Mad Hedge Biotech & Healthcare Letter
August 19, 2021
Fiat Lux
FEATURED TRADE:
A LOW-PROFILE BIOTECH WINNER
(VRTX), (ACAD), (SRPT), (FGEN), (MRK), (MRNA), (NVS), (XLRN), (PTGX), (IONS), (BLUE), (EDIT), (ABBV)
Choosing winners among biotechnology and healthcare stocks these days isn’t easy.
Since the year started, the sector has been marred with several unexpected disappointments like the 50% decline of crowd favorites Acadia Pharmaceuticals (ACAD) and Sarepta Therapeutics as well as the 33% fall of the ever-dependable FibroGen (FGEN).
So, how can investors pick a winner?
One tactic is taking a peek at what Wall Street analysts are doing, noting which among the companies they’re following are trading the farthest below the estimated price points.
Among the names on the list, a particular stock stands out as a strong contender these days: Vertex Pharmaceuticals (VRTX).
Although it’s one of the most widely known biotechnology companies today, Vertex actually started in a garage of a Harvard-trained chemist, Joshua Bogner, who left his cushy job at one of the most illustrious big pharma companies at that time, Merck (MRK), to pursue his vision.
The company’s raison d’être was a major selling point for a lot of talented and idealistic scientists in that era.
That is, Vertex wanted to find cures for the most challenging diseases and do this in an unbureaucratic setting.
Since then, Vertex’s goal has been straightforward: tackle the most complex and toughest diseases and deliver breakthrough treatments that offer tangible benefits to patients.
Over the years, the company has managed to keep this goal at the forefront of its efforts, starting with its work on the devastating genetic disorder called cystic fibrosis (CF).
Vertex’s work on CF took over a decade, but it eventually led to an impressive franchise that helped with the treatment of patients.
In the first quarter of 2021 alone, sales in this segment reached $1.7 billion.
Expanding on its work, Vertex has explored genetic therapies and set up a collaboration with Moderna (MRNA) in 2016.
Using the latter’s well-established expertise in messenger RNA technology, the companies are expected to come up with more aggressive and advanced CF treatments in the coming years.
Given these developments, Vertex reiterated its 2021 sales guidance to be somewhere in the range of $6.7 and $6.9 billion. Meanwhile, sales of its CF franchise are estimated to peak at $9 to $10 billion—if not higher—by 2024.
Aside from its work on CF, Vertex has also been pouring resources on developing treatments for severe sickle cell anemia and beta thalassemia, a rare blood disorder.
In fact, the company has been looking into these developments as the next major revenue stream, as seen in its bolstered collaboration deal with CRISPR Therapeutics (CRSP).
In this deal, Vertex paid the smaller biotechnology company $900 million upfront plus a potential addition of $200 million following the first regulatory approval of their therapy, CTX001.
While this may sound like a hefty deal to some, Vertex actually values CTX001 at roughly $11 billion.
CTX001, which is a one-time therapy, is priced at roughly $1 million per patient. At this point, the market for beta thalassemia is valued at $32 billion.
Needless to say, this would make CTX001 a massive income generator in the next few years.
Considering the lucrative market for beta thalassemia, though, it’s no surprise that several competitors have emerged to grab their share as well.
Some companies, such as Novartis (NVS) and Acceleron (XLRN), offer maintenance drugs for the disease.
Meanwhile, others like Protagonist Therapeutics (PTGX) and Ionis Pharmaceuticals (IONS) are attempting to develop treatments that would become direct competitors of CTX001.
However, the closest rivals of the Vertex-CRISPR candidate are from Bluebird Bio (BLUE) and Editas Medicine (EDIT).
While this has become a crowded space, Vertex and CRISPR remain the leaders in this segment, as most of the other candidates are still in the investigation phase.
Since it was founded in the 1980s, Vertex has remained true to its vision of tackling some of the toughest diseases out there.
While big pharmaceutical companies, such as AbbVie (ABBV), decided to expand their portfolio through acquisitions, Vertex leveraged its talent pool and maximized its funds by establishing strategic collaborations instead.
