Biotech Letter - John Thomas - Mad Hedge Fund Trader

A Long-Term Stock for Monopoly Aficionados

Investors have a myriad of biotechnology stocks to choose from. However, most of these options are still in the developmental stage for their first blockbuster product that can hit at least $1 billion in sales annually.

Then, there are biotechnology companies like Vertex Pharmaceuticals (VRTX).

Vertex has a storied history of launching blockbuster names in the market for rare and hard-to-treat diseases.

Among the products in its portfolio, what stands out is Vertex’s work on cystic fibrosis (CF) treatments.

CF is an incurable genetic condition that can damage the lungs and the pancreas. So far, Vertex has four CF treatments available and holds 97% of the market share worldwide, valued at roughly $6.36 billion in 2020.

The company’s latest CF treatment, Trikafta, is already projected to generate roughly $5 billion in sales after only less than 2 years since its release.

Thus far, Vertex has reported an annualized sales run rate of $7.2 billion in its second-quarter earnings report for 2021. This number is expected to climb higher as the company increases its penetration rate in the CF market in the coming years.

Given its history and trajectory, Vertex is projected to generate $10 billion to $10.5 billion in sales for its CF franchise by 2024.

Considering the lucrative CF market’s potential, it no longer comes as a surprise that more and more competitors are entering the space. However, none can even be considered as a close second to Vertex.

AbbVie (ABBV) partnered with Galapagos (GLPG) to come up with a combination CF treatment a few years back, only to get stalled in Phase 2 trials.

It remains to be seen if AbbVie, which eventually acquired the entire CF line from Galapagos, will be able to develop a drug worthy of challenging Vertex’s dominance in the arena.

The driving force behind Vertex’s success is its operating model, which works overtime to exhaust all resources to protect its CF revenue.

Throughout the years, the company has been consistent in its efforts to keep developing innovative CF treatments and expanding its coverage to include more mutations.

In turn, these new drugs all but guarantee that Vertex enjoys a stable and secure cash flow for years.

For example, the IP protection for Trikafta will reach up to the late 2030s. If innovations on the drug are discovered, then this can very well extend into the 2040s.

Despite the overwhelming success of its CF franchise, Vertex knows not to rest all its eggs in one basket.

The company has been working on expanding its expertise. A telltale sign of this decision is its burgeoning partnership with CRISPR Therapeutics (CRSP).

So far, the two have created a promising gene-editing treatment, CTX001, which targets rare blood diseases and sickle cell disease.

Looking at their timeline, the therapy could be ready for regulatory review by 2023.

Other than CTX001, Vertex and CRISPR have been developing several mRNA-based treatments currently under Phase 2 trials.

Among them, the therapies generating the most excitement are the ones targeting pain and rare kidney diseases.

For acute pain treatments alone, the US market is already worth $4 billion. To this day, the non-opioid medication market remains an extremely attractive space.

Needless to say, a product offering an approved safety profile and high efficacy could easily grab the multi-billion sales potential.

Meanwhile, riding on the momentum of its mRNA programs, Vertex also partnered with Moderna (MRNA) to develop more therapies for rare and hard-to-treat diseases.

While its collaboration with Moderna has yet to reveal its prime candidates, there’s a strong possibility that one of them would be a gene therapy for CF.

CTX001’s addressable market is highly lucrative and still exclusive to hyper-specialized companies.

This top-priced orphan gene-editing treatment could rake in annual sales within the range of $3 billion and $4.5 billion. This estimate covers roughly 3,000 to 4,500 patients every year, with average individual spending of $1 million.

Although this price might sound too steep, keep in mind that CTX001 treats lifelong incurable diseases. Typically, patients spend an average of $200, 000 annually.

If successful, this treatment from Vertex and CRISPR could provide a one-and-done answer to the suffering of these patients, justifying the steep price tag.

Overall, I see Vertex as a stock selling a pretty reasonable price.

Considering its relatively young pipeline, though, this should be seen as a long-term investment—one that has been tested and proven to be successful at targeting multi-billion-dollar markets.

November 2, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 2, 2021
Fiat Lux

Featured Trade:

(IS THIS THE BEST BUY AMONG THE VACCINE STOCKS)
(NVAX), (MRNA), (PFE), (BNTX), (SNY), (JNJ)

Is This the Best Buy Among the Vaccine Stocks?

Biotech Letter

Many investors have amassed a fortune since the pandemic started in the early months of 2020 by betting on COVID-19 vaccine candidates. Moderna (MRNA), for example, has skyrocketed to over 1,500% since last year.

