Mad Hedge Biotech & Healthcare Letter
May 13, 2021
Fiat Lux
FEATURED TRADE:
(THE HOLY GRAIL OF DIABETES)
(NVO), (LLY), (SNY), (BNTX), (CRSP), (EDIT), (NTLA)
Diabetes and obesity continue to be two of the major health issues across the globe—and these problems are only getting worse.
There are about 463 million people worldwide afflicted with diabetes, with only half of this number actually diagnosed and even fewer seeking treatment.
This situation is alarming considering that diabetes is a major cause of diseases like heart attacks, stroke, blindness, kidney failure, and even amputation of the lower limb.
The key to handling diabetes for many diabetics is taking insulin, which is a hormone that aids in regulating the amount of glucose in the patient’s blood.
To date, only 16% of diabetics take insulin.
Interestingly, there are only a handful of producers of this drug despite the fact that the global spending for insulin is estimated to reach $28 billion by 2026.
Only three companies practically control over 90% of the insulin market. That dominance, along with the absence of generic competition, allowed them to generously reward their shareholders.
Currently, one company is dominating the insulin market and holds a virtual monopoly of this lucrative industry: Novo Nordisk (NVO).
In fact, Novo Nordisk shares have increased by over 2,500% since 2000—an honest to goodness wealth-building investment.
For years, Novo Nordisk has focused on developing products specifically for diabetes and obesity.
Thanks to its efforts in these sectors, the company has become the undisputed leader with a 44.5% share of the insulin market and a 49.9% share of the blood sugar drug GLP-1 market.
In 2018 alone, Novo Nordisk generated roughly $14.26 billion in revenue from its diabetes lineup.
In comparison, the second largest producer of these products, Eli Lilly (LLY), generated only $9.71 billion.
Meanwhile, the third challenger in this space, Sanofi (SNY), began its exit from the diabetes industry when the pandemic struck last year.
At this point, Novo Nordisk holds 29.2% of the global diabetes market, making the company within arm’s reach of its goal to conquer one-third of the segment by 2025.
Amid its success in the industry, Novo Nordisk refuses to rest on its laurels. The company continues to come up with innovative treatments for diabetes and obesity.
Novo Nordisk’s latest product is Rybelsus, which is an oral medication for blood sugar, particularly for Type 2 diabetes patients.
In an effort to corner the market, Rybelsus is actually a direct competitor of Novo Nordisk’s own products, Ozempic and Victoza, which target the same market. The difference is that the new product can be taken orally while the two older ones need to be injected into the bloodstream.
When Ryblesus was launched in late 2020, it was hailed as the “holy grail” of diabetes treatments and generated $64.5 million in the first six months.
To understand the potential of Rybelsus, it’s good to remember the growth story of Ozempic.
From $264 million in sales in 2018, this drug skyrocketed to rake in $1.7 billion by 2019 and generated $1.1 billion in the first half of 2020.
Although diabetes clearly holds the bulk of Novo Nordisk’s portfolio, it’s not the sole revenue stream for the company.
In the past years, Novo Nordisk has also been developing treatments for chronic obesity—a condition that could lead to serious diseases, including various types of cancer and heart disorders.
Global obesity has roughly tripled since 1975, with the COVID-19 pandemic accelerating this alarming trend.
For context, 1.9 billion adults were diagnosed as overweight in 2016. Of these, 650 million were considered obese.
More alarmingly, only 2% of 650 million people suffering from obesity are receiving any medical treatment.
In relation to Novo Nordisk’s revenue stream, this offers notable potential for future revenues for the segment.
The company’s flagship obesity drug, Saxenda, has shown extremely strong growth in terms of market share as well as total revenue since its launch.
With incredible attention focused on groundbreaking treatments for diabetes like messenger RNA from companies like BioNTech (BNTX), CRISPR Therapeutics (CRSP), Editas Medicines (EDIT), and Intellia Therapeutics (NTLA), it’s understandable to find a company established in the 1920s extremely boring.
However, it’s important to always keep in mind what investing is truly about. It’s distributing your money to businesses that have the capacity and potential to grow over the long term.
This is what sets apart companies like Novo Nordisk.
Historically, Novo Nordisk has been giving back to its shareholders for decades.
Since it debuted in the US market in 1981, the company has returned roughly 22,000% to its investors.
Four decades later, shareholders can rest easy and expect continuous rewards in the years to come. So, take advantage of this opportunity and buy the dips.
