Mad Hedge Biotech & Healthcare Letter
September 28, 2021
Fiat Lux
FEATURED TRADE:
(A RINSE-WASH-REPEAT PLAY FOR OPPORTUNISTIC INVESTORS)
(EXEL), (BMY), (RHHBY), (VRTX), (TDOC)
No matter the short-term consequences of events in the past months, what remains constant is the stock market’s ability to create wealth over the long term.
Each crash or correction that occurred in history was eventually offset by a strong bull market rally.
That’s why it pays to be prepared for when things start to turn around.
Today, I’d like to take a look at another name in the oncology sector that’s poised to skyrocket in the coming years: Exelixis (EXEL).
Here’s a quick overview of Exelixis.
Exelixis is a California-based biotech that’s focused on developing treatments for hard-to-treat types of cancer. To date, the company has three FDA-approved treatments in the market.
The stock has been trading within the $20 and $22 range and sports a market capitalization of roughly $7 billion.
For most of its existence, Exelixis’ growth story centers around its blockbuster therapy, called Cabometyx.
In the second quarter earnings report, Cabometyx’s sales went up 59% compared to its 2020 performance to contribute $275.6 million.
This comprised the bulk of Exelixis’ total revenue worth $385.2 million, which climbed an impressive 48.4% year over year.
Cabometyx is the leading treatment for first- and second-line treatment for advanced renal cell carcinoma (RCC) and advanced hepatocellular carcinoma.
Together, both indications could generate over $1 in annual sales for Cabometyx in 2021 and 2022.
To put things in perspective, the entire Cabometyx franchise was only worth about $742 million in 2020.
What makes Cabometyx an exciting revenue stream is its label-expansion capacity.
Apart from the two approved indications, Exelixis is also conducting six more clinical trials for this drug either as a monotherapy or a combination treatment.
So far, Cabometyx has proven to be effective as a combination therapy with Bristol-Myers Squibb’s (BMY) Opdivo. This additional approval has allowed Exelixis to seize an even bigger share of the RCC market today.
Considering the label-expansion opportunities for Cabometyx, this treatment is projected to become a multi-billion-dollar drug soon.
Given the solid performance of its products and successful collaborations, Exelixis has also become a cash cow.
The company estimates that it would conclude 2021 with roughly $1.6 billion to $1.7 billion in cash and investments—an amount that comprises over 20% of its market capitalization.
With this money, the company can comfortably pursue acquisitions and even strengthen its internal R&D engine.
However, not everything has been smooth sailing for Exelixis in the past months.
One of the major factors that pulled the stock down by a whopping 20% is the unimpressive results from its liver cancer clinical trial with Roche (RHHBY) last June.
However, I think the market overreacted to this piece of negative news.
If anything, Exelixis has already turned the situation around.
Unfazed by its unexpected flop with Roche, Exelixis is again pursuing a difficult-to-treat condition: prostate cancer.
The difference this time is that the company appears to have more confidence in the efficacy of its famed Cabometyx as a treatment for the condition—so much so that they intend to apply for FDA feedback in the high-risk group and possibly even an accelerated approval.
It also celebrated a recent win with the approval of Cabometyx’s label expansion to cover 12 years and older—an approval granted way ahead of their December 4 schedule.
Now, Cabometyx can also be prescribed to treat DTC, which is the most common kind of thyroid cancer in the United States.
More than that, Exelixis is the first to provide a standard treatment option to these patients, making the company a first mover in this segment.
Looking at the history of first movers, such as Vertex (VRTX) in the cystic fibrosis sector and Teladoc (TDOC) in the telehealth space, Exelixis could very well be on its way into becoming a functioning monopoly.
In terms of its pipeline, Exelixis has more than 100 studies going through different stages. These cover diverse indications including gastrointestinal cancers, neuroendocrine tumors, and lung cancer.
While Exelixis has a balance sheet akin to Fort Knox and a remarkable revenue growth, its shares remain range-bound in the past couple of years.
Nonetheless, it has continued to be an impressive “rinse-wash-repeat” covered call play during the same period and is considered a dividend stock with double-digit yields.
Moreover, Exelixis has been consistently ramping up revenue growth in the past years.
The biotech’s big cash balance along with its proven profitability indicate a minimal possibility of dilution.
Considering its price-to-earnings-growth ratio of almost 1, this company is the picture of an ideal balance of double-digit sales growth complemented with great value.
Simply put, it’s a great opportunity for long-term investors.