However, there was an even bigger winner: Novavax (NVAX).

Novavax shares actually rose by a jaw-dropping 4,000% since the COVID-19 pandemic began, with the company’s wild rollercoaster ride still not reaching its end anytime soon.

In fact, Novavax has been quite volatile in 2021, rising by more than 180% in early February only to have most of those gains practically wiped out a mere three months after.

Then, the stock managed to show off a strong rebound over the following months. Since early September, though, Novavax’s share price has fallen by over 35%.

While these can be discouraging for some investors, I think that the befuddling gyrations that had us reeling in the past months tell a different story: We might have just discovered the biggest bargain among the leading COVID-19 vaccine stocks in the market today.

There are two possible reasons for the Novavax selloff recently.

The first is the company’s delayed filing of its own COVID-19 vaccine candidate, NVX-CoV2373. This is particularly frustrating considering that Novavax has failed to meet its deadlines multiple times now.

Nonetheless, I prefer to look at these delays as mere speed bumps than actual roadblocks that hinder the company from achieving its goal.

After all, the issue is not on the vaccine’s safety and efficacy—the results have been proven to be highly compelling—but on manufacturing concerns, which can eventually be resolved.

The second reason is the recent update from Merck (MRK) and its partner, Ridgeback Biotherapeutics, on their COVID-19 pill. Of the two, I find this reason to be an overreaction by the market.

None of the vaccine developers should ever be negatively affected by Merck’s oral treatment. While some people might choose not to get the vaccine if and when the pills become available, practically all governments worldwide are still committed to vaccinating their citizens.

Moreover, the COVID-19 vaccines will probably be necessary every year.

When Novavax gets the required authorizations, the company is set to generate a boatload of cash. The biotechnology company is anticipating to supply up to 200 million doses in the European Union alone.

The entire COVID-10 vaccine market is projected to be worth $115 billion by the end of 2021. Moderna is estimated to deliver up to 3 billion doses, while Novavax is expected to produce up to 2 billion doses by 2022.

The rest of the anticipated 14 billion doses will be divided among the other vaccine makers.

Among them, though, Novavax is expected to be the stand-out.

For one, its vaccine candidate appears to be the most robust and affordable at $16 per dose compared to Moderna’s $25.50 and Pfizer-BioNTech’s $22.80.

The growing number of reports on the side effects of mRNA vaccines, which are said to be of a higher rate than Johnson & Johnson’s (JNJ) candidate, can also be a turnoff for many people.

Since Novavax uses a more traditional and familiar vaccine technology—the same one used for the flu, HPV, and Hepatitis B—it causes lower side effects rates.

More importantly, these are mild symptoms like muscle pain and fatigue compared to the heart inflammation concerns raised among those jabbed with Moderna or Pfizer vaccines.

While the side effects from the other two occur in relatively small populations, Novavax is anticipated to be perceived as the more reassuring option, especially for people who are still uneasy with the new technology of mRNA vaccines.

More importantly, Novavax can offer a solution to the global problem of vaccine hesitancy for COVID-19.

To offer a context on how important this is, 48% of Russians and 27% of Americans refuse to take the vaccines.

As of September, only 181.2 million individuals in the US, or 55.1% of the country’s population, have agreed to be fully vaccinated. Needless to say, overcoming this hesitancy would be a massive relief for everyone.

Apart from its COVID-19 vaccine, Novavax has also been working on an influenza vaccine candidate, NanoFlu.

Recently, results from the NanoFlu clinical trials showed that it’s way more effective than the leading brand today, Sanofi’s (SNY) Fluzone Quadrivalent.

If NanoFlu gains approval, this will be another huge growth driver for Novavax.

To put it in perspective, Sanofi’s Fluzone generated $2.9 billion in sales in 2020—a market that Novavax can also tap into and might even dominate.

Meanwhile, the flu vaccine market in the US alone continues to expand.

From 2020 to 2021, the number of flu vaccines administered rose by 11% year over year to reach 193.8 million doses. That’s roughly 59% of the US population—a country that’s only 7th place in terms of the global rates of flu vaccination.

That signifies a colossal market opportunity worldwide for Novavax to capitalize.

At this point, Novavax has yet to secure any approval or official authorization for NVX-CoV2373 or NanoFlu—and that’s the best reason to add this stock to your portfolio.

Investors are given a chance to seize shares of the stock while it’s still in the stage where its most lucrative catalysts are just lurking around the corner.