Mad Hedge Biotech & Healthcare Letter
May 11, 2021
Fiat Lux
FEATURED TRADE:
(A FALLEN BIOTECH OUTPERFORMING THE MARKET)
(VRTX), (ABBV), (CRSP), (BLUE)
Despite the exceptional performance of a handful of biotechnology companies, many healthcare stocks have languished over the course of the last 12 months due to the extra costs and added uncertainty brought by the COVID-19 pandemic.
Amid its continuous success for almost a decade, with shares climbing by over 800% from 2012 to mid-2020 and outpacing the S&P 500 nearly four times over, Vertex Pharmaceuticals (VRTX) stock was not spared during this turbulent period.
In fact, shares of the company fell by roughly 25% in mid-October following their decision to cancel the development of VX-814.
This once-promising drug, which was initially expected to treat a genetic disorder affecting the liver and kidney, showed disappointing results in its trials last year.
Despite falling out of favor with investors, I think this $55.66 billion-by-market-capitalization biotechnology company holds a strong track record and remains a compelling buy—a fact proven by its first quarter earnings report.
Vertex recorded $1.72 billion in revenue for the first quarter of 2021, showing off a 14% year-over-year jump and topping the projected estimate from analysts of $1.66 billion.
The company also reported a notable improvement on its bottom line, with an adjusted net income of $781 million or $2.98 per share.
In comparison, Vertex recorded $674 million in earnings or $2.56 per share during the same period in 2020.
This embattled biotechnology company marked the end of the first quarter with a total of $6.9 billion in cash, cash equivalents, and marketable securities, exhibiting a $265 million increase from the end of 2020.
Although Vertex anticipates a slowdown in its revenue growth this year, it still projects a full-year sale in the range of $6.7 billion and $6.9 billion.
To see if this is realistic, let’s take a look at the company’s current drug portfolio.
The core of Vertex’s business is its cystic fibrosis (CF) lineup. Without treatment, this disease could lead to the early death of patients.
At the moment, Vertex has four approved CF drugs out in the market: Kalydeco, Orkambi, Symdeko, and Trikafta.
With the extent of patient profiles that these four drugs cover, Vertex has virtually cornered the CF market and established a monopoly.
To date, roughly 50% of cystic patients in the US, Australia, Canada, and Europe are treated using Vertex drugs.
Among the four, Trikafta appears to have the potential to become a blockbuster.
Trikafta is forecasted to take the lion’s share in the CF market in the next few years, with its revenue rising from $3.8 billion to $8.9 billion by 2026. This would translate to a growth in Vertex’s CF program from $6.2 billion to $9.6 billion.
While skeptics might assume that the growth projection is too high, it’s important to remember the trajectory of the Trikafta-Kaftrio drug.
The revenue of this combo grew from $420 million in 2019 to a whopping $3.86 billion in 2020.
Given that CF has become a lucrative market, it no longer comes as a surprise that competitors are starting to swarm the space.
Vertex’s biggest rival in the space so far is AbbVie (ABBV), which has been working on triple combinations of its own drugs.
Apart from its CF programs, Vertex’s pipelines also serve as catalysts for its growth.
Although VX-814 failed and caused the company’s shares to fall in 2020, Vertex has another candidate, VX-864, which has been showing more promising results as of late.
You might be wondering why Vertex insists on working on this drug despite the backlash it suffered last year. This is primarily rooted in the potential of the product.
VX-864, if successful, could be the next CF-like moneymaker for Vertex. By 2026, sales for this drug are estimated to reach $640 million and will peak by 2030 at $1.1 billion.
On top of these, Vertex has collaborated with CRISPR Therapeutics (CRSP) to develop gene therapy for sickle cell disease. So far, the treatment has received a fast-track designation from the FDA.
If approved, their drug, CTX-001, will directly compete with bluebird bio’s (BLUE) LentiGlobin.
The current pricing for bluebird’s therapy is $1.2 million.
To date, there are roughly 250,000 patients suffering from sickle cell disease in the US and Europe. Among them, 25% are diagnosed to be in the severe stages. This is the market that CTX-001 aims to target.
Using the pricing of LentiGlobin as the basis, CTX-001 has the potential to reach $1.6 billion in sales in 2026 and peak at $2 billion in 2029.
If the two companies succeed in this, then CTX-001 is another blockbuster drug added to Vertex’s portfolio.
Overall, Vertex is a good long-term investment stock. It has a proven track record and a healthy pipeline filled with promising candidates. I say you should take advantage and buy the dips.