More importantly, its recent stock-price meltdown makes it an ideal addition to the portfolio of opportunistic investors.
Mad Hedge Biotech & Healthcare Letter
September 21, 2021
Fiat Lux
FEATURED TRADE:
(GO GLOBAL WITH THIS VALUE PICK)
(AMRN), (HKMPF), (RDY)
Since it bottomed out in March last year, the stock market has been relatively unstoppable.
It took the widely tracked S&P 500 roughly 17 months to practically double its value, exhibiting what could only be described as the strongest rebound from a bear-market bottom throughout history.
But it looks like things are only starting to heat up. Even with the market already hitting new all-time highs, there remain some serious values up for grabs.
One of them is a small-cap company operating in the biotechnology and healthcare sector: Amarin (AMRN).
This biotech’s claim to fame is Vascepa, which can lower the risk of major adverse cardiovascular occurrences by 25% among patients undergoing statin therapy.
Basically, Amarin discovered that controlling cholesterol with statins is not enough to prevent heart disease.
Therefore, it formulated Vascepa to do something more effective: to reduce triglycerides, which is a kind of fat found in your blood.
What makes Vascepa an amazing drug is that it offers us a new understanding of the No. 1 killer among humans.
Based on a Harvard study, Vascepa’s ability to lessen triglycerides has succeeded in reducing strokes, heart attacks, and even deaths.
Right now, Amarin stock is incredibly cheap. There are two possible reasons behind this.
One reason is the COVID-19 pandemic, which triggered lockdowns that consequently hampered sales growth.
Typically, doctors need to be informed of new scientific and medical breakthroughs in their fields. That’s obviously difficult to do amidst lockdowns.
Despite that challenge, Amarin actually still managed to boost its revenue in 2020 by 43%. Considering that the lockdowns have started to ease this year, I anticipate increasing the rate in 2021.
The second reason for the stock’s low price is Amarin’s involvement in legal battles over its patents in the past year.
This problem has opened doors for the likes of Hikma Pharmaceuticals USA Inc. (HKMPF) and Dr. Reddy’s Laboratories (RDY) to offer generic versions of Amarin’s Vascepa in the US market.
As expected, this cast a cloud over the biotech’s growth story and pushed its share price down.
Although Amarin is caught in a tug-of-war between believers and naysayers, I still expect sales of Vascepa to spike in the future.
Regardless of the generic competition in the US, Amarin has retained 89% of the market share in this segment.
Moreover, Amarin’s patents outside the US remain intact. In fact, the European Commission has allowed the company to market the drug in the region.
Amarin’s patent on Vascepa has been extremely well protected in Europe for roughly two decades.
In fact, the company will be launching this blockbuster drug as Vazkepa in Germany and the UK this year—a strong contender as one of the company’s main revenue streams, with 80 million people diagnosed with cardiovascular disease in these regions.
For context, Vazkepa is expected to be sold for $250 in Europe compared to the lower $88 price point in the US, resulting from generic erosion.
Probably stemming from this issue, Amarin has modified its business model to focus more on global expansion.
One area of expansion is in Asia, specifically in China.
What we know so far is that Amarin and its Chinese partner are expected to receive regulatory approval by the end of 2021. When this happens, Vazkepa can then be marketed in mainland China and Hong Kong through commercial partners.
Apart from Europe and Asia, Amarin has also been expanding in other regions, including Canada, the UAE, and Lebanon.
Considering that the market for cardiovascular drugs is projected to reach roughly $92.4 billion this year, it’s not farfetched to say that Vascepa holds a multi-billion-dollar market opportunity.
In short, Amarin holds an approved drug proven to save lives, a massive market opportunity, and a solid competitive moat.
With a market capitalization of a little over $2 billion and priced at roughly $5 per share, Amarin is projected to reach at least $19 in the following months.
That’s a 280% upside awaiting patient investors.
Mad Hedge Biotech & Healthcare Letter
September 16, 2021
Fiat Lux
FEATURED TRADE:
(RIDING THE COVID-19 VACCINE MOMENTUM)
(PFE), (BNTX), (MRNA), (JNJ), (SNY), (GSK), (TRIL)
The pandemic is exhibiting hints of easing, and one of the names playing a critical role in the vaccine rollout that has made this step towards normalcy possible is Pfizer (PFE).
Actually, Pfizer stock has hit an all-time high courtesy of its COVID-19 vaccine, Comirnaty, which it developed with German biotech firm BioNTech (BNTX).