October 28, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 28, 2021
Fiat Lux

Featured Trade:

(AN ANYTIME, ANYWHERE HEALTHCARE STOCK)
(TDOC), (AMZN), (AMWL), (WMT), (HIM)

An Anytime, Anywhere Healthcare Stock

Biotech Letter

Following massive gains at the onset of the COVID-19 pandemic, several healthcare growth stocks have fallen a long way from their highs.

In fact, some high-quality names have become potential bargains due to the market's recent negative turn.

In this situation, we can apply Warren Buffett’s advice: "We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful."

That is, I think it might just be the time to be a bit greedy.

One of the companies affected by the massive pullback is Teladoc (TDOC).

Over the past 1.5 years, Teladoc has been on a rollercoaster ride when it comes to its price action.

Initially, the stock was regarded as merely a COVID-19 pandemic play with limited growth in the future.

Because of that perception, Teladoc's price started to drop the moment the people got their vaccine shots.

Some investors believe that when things go back to normal, the whole telehealth industry will become pointless.

I don't think that's the case.

I believe that digital medicine and the presence of virtual health services will become mainstays in our lives—and Teladoc is in an enviable position as one of the pioneers in this disruptive industry that's only starting to take on the healthcare system by storm.

When the pandemic started, it was nearly impossible for most people to gain access to healthcare.

Most patients were scared to travel to the doctor for consultations, causing them to cancel and postpone appointments.

What Teladoc offered is to turn the impossible possible for several patients who needed access to their healthcare providers—and its efforts were rewarded in spades.

In 2019, Teladoc reported $553 million in total revenue, increasing by 32% from its 2018 earnings.

By 2020, the business exploded to reach a whopping $1.09 billion, showing a massive 98% growth year-over-year. Moreover, visits and consultations skyrocketed by 206%.

To hold on to its lead, Teladoc has been working hard to bolster its competitive positioning. It seized a blockbuster acquisition and bought Livongo for $18.5 billion in cash and stock.

Adding Livongo to its portfolio means cornering the market on remote monitoring for patients suffering from chronic diseases.

This addition to its business not only expands Teladoc's business, but also opens a massive addressable market worth $50 billion to the company.

Teladoc can leverage this vast network through cross-selling products and services, thereby creating the Amazon (AMZN) of the healthcare world—a platform with an unbeatable ecosystem and an irresistible value proposition.

Since the merger, the two companies have developed a full-person digital healthcare platform called Primary360.

Meanwhile, Teladoc's growth story carries on, with the total revenue for 2021 already approaching the $2 billion mark.

This signifies an impressive 84% increase on top of the company's COVID-19-induced spurt.

As for 2022, Teladoc is projected to grow at a conservative 29%.

Despite the impressive growth of Teladoc, the company has barely scraped the surface.

Overall, the virtual care market is estimated to be worth $250 billion annually. Although Teladoc holds the most significant share thus far, it's evident that it has less than 1% of the market share.

In fact, the telemedicine industry is projected to be valued at half a trillion dollars globally by 2030.

Considering that Teladoc's yearly revenue thus far is sitting at only $2 billion, the company definitely has a lucrative growth runway in the coming 9 years.

In 2020, its stock price roughly tripled from being under $100 to reaching $300. Recently, though, Teladoc's price has gone down to approximately $130.

Given its obvious room for growth, I say this stock is undervalued. So, investors are granted the chance to add this company to their portfolio at a relatively low price.

With the massive market potential of this industry, it comes as no surprise that Teladoc now faces intense competition in the field.

The strongest rivals of the company in the telehealth segment include Amwell (AMWL), Walmart (WMT), Hims and Hers Health (HIM), and even Amazon.

With the market's sheer size, though, the situation doesn't seem to be a winner-takes-all type.

The space is definitely massive enough to support more than one telehealth company.

However, Teladoc does have the advantage as the first mover. It also has its impeccable partnership with Livongo, making it an anytime-anywhere-healthcare service.

So far, I can say that Teladoc is off to an excellent start in a rapid growth segment. I especially appreciate the company's goal to disrupt the medicine and healthcare space—a field that is in dire need of a revolution to eliminate the debilitating costs and crippling inefficiencies.

More than that, I think Teladoc is becoming instrumental in boosting the reach of the most effective medical professionals and offering a remarkable platform to promote artificial intelligence innovation in healthcare.

Ultimately, this will help enhance the quality of healthcare received by patients.

When looking at disruptive technologies, I always say that it's best to invest in companies working to shape the future.

This goal is typically a surefire way to make money in the long run, and Teladoc perfectly suits the description.

