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.
Mad Hedge Biotech & Healthcare Letter
April 27, 2021
Fiat Lux
FEATURED TRADE:
(THE FUTURE OF MEDICINE)
(CRSP), (VRTX), (EDIT), (NTLA), (PFE), (NVS), (GILD), (RHHBY),
(BMRN), (QURE), (SGMO), (CLLS), (ALLO), (BEAM)
Winning the Nobel Prize in 2020 provided biotechnology companies more traction on Wall Street.
The victory led to commercializing the 2012 discovery, Crispr-Cas9, at breakneck speed, with gene editing companies like CRISPR Therapeutics (CRSP), Editas Medicine (EDIT), and Intellia Therapeutics (NTLA) gaining considerable boost in their values.
Since then, the total market value for the products of these three has more than doubled in recent months to reach $23 billion.
Basically, Crispr-Cas9 functions like molecular scissors.
What makes this technology incredible is that Crispr-Cas9 can classify a single address out of 3 billion letters within the genome by using only a particular sequence. With this, we can repair thousands of genetic conditions and even offer more potent ways to battle cancer.
The market favorite among the gene editing companies so far is CRISPR Therapeutics, with $8.72 billion in market capitalization.
In comparison, Editas has $2.76 billion while Intellia Therapeutics has $4.15 billion.
CRISPR Therapeutics is currently working on a treatment that would implant tumor-targeting immune cells in cancer patients. The company is also prioritizing therapies that could edit cells to treat diabetes.
So far, it has made significant progress in developing treatments for a genetic disorder called sickle cell.
In the US alone, at least 100,000 people suffer from sickle cell disease, with 4,000 more born every year. Conservatively, we can estimate at least 3,000 patients availing of this one-time treatment at over $1.6 million a pop.
To date, CRISPR Therapeutics has five candidates under clinical trials for diseases like B-thalassemia, sickle cell disease, and other regenerative conditions.
It has four more queued, which target diabetes, cystic fibrosis, and Duchenne muscular dystrophy.
Compared to its rivals in the space, it’s clear that CRISPR Therapeutics is ahead when it comes to product development and trials.
Two of its candidates, transfusion-dependent beta thalassemia treatment CTX001 and sickle cell disease therapy CTX110, have already been submitted for clinical tests for safety and efficacy.
Recently, Vertex (VRTX) boosted its 2015 agreement with CRISPR Therapeutics by 10%, with the deal reaching $900 million upfront to push for quicker results in developing CTX001.
This is a crucial move for Vertex, but more so for CRISPR Therapeutics as CTX001 holds a highly lucrative addressable market.
The additional funding significantly widened the gap between the Vertex-CRISPR team and bluebird bio (BLUE) in the race to launch a new gene editing therapy targeting sickle cell disease and beta thalassemia.
To sustain its growth, CRISPR Therapeutics’ strategy is to develop drugs that only require mid-level complexity but can rake in generous financial rewards.
This is a similar tactic used by bigger and more established biotechnology companies like Pfizer (PFE), Novartis (NVS), and Gilead Sciences (GILD).
Evidently, this strategy is a great way to ensure cash flow.
Aside from its earning from the commercialization of these products, CRISPR Therapeutics can also attract larger companies to buy the intellectual property of their breakthrough treatments.
After all, startups generally get 100% premiums in contracts with Big Pharma.
Good examples of this are Novartis that bought AveXis and Roche’s (RHHBY) purchase of Spark Therapeutics.
The Roche-Spark agreement led to the first-ever FDA-approved treatment since gene therapy trials started in the 1990s. It was for the genetic blindness therapy Luxturna, which received the green light in 2017.
The second approved treatment was a muscle-wasting disease therapy Zolgensma, which was the fruit of the Novartis-Avexis acquisition.
Both conditions are rare, but the financial rewards are impressive.
At $2 million for each treatment, Zolgensma sales reached $1.2 billion annually. At the rate the therapy is selling, Novartis estimates that Zolgensma will surpass the $2 billion mark in 2021.
Novartis and Roche aren’t the only ones partnering with smaller gene editing companies.
Pfizer has been working with biotechnology companies BioMarin Pharmaceutics (BMRN) and UniQure (QURE) to develop a treatment for blood-clotting disorder hemophilia.
The COVID-19 frontrunner is also collaborating with Sarepta Therapeutics (SRPT) to come up with a treatment for Duchenne muscular dystrophy.
Gene editing has also served as the foundation for several biotechnology companies out there today like Sangamo Therapeutics (SGMO), Cellectis (CLLS), and Allogene Therapeutics (ALLO).
The market size for gene editing treatments is estimated to be worth $11.2 billion by 2025, with the number rising between $15.79 billion to $18.1 billion by 2027.