Mad Hedge Biotech & Healthcare Letter
May 6, 2021
Fiat Lux
FEATURED TRADE:
(THE WHITE KNIGHT OF BIOPHARMA)
(PFE), (AMGN), (BMY), (LLY), (GILD), (MRK), (BNTX), (VTRS), (GSK)
After a week of dissatisfying earnings reports from huge biopharmaceutical firms like Amgen (AMGN), Bristol-Myers Squibb (BMY), Eli Lilly (LLY), Gilead Sciences (GILD), and Merck (MRK), one company has managed to buck the trend: Pfizer (PFE).
In its first quarter earnings report for 2021, Pfizer reported adjusted diluted earnings of 93 cents per share, surpassing the earlier experts’ estimate of 77 cents.
Even its reported revenue exceeded the earlier predictions of $13.4 billion, raking in $14.6 billion during the period instead.
Aside from those, Pfizer also massively boosted its projected revenue from the COVID-19 vaccine it developed with BioNTech (BNTX).
Pfizer’s COVID-19 vaccine is slated for approval to be used for 12- to 15-year-olds by next week.
On top of these, the company expects data from its third COVID-19 vaccine candidate. This recent trial is for a booster dose, which could have results by early July and possibly a full emergency approval later on the same month.
The company now estimates $26 billion in sales for the vaccine, which is notably up from its $15 billion projection in February 2021.
Pfizer is also confident in its capacity to manufacture at least 3 billion doses of the COVID-19 vaccine in 2022, with the company already negotiating agreements with countries for their 2022 supply and beyond.
While the huge boost in the company’s COVID-19 vaccine sales expectations definitely grabs headlines, Pfizer’s base business brought in notable results as well.
Apart from the vaccine, the company’s operational growth in the first quarter was mostly driven by the sales from its blood clot treatment Eliquis, which went up by 25% operationally.
Sales of its heart drug Vyndagel soared by 88%, while its cancer drug Xeljanz jumped 18%.
One of the most notable moves from Pfizer is spinning off its off-patent drug division, Upjohn, to form a new company with generic drug developer Mylan, called Viatris (VTRS).
This decision would rid Pfizer of several well-known products, such as Viagra, Lyrica, Lipitor, Celebrex, and Chantix, which were responsible for roughly 15% of its total revenues.
However, sales for these items fell by 30% in the first nine months of 2020 alone—a chronically falling performance since 2017.
By eliminating the products that no longer hold any exclusivity rights and signing them off to Viatris, Pfizer can focus on developing and marketing new and innovative treatments.
So far, this strategy has started to bear fruit.
At the moment, Pfizer has several attractive assets in its pipeline. One of them is non-small cell lung cancer (NSCLC) treatment Lorbrena, which could become one of the highest-selling products in the oncology market.
Lorbrena is estimated to grow to over $40 billion each year by the mid-2020s.
At this point, the drug is in its registration phase and was granted a priority-review status. That means approval is on the horizon in the not-so-distant future.
Other potential blockbuster oncology assets include prostate cancer drug Xtandi, NSCLC treatment Bavencio, and breast cancer medication Ibrance.
All these are in late-stage trials, which means they should be available to market soon.
In total, Pfizer currently has at least 33 drugs queued in either Phase 3 trials or registration. The list includes vaccine candidates, immunology treatments, and, of course, oncology assets.
While Pfizer lost Upjohn in 2020, it gained a new partner in GlaxoSmithKline (GSK). The two companies decided to merge their consumer healthcare programs.
This made them the biggest provider of non-prescription drugs across the globe.
By shedding its sluggishly growing assets, Pfizer managed to develop its culture into one that concentrates on developing and marketing new and innovative products.
Additionally, the company’s current portfolio holds several growing products with the potential for expansion.
Given all these changes, Pfizer raised its financial guidance for 2021 as well.
For this year, the company now estimates adjusted diluted earnings to be valued between $3.55 and $3.65 per share compared to the previous range of $3.10 to $3.20 per share.
In terms of its full-year revenue, the company raised it from its estimate between $59.4 billion and $61.4 billion to $70.50 billion and $72.5 billion.
In terms of its projected revenue compound annual growth rate, Pfizer reconfirmed that it could deliver at least 6% through 2025 and a double-digit growth on its bottom line.
Remarkably, this is still not taking into consideration its COVID-19 vaccine.
If you pull out the revenues from its COVID-19 vaccine, then the company’s projected EPS growth for 2021 is at 15%.