This tactic provided the company with enough elbow room that eventually led to its dominance in the CF space, where it now enjoys a virtual monopoly until at least the next decade.
Meanwhile, it has forged strong relationships with promising biotechnology companies and can very well be on its way to becoming the most dominant force in the rare blood disorder segment.
Overall, Vertex Pharmaceuticals is an attractive stock with an impressive portfolio and an even more impressive pipeline.
Mad Hedge Biotech & Healthcare Letter
August 17, 2021
Fiat Lux
FEATURED TRADE:
(EYES ON THE PRIZE)
(STAA), (UNH), (LLY), (AMZN), (V), (NKE), (MA), (GOOGL)
The investing world is filled with buzzwords, and one of the most widespread lately is “compounders” – aka stocks with the capacity to generate double-digit compound growth in terms of revenue and earnings.
They’re typically dubbed as the “next” Amazon (AMZN), Visa (V), or Nike (NKE), making them heavy favorites among growth investors aggressively looking for companies that can generate high returns in the next five to 10 years.
Ultimately, the goal is to find the next “10 bagger.”
Most investors are perfectly content with big and popular compounders like Mastercard (MA) and Alphabet (GOOGL).
Since the healthcare and biotechnology sector has its own well-known compounders, such as Eli Lilly (LLY) and UnitedHealth Group (UNH), it’s easy to miss the smaller lesser-known companies that are consistently generating high growth in their profits over the past years.
A good example of this is Staar Surgical (STAA).
Founded way back in 1982, this under-the-radar stock is up by over 243% over the past 12 months and more than 85% this year alone.
Saying that the company has had an impressive 2020 despite the pandemic is an understatement.
The company’s latest product is an implantable lens that works to correct myopia or nearsightedness.
This technology addresses a potentially massive market, taking into consideration the growing number of vision-related problems globally.
Staar anticipates the lens, which has already been made available across Europe and even Asia for roughly five years now, to enter the US market by the fourth quarter of 2021.
Inasmuch as the human eyes are considered powerful organs, they are definitely far from perfect. That’s why eyeglasses and even contact lenses have been in the market for decades.
Aside from its new product, Staar’s bread and butter is its Visian implantable collamer lenses, which are designed to deal with various vision issues including myopia (nearsightedness), presbyopia (an incapability to focus on nearby objects), and astigmatism (blurred or distorted vision).
Although they are quite different, many people confuse Staar’s solution with LASIK.
The key difference is that LASIK surgeries necessitate trimming of the cornea using lasers to correct the vision of the patient.
In contrast, what Staar does is to implant the corrective lenses directly in the eye, specifically behind the patient’s iris but right in front of the cornea.
This makes Staar’s solution reversible and, of course, less invasive compared to LASIK.
To date, Staar’s surgery is more expensive at $3,500 per eye, while LASIK costs roughly $2,246 for each eye.
However, this cost is expected to go down as more doctors eventually choose Staar implants over other options.
Looking at its trajectory, Staar could lead to LASIK becoming obsolete in the same way that radial keratotomy stopped being the norm before.
So far, Staar remains profitable and continues to grow its quarterly profits by 18.3% year over year. However, it’s the long-term revenue that shareholders would stand to gain most.
At this point, roughly 30% of the world is diagnosed as nearsighted. By 2050, over half of the population may require vision for myopia alone.
Meanwhile, 75% to 80% of adults between ages 45 and 74 are already struggling with presbyopia.
These figures spell massive opportunities and lucrative markets for Staar’s vision lines, with the annual spending on cheaper alternatives like eyeglasses projected at $48 billion.
Silently growing companies in the seemingly humdrum market are often pretty sneaky.
Vision correction doesn’t appear to be a white-hot investment sector that calls for urgent investment.
Only a handful of investors possess the foresight to view mundane products and services, like eye surgeries, as lucrative investments.
However, there’s usually a flicker of greatness in the most unlikely markets.
Mad Hedge Biotech & Healthcare Letter
August 12, 2021
Fiat Lux
FEATURED TRADE:
(THE FUTURE OF REGENERATIVE MEDICINE)
(CRSP), (EDIT), (BLUE), (PFE), (AZN), (GSK), (TAK), (REGN)
As our bodies begin to show signs of aging and fatigue, exploring ways to regenerate our organs has become crucial in ensuring a hale and hearty lifespan.
