5 billion in peak sales for this vaccine if it gains regulatory approval.
Other impressive programs in the biotech’s pipeline are its HIV vaccine candidate and a personalized cancer vaccine, which Moderna has been developing with Merck (MRK).
Needless to say, both hold the potential to become game-changers not only for Moderna but also for the entire industry.
Aside from its personalized cancer vaccine, another relatively advanced program in its pipeline is its work with AstraZeneca (AZN) on the AZD8601 program.
The AZD8601 program aims to use mRNA therapies to encode for vascular endothelial growth factor-A in people who are supposed to go through a coronary artery bypass grafting.
In layman’s terms, AstraZeneca and Moderna want to develop a treatment that induces the heart blood vessels of heart bypass surgery patients to repair themselves.
However, the most exciting collaboration is Moderna’s work with Vertex (VRTX) to develop a cystic fibrosis (CF) treatment.
Considering that Vertex is practically a monopoly in the CF space, this can turn out to be a lucrative direction for Moderna as well.
In terms of competition, the biotech might go head-to-head against Vertex’s other partner, CRISPR Therapeutics (CRSP).
Until two years ago, Moderna was an obscure biotechnology company with no product out on the market.
Today, it is hailed as one of the biggest biotechs worldwide thanks to its market capitalization of roughly $120 billion, surpassing long-established names in the sectors like Gilead Sciences (GILD) and even Vertex.
Some investors point out that Moderna’s breakneck rise to the top might also mean a steady descent.
While I agree that its climb was faster than the usual biotech, I still believe that Moderna possesses the right tools to sustain its momentum for the years to come.
Mad Hedge Biotech and Healthcare Letter
December 16, 2021
Fiat Lux
Featured Trade:
(TIME TO LOOK AT ONE OF THE LEAST FAVORED BIOTECHS)
(AMGN), (RHHBY), (PFE), (MRK), (GSK), (JNJ), (AZN)
Value investing shouldn’t be an ordeal. It definitely doesn’t have to entail scouring for a needle in a haystack. The truth is, several quality discount stocks are hiding in plain sight. Unfortunately, these have fallen out of favor with investors recently.
While the market has performed quite well in 2021, the technology sector served as the primary driving force behind this positive performance.
In comparison, the healthcare sector has been besieged with negative updates throughout the year. This resulted in a number of excellent biotech healthcare names getting undervalued, and one of them is Amgen (AMGN).
Amgen is widely known as one of the biotechnology and pharmaceutical sector pioneers, alongside Genentech, which has since been acquired by Roche (RHHBY). The company focuses on specialty biologics in the fields of blood disorders, cancer, and immunology.
To date, Amgen has a market capitalization of $119 billion and has generated $25.8 billion in revenue in the past 12 months.
This biotechnology company also holds a relatively solid and steady track record of growth, having grown its revenue by roughly 65% in the past 10 years.
Amgen has also virtually not experienced any significant dip in its sales over the same period—an impressive feat considering the slowly crowding and often tumultuous biotech space.
Looking at its EBITDA margin, or earnings before interest, taxes, depreciation, and amortization, Amgen also emerges as a superior stock compared to others in the industry.
In the past five years, Amgen’s EBITDA margin has consistently been within the 50% range. This is higher than its peers, such as Pfizer (PFE), Merck (MRK), GlaxoSmithKline (GSK), and Johnson & Johnson (JNJ), which only reached 30%, while Sanofi (SNY) recorded roughly 20%.
In addition, Amgen declared a dividend worth $1.76 per share each quarter in October. This represents a 10% jump year over year.
Then, the company opened in December with another dividend increase to reach $1.94 per share by the first quarter of 2022, showing off a 10.2% increase year-over-year.
Since 2011, Amgen has been consistent in increasing its dividend payout annually—a guarantee of the company’s robust and stable business performance.
Moreover, Amgen’s dividend yield is higher than other industry leaders as well. At present, the company offers a 3.5% dividend yield. In comparison, Pfizer gives out 2.9%, while JNJ offers 2.7%.
To sustain its momentum, Amgen has been busy bolstering its pipeline.
Thus far, the company has 58 programs under development. Of these, there are 34 queued in Phase2/3 clinical trials, while there are others submitted for regulatory approval.
One of the promising programs is its collaboration with JNJ, which combines Amgen’s Kyprolis and the latter’s Darzalex Faspro.
Just this December, the US FDA approved this combination treatment for patients suffering from multiple myeloma, a rare type of blood cancer.
In terms of profitability, Kyprolis generated $1.065 billion, and Darzalex Faspro raked in $4.19 billion in sales in 2020.
The high revenues recorded for these drugs last year are indicative of the strong demand from the healthcare industry.