October 26, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 26, 2021
Fiat Lux

Featured Trade:

(A BEATEN-DOWN STOCK POISED FOR A BREAKTHROUGH)
(ABBV), (ABT), (REGN), (PFE)

A Beaten-Down Stock Poised for a Breakthrough

Biotech Letter

The market's volatility has made it difficult to find high-quality stocks at reasonable prices as of late.

Despite challenges, the key to investing is never to stray from quality.

In the words of no less than Warren Buffett, “It is better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

This reminds me of one of the stocks I constantly add on pullbacks: AbbVie (ABBV).

AbbVie, which is a spinoff company from Abbott Laboratories (ABT), started trading in 2013. Since then, its name has been synonymous with its rheumatoid arthritis drug Humira—the No. 1 selling drug globally in the past years.

While AbbVie understandably relied heavily on this product for years, with 65% of its revenue coming from Humira sales in 2018, the company has already aggressively implemented ways to diversify its portfolio to prepare for the impending patent loss.

Among its efforts, one of the most exciting ones is its work with biotechnology company Regenxbio (RGNX).

AbbVie and Regenxbio have been collaborating to develop gene therapies that can treat rare eye disorders.

Basically, gene therapy is a novel approach to deal with diseases by genetically altering a patient's cells instead of the traditional method involving surgery or drugs.

AbbVie’s deal with the smaller company comprises a $370 million upfront payment to Regenxbio, with up to $1.38 billion in developmental and commercial milestones.

So far, the two have come up with RGX-314, a gene therapy candidate in Phase 2 trial for wet age-related macular degeneration (AMD).

This condition includes symptoms like blurred vision and a blind spot.

Patients can also suffer from a complication triggered by diabetes, called diabetic retinopathy, which results in damages to the retina’s blood vessels. Some cases may even lead to blindness.

In terms of the target market, the US alone has recorded over 11 million individuals suffering from some form of AMD, with the number projected to double and reach 22 million by 2050.

There’s also an urgent need for treatments for this condition, as more and more AMD cases lead to blindness annually.

In fact, diabetic retinopathy has been identified as the leading cause of blindness among adults with diabetes and the No. 1 cause of blindness among all adults in the US.

Considering the pervasiveness of diabetes and the continuously rising number of cases of this disease in the US, the number of people affected with diabetic retinopathy is estimated to virtually double from 7.7 million recorded in 2010 to over 14.6 million by 2050.

Assuming that RGX-314 gains FDA approval, AbbVie and its partner can target a market that can generate sales reaching $8.7 billion by 2025 due to the aging global population.

Meanwhile, the diabetic retinopathy segment, which has had an annualized growth rate of 6.3% since 2017, can reach up to $10.1 billion by 2025.

Given the massive addressable market, it is no surprise that the AMD segment has also attracted competitors. One of the contenders is Regeneron (REGN) with Eylea.

What makes RGX-314 more attractive, however, is that it’s a one-time treatment.

This is a massive competitive advantage over Eylea, which requires administration every four to eight weeks.

Using a conservative estimate, we can safely assume that AbbVie could take at least 8% of the market share by 2030. This would work out to roughly $2.1 billion in yearly revenue for RGX-314.

This is just one of the candidates that Regenxbio and AbbVie are working on these days, and its potential is enough to move the needle.

Other than that, AbbVie has the product portfolio from its $63 billion acquisition of Allergen, which includes the best-selling Botox.

The company also has its own homegrown drugs, cancer treatment Imbruvica, rheumatoid arthritis drug Rinvoq, and psoriasis medication Skyrizi, which all deliver strong results every quarter.

To date, they have a dividend yield of 4.7%, and the company has boosted its dividend for an impressive 8 consecutive years now.

Recently, AbbVie stock has been clobbered because Rinvoq was included in the list of drugs that the FDA instructed to carry a warning label that announced severe side effects, such as blood clots and even death.

However, AbbVie isn’t too worried about this as the company explained that the FDA based the decision on another company’s product, Pfizer’s (PFE) Xeljanz, which holds a completely different safety profile as Rinvoq.

So, what do all these mean?

This means that investors are handed a rare opportunity to buy into a solid, cash-generating biopharmaceutical titan at a massive discount.

October 21, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 21, 2021
Fiat Lux

Featured Trade:

(A DIVIDEND ARISTOCRAT THAT DELIVERS LIKE CLOCKWORK)
(JNJ), (PFE), (MRNA), (BNTX), (NVS), (RHHBY), (MGTX)

A Dividend Aristocrat That Delivers Like Clockwork

Biotech Letter

There have been two narratives as far as COVID-19 vaccine developers go. One story centers on companies with fortunes essentially built and exploding thanks to their COVID-19 vaccines, like Moderna (MRNA), Novavax (NVAX), and BioNTech (BNTX).