This demand has given rise to a branch of biotechnology and healthcare, which could very well be on the brink of becoming the next big thing in the mainstream biopharmaceutical industry: regenerative medicine.
For example, experts at Gladstone Institutes is applying gene therapy to repair heart damage. Basically, their goal is to reprogram scar tissue and transform it into a new heart cell.
What they do is inject the genes into the damaged heart caused by a heart attack. Then, these “new” genes alter the scar cells, converting them into beating hearts.
This approach no longer demands any cloning to obtain an extra set of organs. The Gladstone Institutes’ use of gene therapy allows us to regrow our own set of organs right inside our bodies.
And in case you’re wondering whether this type of work actually has a future or just another trend that would quietly disappear in the future, I’m telling you that this industry has incredibly potential.
Just look at the $12 billion valuation of a biotechnology unicorn called Samumed in San Diego.
Founded in 2008, this company has spent most of its lifetime operating under the radar. It impressively came out of the shadows last 2016 and was quickly dubbed as an “anti-aging” company.
To them, though, they’re a “de-aging” company. That is, they believe that people should be brought back to their peak health conditions before they can even begin to restore youth.
This ideology is exhibited by the company’s lead program: a knee osteoarthritis cure called Lorecivivint.
As we know, osteoarthritis has no known treatment that works to reverse the damage to the joint.
That’s why the doctors focus on handling or managing the symptoms. They tell their patients to exercise and lose weight to boost muscle strength and decrease the burden on their joints.
They also prescribe various drugs like painkillers, some anti-inflammatory pills, and even cortisone shots. Other patients would eventually need to go through replacement surgery.
This is where Samumed comes in.
The company created Lorecivivint to repair the joint damage. That way, patients will no longer need to go through all the burden of managing the symptoms of knee osteoarthritis.
In their proof-of-concept report, Samumed shared that one year after getting injected with Lorecivivint, the X-rays of the knees of the patients showed that there was an increase in “medial compartment joint space width.”
In simpler terms, the knees grew cartilage after a single shot of Lorecivivint.
Other than working on a cure for knee osteoarthritis, Samumed is also looking into treating male pattern baldness.
Another impressive biotechnology company focused on regenerative medicine is Humacyte, which recently shifted from being a clinical-stage firm to a commercial one.
Humacyte’s core work is on Human Acellular Vessels (HAVs) or “implantable regenerative human tissue.”
A use case for this is when a patient has damaged blood vessels. Typically, there are three options to treat this: take a vessel from another part of the body, try to implant a donated vessel, or utilize a plastic tube.
The first one requires at least two surgeries and, of course, losing a vessel in another part of your body.
Meanwhile, the second and third options expose the patient to the possibility of an infection or the body rejecting the vessel or plastic tube.
Humacyte’s HAVs offer a fourth option.
Since the HAVs carry similar properties as the native tissues of the patient’s body, they significantly lower the risk of rejection.
Basically, they’re “growing” HAVs that won’t be rejected by the body.
More importantly, the company is creating engineered off-the-shelf replacement tissue that can be implanted to anyone without using immunosuppressive drugs.
This is impressive because immunosuppressants are staples in ensuring that the body does not reject the organs. However, the use of this can be dangerous because it increases the risk of infections.
So far, Humacyte has been working on coming up with safer and more effective treatments for hemodialysis patients since the current methods tend to expose them to higher risks of infections.
If everything goes according to plan, then the company will be able to file for FDA approval by 2022.
While the technologies offered in the regenerative medicine space have been discussed and even praised for years, it’s only recently that these became commercially viable.
For all the noise and hype surrounding these breakthrough and next-generation treatments, only a handful of patients have actually benefited from them.
However, 2021 might just mark the year that all these will change.