This means that the approval of the combination treatment could lead to a more lucrative payout for both companies moving forward.
Another promising program for Amgen is Tezepelumab, which is a severe asthma therapy it developed with AstraZeneca (AZN).
In July, this treatment was approved for Priority Review by the US FDA. The two companies expect to submit Tezepelumab for approval to the US FDA by the first quarter of 2022.
Meanwhile, Amgen is also working on its first RNA-based treatment, called Olpasiran or AMG 890. This project is for myocardial infarction patients and will work the same way as gene therapies.
Basically, its goal is to target the relevant gene to prevent any damage. Looking at its timeline, Amgen expects Phase 2 results within 6 months.
If this RNA-based project succeeds, Amgen plans to expand its portfolio to include more than 25 first-in-class therapies and three more biosimilars based on this technology.
Doing so will equip the company with a steady revenue runway while also reinforcing its position as one of the top biotechnology companies in the world.
Overall, Amgen looks extremely undervalued these days, making it attractive given how profitable this biotech is and its prospects moving forward.
Mad Hedge Biotech and Healthcare Letter
December 14, 2021
Fiat Lux
Featured Trade:
(FROM AN UNKNOWN mRNA PIONEER TO BIG PHARMA PLAYER)
(BNTX), (PFE), (MRNA), (AZN), (JNJ), (SNY), (CVAC), (REGN), (MRK), (BMY)
Almost everything that could go right has gone right for BioNTech so far.
Its COVID-19 vaccine with Pfizer (PFE), Comirnaty, has been breaking records left and right, and more and more approvals in other countries are piling up.
Needless to say, BioNTech has transformed into one of the most profitable biotechnology companies with a rapidly growing cash stockpile.
Now, the company is up for another challenge: the Omicron variant.
Although BioNTech and even Moderna (MRNA) insist that they offer more than COVID vaccines, the reality is that their pipelines still have not reached the stage where they can generate as much revenue.
Hence, it is no surprise that their share prices have climbed since discovering the Omicron strain.
The emergence of this new mutation sparked another competition among COVID-19 vaccine developers, specifically in the mRNA segment dominated by BioNTech and Moderna.
Since news broke about the Omicron variant, these companies have been racing to come up with the most effective vaccine against it.
BioNTech holds a competitive advantage between the two since the company reportedly has been working with Pfizer on a vaccine candidate for this type of situation months before the discovery.
In comparison, Moderna has yet to determine where their candidate stands in terms of fighting off the new variant.
The same can be said about other vaccine developers like AstraZeneca (AZN) and Johnson & Johnson (JNJ).
What happens to their efforts if the Omicron variant turns out to be less dangerous and possibly closer to the common flu?
In this case, the vaccine developers would most likely boost the prices of their products 10-fold because then they’d end up with fewer orders to private customers instead of sealing agreements with governments.
The flu vaccine market is worth roughly $8 billion annually, while the COVID vaccination market is projected to bring in approximately $25 billion each year in the post-pandemic period.
Either way, this situation could offer speculative investors a solid stream of price catalysts.
The uncertainty will result in a higher valuation for BioNTech in the short term because the company has already proven its ability to deliver an effective vaccine within a short period.
Prior to its COVID work, BioNTech was actually known as one of the “Big 3” and a pioneer in the mRNA world. At that time, it shared this title with Moderna and CureVac (CVAC).
Since then, the segment has grown, and new challengers have joined the mRNA industry.
Some of the promising ones include China’s Abogen Biosciences, which managed to raise over $700 million in funding for its own mRNA COVID vaccine, and of course, Sanofi (SNY), which splurged in a $3.2 billion acquisition of Translate Bio to access the latter’s mRNA pipeline for cystic fibrosis and several genetic conditions.
Meanwhile, BioNTech has retained its focus on cancer, with 16 of the 18 programs targeting oncology in its Phase 1 pipeline.
If BioNTech successfully develops an mRNA treatment for cancer, they’ll be breaking into a massive and lucrative market.
By 2024, the market for cancer treatments is projected to grow and reach over $200 billion.
Apart from its work on oncology therapies, BioNTech is also known for its infectious disease pipeline, including vaccines for HIV, malaria, and tuberculosis. It’s also collaborating with Pfizer on 2 influenza vaccines.
By the end of 2021, BioNTech is anticipated to release 5 updates on its vaccine trials involving solid tumors that target head and neck cancer, melanoma, and colorectal cancer.
Other than Pfizer, the company has been working with Regeneron (REGN), Genentech, Merck (MRK), Bristol Myers Squibb (BMY), and Sanofi.
In terms of performance so far, BioNTech has raked in $15.2 billion in revenues for the first three quarters of 2021, with full-year earnings expected to reach $18.1 to $19.2 billion.