While this is undoubtedly an exciting time for the company, many investors wonder whether this period also marks the spectacular of Pfizer, and things will go downhill from here. After all, several of its patents are set to expire starting in 2025.
My short answer to this question is no. This isn’t the beginning of the end for Pfizer. Looking at the company’s history, pipeline, and trajectory, I can say that Pfizer’s rise is just getting started.
One of the key reasons behind my belief is Pfizer’s robust pipeline.
To date, the company has roughly 100 drugs queued for regulatory clearance, while others are slated for late-stage clinical testing.
That means that regardless of the patent expirations in Pfizer’s horizon, the company’s strong and diverse pipeline can easily counteract the blow from the loss of exclusivity.
Just last month, Pfizer received full approval from the US FDA for Comirnaty.
Since fellow vaccine developers like Moderna (MRNA) have yet to achieve the same, this makes Pfizer the first COVID-19 vaccine to gain this endorsement from the regulatory committee.
Needless to say, Pfizer could capitalize on this massive opportunity to boost its profits in the quarters.
The availability of a fully approved COVID-19 vaccine could allow establishments to oblige mandatory vaccinations, which could obviously lead to higher demand for Comirnaty, as over 100 million Americans have yet to receive at least a single jab.
In the second quarter of 2021, the company reported $19 billion in revenue, indicating a 92% year-over-year climb thanks to the $7.8 billion raked in by its COVID-19 vaccine.
Pfizer now estimates Comirnaty revenue to reach roughly $33.5 billion, indicating an expected 2.1 billion doses to be delivered within the year.
Excluding Comirnaty’s sales, Pfizer’s revenue increased by 10%. This strong momentum led the company to raise its 2021 full-year guidance to somewhere between $78 and $80 billion.
Before Comirnaty, though, Pfizer had already been known as a prolific vaccine developer.
One of its prized creations is the pneumococcal vaccine Prevnar, which generated $2.52 billion in revenue in the first 6 months of 2021.
Meanwhile, its tick-borne encephalitis vaccine, marketed as TicoVac, gained FDA approval in July and could bring in roughly $1 billion per annum.
Riding this momentum, Pfizer has been busy developing another potential moneymaker in this segment in the form of its respiratory syncytial virus (RSV) vaccine candidate: RSVpreF.
And if the Phase 3 results for RSVpreF come anywhere near its Phase 2 trial, then Pfizer has another blockbuster in its hands.
This is because the RSV vaccine market is projected to grow to approximately $10 billion by 2030, and Pfizer’s candidate is targeting 72% of that population.
However, the RSV market will be a crowded space with the likes of Johnson & Johnson (JNJ), Sanofi (SNY), and GlaxoSmithKline (GSK) working to fill this unmet medical demand.
So, realistically, Pfizer’s RSVpreF has the potential to capture 20% market share, translating to $2.1 billion in annual revenue.
Apart from its vaccine-related efforts, Pfizer’s core businesses have been growing as well. Top contributors come from its oncology arm, specifically Eliquis and Ibrance.
Its recent acquisition of Trillium Therapeutics (TRIL) is anticipated to serve as a catalyst for Pfizer’s cancer segment in the next years as well.
Overall, Pfizer has a blockbuster drug pipeline and an impressively successful COVID-19 vaccine rollout. These provide the company with a long runway for solid and steady growth.
Mad Hedge Biotech & Healthcare Letter
September 14, 2021
Fiat Lux
FEATURED TRADE:
(IS THIS THE BIGGEST WINNER IN A WINNER-TAKE-MOST MARKET?)
(NVTA), (ARKK), (ARKG), (SFTBY), (AMZN), (EXAS), (AAPL), (MSFT)
One of the most underappreciated names in the biotechnology sector might just be the biggest winner in a winner-take-most market today: Invitae (NVTA).
Despite being at the receiving end of a seemingly endless flogging since the year started, Invitae remains an attractive stock for the likes of Cathie Woods.
In fact, this San Francisco-based company is one of the Top 20 holdings of ARK Innovation (ARKK) and ARK Genomic Revolution (ARKG).
Described by Woods as "probably one of the most important companies in the genomic revolution," Invitae is the sixth-largest holding of the ARK Investment portfolio with more than $1 billion worth of exposure.
Aside from ARK, Invitae also recently attracted the attention of Japanese tech conglomerate SoftBank (SFTBY), which came in the form of $1.2 billion worth of convertible bond investment.