Other than the private firms and smaller biotechnology companies like CRISPR Therapeutics (CRSP), Editas Medicine (EDIT), and bluebird Bio (BLUE), bigger names in the biopharmaceutical space, including Pfizer (PFE), AstraZeneca (AZN), GlaxoSmithKline (GSK), Takeda Pharmaceuticals (TAK), and Regeneron (REGN), are also starting to invest more aggressively into it.
Mad Hedge Biotech & Healthcare Letter
August 10, 2021
Fiat Lux
FEATURED TRADE:
(CLEARING THE SMOKE)
(PM), (GSK), (NVS), (BAYN)
Philip Morris (PM) has long been synonymous with tobacco products, with the company dating all the way back in 1847.
Over 170 years later, though, this $154.6 billion company has gathered and read the tea leaves—and it looks like it finally realized that the future is “smoke-free.”
In a complete about-face, the Marlboro maker is now telling people that it wants to find a cure for heart and lung problems—the very same health conditions people get from tobacco.
Turning from poacher to gamekeeper, Philip Morris has decided to use its widely known expertise in inhalation to improve the health of the people.
One of its major moves towards this decision is to gatecrash the bidding for Vectura, a UK-based contract development and manufacturing company (CDMO) for the healthcare and pharmaceutical industry.
Vectura is known for its expertise and device technology in inhaled products, and the company has been working with numerous companies in the healthcare field, including GlaxoSmithKline (GSK), Novartis (NVS), and Bayer (BAYN).
Basically, Vectura develops treatments and medicines that help manage and cure smoking-related diseases.
So far, Vectura has 13 inhaled medicines along with 11 non-inhaled treatments in the market today.
To date, Philip Morris has raised its offer price to beat out the other contenders bidding for Vectura.
It’s now offering $2.30 per share, with the total reaching roughly $1.4 billion. That puts an almost 45% premium over Vectura’s shares—an offer that experts believe wouldn’t be matched elsewhere.
Considering that Vectura only generated $245 million last year, this is a massive gamble for Philip Morris.
This move comes after Philip Morris acquired Fertin Pharma for $820 million in July.
Fertin is known for developing nicotine chewing gum, lozenges, chewable tablets, and “pouch powders” that quickly dissolve in the user’s mouth.
Considering that Fertin only generated roughly $160 million in sales in 2020, Philip Morris’ move to buy it at that price point also speaks volumes of its plans moving forward.
Although it has yet to wrap up its Vectura acquisition, Philip Morris is not one to wait around.
While waiting for a decision on the British company, it snapped up another respiratory drug development company: OtiTopic.
Founded in 2012, OtiTopic’s main work is focused on Aspirhale, which is a late-stage inhalable acetylsalicylic acid for intermediate to high-risk acute myocardial infarction.
In simpler terms, OtiTopic is working on an inhaled aspirin for heart attacks.
Specifically, Aspirhale works as a dry powder inhalation via a self-administered aerosol.
This is promising since early research indicates that inhaled systems can alleviate the condition in two minutes compared to the 20 minutes needed for chewable aspirin.
With Philip Morris behind it, OtiTopic expects to complete testing soon and file for FDA approval by early 2022.
Considering the massive and expanding market for inhaled therapeutics science, the work of OtiTopic and Philip Morris is estimated to generate at least $1 billion in net revenues by 2025.
Moreover, the tobacco company anticipates the market for inhaled therapeutics will rapidly grow in the next few years and reach as much as $41 billion globally by 2026—a reasonable justification for its decision to splurge on Vectura as well.
When Philip Morris announced that it’ll stop selling cigarettes in the United Kingdom in 10 years, a lot of people thought it’ll be folding up shop.
Truth be told, the company’s about-face to healthcare wasn’t the strongest possibility entertained by the market.
Most believed that it would join forces again with its spinoff, Altria Group (MO), to form a stronger company in the industry and become a powerhouse of smoke-free alternatives.
However, its recent acquisitions indicate that Philip Morris plans to use Fertin, OtiTopic, and Vectura as the core of its legacy business in the healthcare and pharmaceutical industry.
According to Philip Morris, these decisions are part of its "natural evolution into a broader healthcare and wellness company."
While it does feel a bit like an arsonist marketing fire damage insurance, Philip Morris appears to be putting money where its mouth is in terms of transforming itself into a serious life sciences company.