Adding the vaccine into the equation gives us an impressive 41% increase in its EPS.
If you consider the wild card that is Pfizer’s COVID-19 vaccine, which would include a price increase coupled with the possibility of booster shots administered annually, and combine it with its base business, then it’s easy to see how the company’s growth could be turbocharged in the next few years.
Mad Hedge Biotech & Healthcare Letter
May 4, 2021
Fiat Lux
FEATURED TRADE:
(A BAD NEWS BUY STOCK)
(AZN), (PFE), (BNTX), (MRNA), (JNJ)
Along with Pfizer (PFE), BioNTech (BNTX), and Moderna (MRNA), one of the biggest potential winners in the COVID-19 vaccine race is AstraZeneca (AZN).
While the company did manage to develop a vaccine nearly as fast as the others, its product is now suffering the same fate as Johnson & Johnson’s (JNJ) candidate and is getting bogged down by blood clotting issues.
As if that isn’t enough, AstraZeneca’s plan to use its diabetes drug Farxiga as another potential COVID-19 treatment also flopped.
Needless to say, it looks like not a lot of things are going well for AstraZeneca in the past months.
Looking at its fundamentals though, it’s worth noting that AstraZeneca stock might just be one of those rare prime candidates for being bad news buys.
After all, the company never really had plans to profit from its COVID-19 vaccine venture. In fact, AstraZeneca has long announced that it would sell its vaccine at cost. Hence, any bad news from the vaccine won’t really affect the company’s sales.
For years, AstraZeneca has been focused on creating a hyper-growth product lineup in several of the pharmaceutical industry’s most profitable submarkets.
In fact, the Phase 3 advanced pipeline candidates of the company are some of the most promising candidates in the industry, with these soon-to-be-launched drugs already generating 24% growth in revenue as early as 2017.
Not including cancer, there are at least 2.1 billion people globally who suffer from various chronic diseases. That accounts for over 25% of the entire human population, thereby representing a massive and lucrative addressable market--the very same market that AstraZeneca has been targeting.
In the years to come, AstraZeneca is projected to release at least six blockbuster drugs—each one of them estimated to rake in more than $1.3 billion in sales annually.
At the moment, one of the company’s major growth drivers is its oncology franchise, which has an early-stage pipeline anticipated to rake in roughly $1.3 billion each year by 2026.
In particular, AstraZeneca’s recently released cancer drugs Imfinzi and Tagrisso are well-positioned to dominate the segment thanks to their leading efficacy when it comes to hard-to-treat cancer types.
Meanwhile, other sub-sectors are expected to contribute $2.65 billion annually.
So far, AstraZeneca operates in more than 70 countries, ensuring its presence in practically all potential addressable markets.
In China alone, the company’s new product sales have risen by 68%, while the rest of the emerging markets recorded 56% growth.
Despite the negative publicity of its COVID-19 vaccine recently, AstraZeneca still managed to report positive data for its first quarter earnings.
Within this period, the company generated $7.2 billion in revenue, which is 15% more than its earnings during the same time last year. Its earnings per share rose by 100% to reach $1.19, while its core earnings were up 55%.
This is a welcome surprise, especially since analysts predicted $0.75 per share for the company.
The rise in AstraZeneca’s stock performance was driven mostly by its best-selling drugs, including Tagrisso with $1.15 billion in sales in the first quarter of 2021 alone and showing off a 17% jump year-over-year.
Even with the failed COVID-19 treatment, the diabetes drug Fargixa soared this quarter with $625 million, indicating a 54% increase from its previous performance during the same period.
More importantly, AstraZeneca has been consistently paying investors a dividend since it started doing it 20 years ago—a trend that’s expected to continue since the company is poised to become one of the fastest growing businesses in the world with 15% growth annually.
Given its pipeline programs and current portfolio of products, AstraZeneca is on track to continue its hypergrowth through 2023. At this pace, we can expect an estimated 105% in total returns and compound annual growth rate returns at 30.2%.
Currently, AstraZeneca stock is experiencing some turbulence due to the bad news linked to its COVID-19 vaccine. Now would be the best time to buy the dips on the bad news.
Mad Hedge Biotech & Healthcare Letter
April 29, 2021
Fiat Lux
FEATURED TRADE:
(A CANCER PLAY OFF THE BEATEN PATH)
(NVCR), (MRK), (ISRG)
How can you surprise the world? More often than not, a revolutionary solution comes from an unconventional idea that initially gets mocked for its ridiculousness.