Amid all these, why is Invitae still under-appreciated?
First, it’s essential to understand that biotech companies opt to target particular niches where they aim to maintain high prices and maximize profitability for as long as possible.
That way, they can maintain and continue to boost their profits.
This results in highly prohibitive costs in the healthcare innovation section, which in turn cause rationing of cases because only a select group of patients can actually afford the exorbitant fees for the innovative drug or therapy.
While rationing care and maximizing profits are obviously great for investors, this makes the innovations inaccessible to people who could not shell out the cash to take the tests or treatments.
This is where Invitae comes in.
Basically, Invitae is taking a completely different approach compared to its peers in the biotechnology world.
According to the company, its mission is "to bring comprehensive genetic information into mainstream medicine to improve healthcare for billions of people."
How will Invitae achieve this?
Instead of choosing a single genetic variant to test, which costs over $1,000 each, the company is developing a testing platform that can identify thousands of genetic variants.
The clincher? This will only cost less than $250 for the entire test panel.
This nonconforming approach to biotechnological innovations is what has primarily led to Invitae’s under-appreciation.
However, Invitae’s mission holds incredible potential.
What it means in medical terms is that the company can help about 1 in 6 people suffering from a medical condition with an inherent genetic factor.
What it means in financial terms is that the company holds the possibility of generating several hundred dollars per year from over 2 billion people—a jaw-dropping market opportunity worth $4 trillion.
One of Invitae’s key ideas is to grant people access to their genetic information and then interpret it for them.
To me, this indicates the company’s goal of doing for genetics what Amazon (AMZN) has done for book buyers.
The next question is this: Can Invitae truly accomplish this?
Let’s consider the company’s growth trajectory along with the catalysts ahead.
So far, three catalysts can push the company towards its goals.
First is the steady growth in testing volume. As with most medical procedures, the volume of genetic testing went down during the COVID-19 pandemic. However, this is now rebounding gradually.
In the first quarter of 2021, the billable volume went up by 72% year over year, with roughly 259,000 tests in that quarter alone.
Traditionally, genetic testing is generally driven by orders from doctors and the cooperation of health plans to cover the tests.
Moving forward, we expect pharmaceutical firms to play more significant roles in promoting and even paying for these tests.
Approximately 90% of the pharma pipelines these days are based on genetic conditions.
As these new and innovative genetic treatments gain FDA approval, the pharma companies would have additional vested interest in ensuring eligible patients receive testing. That way, they can drive demand for the therapies they developed.
The second catalyst comprises the oncology sector.
Genetic testing has become the trend, particularly for cancer—an undoubtedly massive and financially lucrative market.
To leverage this growth, Invitae acquired ArcherDX in 2020 in an effort to expand its offerings.
With this purchase, the company can help major cancer centers implement their testing systems while also offering support to healthcare providers who opt not to do their own testing.
The availability of these comprehensive services will serve as critical drivers of income and profitability considering the historically proven high reimbursement rates in the oncology testing segment.
Apart from this, Invitae recently announced its decision to acquire Ciitizen, a consumer health tech firm, for $325 million.
This move will allow Invitae to expand its patient database through the genomic and clinical information gathered from Ciitizen’s platform.
Thus far, Invitae has announced 13 acquisitions over the past 5 years.
The third catalyst is the continuous global growth of Invitae.
Evidently, the mission of reaching 2 billion people requires worldwide expansion—something that the company has been working on.
In fact, roughly 18% of the total billable volume of Invitae in the first quarter came from international transactions, which have the potential to grow faster than their business in the US.
To date, Invitae has been expanding its operations in Japan, Israel, Europe, and Australia.
Meanwhile, Invitae’s incredible potential has attracted other companies as well. Exact Sciences (EXAS) has been linked to the company for a potential merger among the firms interested.
Admittedly, Invitae’s mission to offer affordable and accessible genetic testing to 2 billion people will require many more years before it comes to fruition.
When that day comes, the company will join Apple (APPL), Amazon, and Microsoft (MSFT) as part of an elite group with $1 trillion and over market cap.
The long wait for Invitae to achieve this ambitious goal would be worth it for patient buy-and-hold investors.
Mad Hedge Biotech & Healthcare Letter
September 9, 2021
Fiat Lux
FEATURED TRADE:
(A STOCK FOR BARGAIN HUNTERS)
(SRPT), (MRNA), (BNTX), (FGEN), (ACAD), (RARE), (BLUE), (CRSP), (PFE)
Biotechnology stocks that have fallen by over half since 2021 started are strewn around in the market.