The second story involves larger biopharmaceutical companies, such as Johnson & Johnson (JNJ) and BioNTech’s partner, Pfizer (PFE), which barely felt their shares move in the past 18 months.

While it’s easy to understand the excitement over the achievements of the likes of Moderna, is it reasonable for Pfizer and JNJ investors to feel bad over the lack of movement in their shares?

Not at all, especially in the case of JNJ.

After all, these huge companies have decided to sell their vaccines on a not-for-profit basis until the major wave of the pandemic ends—a move that can be seen as a sound strategy for JNJ to rebuild some goodwill especially following the recent scandals involving the company.

Nevertheless, JNJ might still get a boost (pun intended) from its COVID-19 vaccine booster shots.

Just last week, a prominent advisory committee to the US FDA unanimously voted to recommend the booster shots, which likely means that the 15 million people who got jabbed with JNJ’s candidate will get a second shot as well.

If the FDA agrees with this recommendation, then the boosters could be available within the month. This comes after the agency also approved booster shots from Pfizer-BioNTech and Moderna.

Last month, the US government decided to provide Pfizer booster shots to the older population and high-risk groups, with Moderna following suit almost immediately.

So far, there have been 8 million people who have already received their Pfizer booster doses, while 1.6 million got the third dose for Moderna.

This is another lucrative market for vaccine makers, considering that to date, there are over 104 million people vaccinated with Pfizer, roughly 69 million with Moderna, and approximately 15 million with JNJ.

Amid the talks about the boosters, JNJ stands firm that its vaccine’s potency increases over time and doesn’t wane, unlike Pfizer’s candidate. This means there’s no urgency for a booster shot when it comes to JNJ’s candidate.

Nevertheless, considering that JNJ isn’t exactly attempting to earn from its COVID-19 vaccine aggressively, there’s no point in investors worrying about this issue too much.

The fundamental aspects that will impact the stock price can be found elsewhere.

One of the more exciting projects of JNJ lately is its move to become more active in the gene-editing field.

Following the buzz from the multi-billion dollar acquisitions of companies like Novartis (NVS) and Roche (RHHBY) several years ago, it looks like JNJ might be the next big name to enter the fray.

Since 2018, JNJ has been working closely with a small-cap gene-therapy company called MeiraGTx Holdings (MGTX).

While highly secretive of the details, MeiraGTX, which has a market capitalization of just below $600 million, has been developing a gene-regulation technology—an innovation that could revolutionize gene therapy.

For context, this kind of innovation was applied to Novartis’ Zolgensma, a one-time treatment for spinal muscular atrophy worth a whopping $2.1 million—the most expensive medication in the world.

In terms of MeiraGTX’s work with JNJ, the two companies are focusing on creating therapies for various eye diseases. Looking at their timeline, the first candidate should be ready by 2023.

While there remain questions about its COVID-19 vaccine candidate, their earnings are expected to reach roughly $2.5 billion or merely 2.65% of JNJ’s total revenue. This would barely make a dent in the overall performance of the company.

What comes clear in the performance reports from the company is that its core business remains the primary moneymakers.

In the second quarter of 2021, JNJ recorded $23.3 billion in sales, reporting a notable 27.1% from the $18.3 billion revenue it generated from the same quarter in 2020.

Its gross profit also climbed from $11.7 billion to $15.7 billion, showing a 33.8% improvement. As for its EPS, it skyrocketed by 72.8% year-over-year from $1.36 to $2.35.

Meanwhile, JNJ’s guidance for 2021 has been updated to reflect its expected 13.% to 14.% year-over-year increase between the range of $93.8 billion and $94.6 billion.

Its pipeline and current portfolio also all but guarantee that JNJ will deliver mid to high single-digit earnings in the years to come.

Another indicator of the stock’s quality is its dividend record, with JNJ priding itself on a 59-year streak—making it an undisputed dividend aristocrat.

Overall, I see JNJ as an impressive $433 billion behemoth in the biopharmaceutical sector. The company has been consistent in delivering remarkable top and bottom lines every quarter.

October 19, 2021

Biotech Letter

Mad Hedge Bitcoin Letter
October 19, 2021
Fiat Lux

Featured Trade:

(TRANSCENDING ITS COVID-19 VACCINE POTENTIAL)
(SNY), (PFE), (BNTX), (MRNA), (JNJ), (GSK)