Over time though, this very same idea gains traction and the masses gradually see its value.
In the biotechnology world, this came in the form of a physicist searching for a novel approach to battle cancer.
This is how Novocure (NVCR) came to life.
When we look at cancer and how it’s treated, we think about the traditional pharmaceutical companies and their treatments, including radiation, drugs, and surgery.
Novocure has been forging its own unique track in the field of oncology.
The company’s technique is groundbreaking, presenting a different approach from the various forms of chemotherapy proposed.
It’s not even close to the trend of coming with new lines of drugs like Merck (MRK) with Keytruda.
Novocure uses a device, which it calls Optune.
This is worn over a cancer patient’s head. The device then generates an electric field that can help beat cancer. Sounds like a science fiction idea, doesn’t it?
While some call it absurd, Novocure’s idea is actually remarkable.
In layman’s terms, the premise is that cells are held together through an electric charge.
The goal is to blast solid cell tumor cancers using a specific currency to disrupt the charge, thereby inhibiting the tumor’s capability to stay together.
Basically, Novocure uses electro-fields to break up the cell division process that leads to the growth and spread of cancer.
By not letting the tumor replicate, Novocure’s device is dramatically boosting the patient’s capacity to battle the disease.
This therapy is called “Tumor Treating Fields” (TTFields).
While TTFields are definitely promising, these cannot replace traditional therapies. Rather, these are expected to be used alongside or in combination with other treatments, particularly chemotherapies and other direct targeted medications.
Founded in 2000, Novocure received its first FDA approval in 2011.
At the time, the New Jersey-based company developed TTFields for glioblastoma, which is an extremely aggressive type of cancer that originates in the brain and has a very low survival rate.
Since then, the company has been working to expand its regulatory footprint.
Recently, Novocure received FDA approvals for the expanded use of TTFields to cover more cases of glioblastoma.
It also has the green light for mesothelioma, which is typically caused by asbestos and affects the lining of the lungs and chest wall.
Novocure also has late-stage trials for therapies geared towards non-small cell lung cancer, pancreatic cancer, brain metastasis, and ovarian cancer.
Aside from inhibiting tumor cells from replicating, TTFields can also stop DNA damage, induce cell regeneration or autophagy, decrease cell migration, and trigger immune responses.
In terms of collaborators, Novocure has attracted the attention of Merck. While not much is known about their partnership, the two companies have been linked in some projects, including abdominal cancer therapies.
Reviewing the company’s pipeline and track record, it’s reasonable to say that Novocure is a growth stock.
However, its fundamentals are much stronger compared to other companies that are in the early stages.
Novocure’s revenues have steadily increased annually, driven by a series of growth levers.
One of them is its increased market share, with more and more patients using the therapy.
Another is the growing number of use cases for TTFields, with the company expanding to apply the treatment to other cancers. Lastly, there are new geographies to be tapped.
Since 2016, the company’s revenues have grown from only $82.9 million annually to an impressive $494 million in 2020.
In fact, 2020 was a good year for Novocure, showing off a 41% revenue growth since 2019. For 2021, the company is estimated to record at least a 21% increase in its profits.
Two factors could play key roles in achieving this goal.
The first is that the company has finally reached the point of profitability. While its R&D expenses rose due to the new case approvals, Novocure still managed to rake in a positive net income last year. Plus, the company has been rapidly boosting its operating cash flow.
The second is that Novocure has been conscientious in ensuring that its balance sheet remains fairly clean.
In an effort to raise funds, the company has decided to issue equity. While it does have roughly $430 million in gross debt, Novocure investors should see more cash flow thanks to the accelerated stamp of approval the company received for its TTFields therapy.
While growth investors are used to seeing this kind of movement, the objective is to turn the corner and earn a profit eventually.
Hence, it’s promising to see Novocure moving in that direction earlier than anticipated.
At this point, Novocure is the only company offering this treatment. This means it has no direct competitor in the market.
Needless to say, every use case of TTFields that earns approval amplifies Novocure’s total addressable market.
In terms of growth trajectory, the most similar company I can compare Novocure to is Intuitive Surgical (ISRG).
In 2010, ISG’s share price was in the $90 range. By 2021, the company has been trading at roughly $750 per share.
Based on its performance so far, Novocure flashes a similar potential just in a different vertical. In fact, Novocure is estimated to trade at roughly $600 per share or higher by 2025.