Overall, I view BioNTech as a long-term investment.
While many still see it as a pure COVID play, this German company is increasingly starting to act more and more like the Big Pharma organizations.
It’s realistically expecting that its profit-generating asset, Comirnaty, may not have a very long shelf life. Therefore, it understands the necessity to come up with new products to sustain its current valuation over the longer term.
Mad Hedge Biotech and Healthcare Letter
December 9, 2021
Fiat Lux
Featured Trade:
(A WELL-BALANCED STOCK FOR YOUR RETIREMENT PORTFOLIO)
(ABBV)
Have you ever heard of the barbell investment strategy?
If you have already started planning for retirement, you’ve probably been told to assess your risk tolerance level and develop a portfolio that fits that profile.
While there are many things you need to learn about this topic, one of the recurring concepts is that regardless of your risk level, you will always need to build two portfolios.
One portfolio comprises the risks below your risk level, and the other goes beyond it: the barbell model.
Basically, the more conservative portfolio will form part of your short-term survival goals, while the more aggressive one will be reserved for long-term growth.
This barbell strategy gained prominence thanks to Nassim Nicholas Taleb, a renowned statistician, essayist, and trader.
He famously adhered to this tactic during the 2007-2008 economic meltdown, allowing his finances to flourish while his fellow Wall Streeters watched their investments crash.
Taking this approach into consideration, one of the names in the biotechnology and healthcare industry emerges as an embodiment of the investment that meets the requirements of both ends of the barbell: AbbVie (ABBV).
Recently, AbbVie announced a healthy 8.5% boost in its quarterly cash dividend from $1.30 per share to $1.41, which will be payable in February 2022.
This latest increase has pushed its dividend yield to roughly 4.9% under its current price.
Needless to say, this type of dividend yield makes AbbVie an excellent candidate to deliver short-term growth.
Moreover, this isn’t a one-time achievement for the company. The company has a proven track record of returning cash to its shareholders via a growing dividend.
In fact, the company’s quarterly dividend has climbed by over 250% since its inception way back in 2013.
This achievement has secured AbbVie a membership in the S&P Dividend Aristocrats Index, which keeps track of companies that have consistently increased their dividends annually for at least 25 consecutive years.
AbbVie also has outstanding growth prospects primarily due to the solid secular support backing its business and robust pipeline.
Since the biotechnology and healthcare segment targets an essential human need that is showing no signs of disappearing or even changing soon, ordinary investors and super investors have been lured to this sector.
A case in point is Warren Buffett, who currently holds over $1.5 billion worth of AbbVie shares.
And the demand is only going to get stronger moving forward, due to various factors like population growth and extended life expectancy, translating to long-term secular support.
Actually, the average national health spending in the US alone is estimated to grow at an annual rate of 5.4%—far surpassing inflation. By 2028, the spending is projected to reach $6.2 trillion.
Riding the momentum of this industry, AbbVie has been busy working on its pipeline.
To date, the company has roughly 100 candidates in its pipeline, with 29 in the later stage of drug development.
Among them, the most talked about are plaque psoriasis treatments Skyrizi and Rinvoq.
These two are expected to become the long-term substitutes or replacements for AbbVie’s top-selling drug, Humira, which would lose its patent exclusivity by 2023.
Skyrizi showed off an 83.3% year-over-year increase and generated $796 million in the third quarter.
Meanwhile, Rinvoq sales doubled to reach $453 million. Together, their sales totaled $1.2 billion.
For context, Humira sales in the same quarter reached $5.4 billion. So while the two have yet to reach the level of Humira in terms of sales, it looks like they’re off to a promising start.
In the next few years, Skyrizi and Rinvoq sales will reach $15 billion.
Other products are also helping fill the void of Humira’s pending loss.
Aside from creating successors of Humira, AbbVie also leveraged its cash flow to acquire Allergan in May 2020 for $63 billion.
This deal handed the company a number of exciting products, and the most promising is the Botox franchise. Considering that it would be difficult, if not impossible, to develop a biosimilar for Botox, this was a great decision.
In the third-quarter report, AbbVie disclosed that Botox Cosmetics rose by 38.5% year-over-year to bring in $545 million. Meanwhile, Botox Therapeutics rose by 23.4% year-over-year to generate $645 million.
Interestingly, while AbbVie’s fundamentals look solid, this particular stock appears to be heavily discounted by the market. The main reason could be the concerns over the pending patent loss of Humira.
However, AbbVie is a picture of an optimal combination of excellent short-term income, solid and proven financial safety, and long-term secular support.
Moreover, given AbbVie’s history, ability to generate cash and consistent payout, it’s reasonable to categorize this company as safe as the coupon payments taken from treasury bonds.