Mad Hedge Biotech & Healthcare Letter
August 5, 2021
Fiat Lux
FEATURED TRADE:
(LET THE BIOTECH BUYOUTS BEGIN)
(TBIO), (SNY), (MRNA), (PFE), (BNTX), (ARCT), (GSK), (JNJ), (MRK), (BLUE), (CVAC)
One of my predictions for this year just came true: the biotechnology buyouts have begun.
In my letter last January, I forecasted that the growing popularity of the mRNA technology courtesy of the COVID-19 vaccines from Moderna (MRNA) and Pfizer (PFE / BioNTech (BNTX) would trigger acquisitions of smaller biotechnology companies this year.
I predicted that bigger players in the healthcare industry would scoop up smaller players to stake a claim in this quickly growing space.
Topping our list of buyout candidates is Translate Bio (TBIO)—the very same company hogging headlines in the past days following its $3.2 billion acquisition by Sanofi (SNY).
The all-cash deal values each TBIO share at $38, representing a premium of over 30% above the stock’s price. If all goes well, the deal should be completed by the third quarter of 2021.
This is one of the first major moves by Sanofi following the healthcare giant’s recent pivot into vaccines.
However, this isn’t the first time Sanofi and TBIO worked together.
The two companies have actually started collaborating back in 2018, working on a potential mRNA-based flu vaccine—a project that has Sanofi and TBIO ahead of the pack, with BioNTech and Arcturus Therapeutics Inc. (ARCT) trailing behind.
Sanofi and TBIO’s mRNA seasonal flu vaccine candidate is expected to commence with Phase 1 results expected to be out by the fourth quarter of this year.
Considering that Sanofi is one of the leading vaccine makers in the world with roughly $3 billion in sales in flu vaccines alone in 2020, it won’t come as a surprise if their candidate breezes through the trials.
Even prior to this acquisition, Translate Bio has been working on using its mRNA platform to develop vaccines and treatments for a broad range of diseases like liver and pulmonary ailments.
So far, its novel pipeline has 2 clinical-stage programs along with 7 pre-clinical work covering direct therapeutics and vaccines.
One of its lead candidates is MRT5005, which is an mRNA-based therapy for cystic fibrosis (CF).
This is a groundbreaking treatment because it takes advantage of mRNA’s capability to deliver proteins to lung cells. It’s also extremely non-invasive, as patients can simply inhale the mRNA drug into their bodies.
Other than helping with the treatment of CF, this inhalation delivery system can also open avenues for other pulmonary targets.
Most importantly, TBIO’s MRT5005 doesn’t only offer treatments. It actually is a cure for CF.
TBIO’s work on CF treatment is extremely important. This disease is terrible, recording a median age of death among patients in the US as 30.6 years old. In this country alone, over 30,000 people suffer from the condition, and more than 70,000 are recorded worldwide—and the numbers continue to climb each year.
In terms of the CF market, the global demand for treatments for this disease is expected to reach $16.3 billion by 2026, hitting roughly 16.8% in CAGR over the years.
With the acquisition of Translate Bio, Sanofi plows ahead of its competitors in the space, including Pfizer, GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), and Merck (MRK), as the sole Big Pharma company with a wholly-owned in-house mRNA platform.
This is on top of Sanofi’s recent $470 buyout of another mRNA company, Tidal Therapeutics, to bolster its immuno-oncology and inflammatory diseases segments.
Apart from its aggressive buyout strategy, Sanofi also announced its plan to allocate roughly $476 million annually to a “vaccines mRNA Center of Excellence” with the goal of queuing at least six mRNA-based candidates in clinical trials by 2025.
Allotting $476 million to this plan is a telling move on the company’s future direction, as it comprises a substantial fraction of Sanofi’s $6.5 billion overall R&D budget.
These moves strongly signal that Sanofi’s going all-in on the mRNA platform, which could obviously pose a challenge to the likes of Moderna and, of course, BioNTech.
With smaller cap companies like bluebird Bio (BLUE) and CureVac (CVAC) still up for grabs, it’s only a matter of time before another big company decides to follow suit.