While the share prices of COVID-19 stocks, such as Moderna (MRNA) and BioNTech (BNTX), have skyrocketed, the others in the sector are not as fortunate.
The biotechnology segment has been filled with relative horror stories from previous favorites like FibroGen (FGEN), Acadia Pharmaceuticals (ACAD), and Ultragenyx Pharmaceutical (RARE).
Among the companies hit with disappointing news, the gene therapy sector, which has stocks like bluebird bio (BLUE) and CRISPR Therapeutics (CRSP), appears to be having a tougher time than most.
So, where does this situation leave investors? Where should we look for value?
One tactic that would help value investors take advantage of this abysmal situation is studying Wall Street analysts' moves.
Look at target prices they set for the stocks they cover and then choose the companies trading the farthest below the expected price points.
Among the biotechnology stocks struggling these days, one of the names that emerged as a truly promising investment is Sarepta Therapeutics (SRPT).
To say that Sarepta has been experiencing a disappointing year is an understatement. Shares of this company have gone on a 57% heart-stopping plunge since 2021 started.
In fact, this biotech’s nosedive is the third-worst in the midcap or larger stock sector based on the two key exchange-traded funds: iShares Biotechnology ETF (IBB) and SPDR S&P Biotech ETF (XBI).
Despite Sarepta’s abysmal performance, Wall Street still labels the stock a buy.
Sarepta’s decline started in early January when the trial results for its gene therapy for Duchenne muscular dystrophy (DMD) failed to impress investors.
However, the subsequent trial for the same gene therapy, dubbed as SRP-9001, is anticipated to yield better results.
Although the results are expected to be released by late 2022 or early 2023, holding the stock for now is estimated to deliver remarkable profits for patient investors.
At this point, Sarepta stock is trading at roughly $80 per share.
However, experts predict that the next results for SRP-9001 would push the shares to climb to over $200.
DMD, which is a rare degenerative condition characterized by gradual weakening of the muscles, affects about 16,840 people in the US.
So far, the US FDA has only approved a handful of treatments for DMD—three of which are RNA-based drugs developed by Sarepta.
Evidently, the company has a firm grasp of the condition and a proven track record of launching and marketing DMD-centered products.
More importantly, this makes Sarepta a dominant—if not the most dominant—force in the DMD market.
What makes their newest treatment, SRP-9001, different is that it works on DNA. Despite the extended timeline, Sarepta’s candidate remains the frontrunner in this endeavor.
Its closest threat is PF-06939926, an investigational drug from Pfizer (PFE) that uses the same technology as SRP-9001.
At the very least, this competitor is two years away from producing any tangible result.
By the time Pfizer reaches Phase 3, Sarepta’s SRP-9001 has already generated roughly $1 billion in sales.
Apart from the three approved drugs, Sarepta still has 34 drug development programs focused on two niches: RNA and AVV gene therapies. Among them, 7 are already in the clinical stage, including SRP-9001.
If successful, the company will reach $1 billion in revenues by 2023.
Another reason that makes Sarepta an attractive opportunity is its notably intact cash flow backbone—an achievement that’s worth pointing out considering its underwhelming SRP-9001 results.
The company also has an impressive history.
Sarepta has blossomed from its humble beginnings working as a contractor for the Department of Defense on the Ebola virus. Since then, it has developed its pipeline through acquisitions and launching effective treatments for rare diseases.
While Sarepta’s treatments are effective, they cannot cure DMD. They can only slow its progression.
This means continuous and life-long use among patients. For context, one treatment costs an average of $300,000 per patient annually.
Although it lost over 50% of its value, Sarepta still has enough capacity to rebound soon.
The factors that would help the company achieve this include the strong lineup of products generating solid and predictable revenues as well as its promising pipeline.
More importantly, its struggles with SRP-9001 don’t seem enough for the company to scrap the project altogether.
If anything, it proved that Sarepta can explore more potent treatments for DMD by looking into RNA technology—a path that the likes of Moderna and BioNTech have already found success in.
Overall, I think Sarepta still has a lot left in the tank. It operates in one of the most exciting sectors.
It’s worth bearing in mind that the biotech sector is ripe with innovation from companies with the ability to conjure up life-changing treatments—a value perceived as a crucial hallmark for massive gains.
Needless to say, Sarepta’s achievements in the DMD sector and its growth trajectory make it a shoo-in in this category.