This puts the compounded annual growth rate of this sector to be at least roughly 17%.
While this is already groundbreaking with only a handful of companies knowing how to utilize the technology, the gene editing world has come up with a more advanced technique than Crispr-Cas9.
The technology is founded on the “base editing” or “prime editing” technique, which is the simplest type of gene editing that alters only one DNA letter.
So far, one company holds exclusive rights to this technology: Beam Therapeutics (BEAM).
When the technology became public, Beam stock has increased sixfold since its IPO in February 2020.
This latest development can resolve thousands of genetic diseases. However, it still requires further trials since “base editing” can also trigger damaging responses from the body.
Overall, I think CRISPR Therapeutics is the safest among these high-risk stocks.
The data from two of its candidates, CTX001 and CTX110, are incredibly promising. Plus, the added funding from Vertex boosts the confidence of investors that regulatory approval is well on its way.
The company is also capitalizing on the surging price of its stock and investing aggressively across different rare disease programs.
While the company has yet to be considered a major force in the biotechnology world, the potential multiple successes of its products could generate a company worth hundreds of billions.
This potential alone offers an investing opportunity with a substantial asymmetric advantage for its current share price.
However, bear in mind that the stock is still a risk and should be played as a long-term investment. Hence, you should buy on dips.
Mad Hedge Biotech & Healthcare Letter
April 22, 2021
Fiat Lux
FEATURED TRADE:
(THE PFIZER OF ANIMAL HEALTHCARE IMPRESSES WITH GROWTH DRIVERS)
(ZTS), (PFE), (ELAN), (IDXX)
The World Health Organization has yet to offer definitive proof that animals can infect humans with COVID-19.
However, there had been cases where humans infected the animals, including tigers, minks, lions, and domestic cats and dogs.
This might seem insane to some since we’re not even done vaccinating humans yet, but it definitely presents a large and potentially lucrative market.
Recently, Russia launched the first and only registered COVID-19 vaccine for animals, Carnivac-Cov.
Not to be outshone, Zoetis (ZTS), the leader in animal healthcare in the United States, also started working on its own COVID-19 vaccine.
In fact, Zoetis has already commenced testing its candidate on some great apes at San Diego Zoo earlier this month.
So far, the company administered two vaccine shots to three gorillas, four orangutans, and six bonobos.
Zoetis’ efforts date back to last year when news broke that dogs and cats in Hong Kong were also getting infected with COVID-19.
While the USDA has not yet approved the vaccines for dogs and cats, the organization is leaning towards giving the green light for minks.
As it turns out, minks are extremely susceptible to COVID-19, so vulnerable that Denmark actually ordered a mass culling of millions after an outbreak in November 2020.
To date, several zoos have already reached out to Zoetis to avail of its experimental COVID-19 vaccine.
Considering that all these started with the cross-species transmission, experts are also hoping to learn more about it with the help of the company to prevent future pandemics.
Zoetis is ideally positioned to lead this charge since it’s the frontrunner in the pharmaceutical sector for pets and livestock.
This company used to be a branch of Pfizer (PFE), but was later spun off in 2012 to stand on its own.
In terms of competitors, the two most relatable companies to Zoetis are Elanco Animal Health (ELAN) and IDEXX Laboratories (IDXX).
Both offer virtually the same products, but Zoetis is the biggest among the three with approximately $75 billion in market capitalization.
In comparison, IDXX has roughly $41.55 billion, while ELAN has $13.61 billion.
Knowing that there’s more than a single way to expand its business, Zoetis has been favoring acquisitions as one of its growth options.
In the past years, Zoetis has been on a buying spree, making no less than eight acquisitions so far.
Half of these are geared towards veterinary diagnostics, with the intention of dominating the fastest-growing sector of the animal healthcare industry.
All its recent acquisitions put Zoetis directly in competition with IDEXX, which is currently the undisputed leader in the veterinary diagnostics space.
To show the disparity of their current standing, IDEXX raked in $2.4 billion in revenue from diagnostics in 2020, while Zoetis only generated $305 million.
Needless to say, Zoetis has a lot of catching up to do.
Zoetis initiated its venture with a splashy $2 billion acquisition of Abaxis in 2018, which provided the ex-Pfizer company with a powerful foundation in the diagnostics sector.
This was immediately followed by a $35 million deal to buy ZNLabs in 2019. In that same year, Zoetis bought Phoenix Lab for $150 million and then continued its streak to acquire Ethos Diagnostic Science in 2020.
Apart from its venture in the diagnostics space, Zoetis has been working on bolt-on acquisitions to enhance its operations.
A good example is its $140 million acquisition of Performance Livestock Analytics in 2020, which added a software platform that Zoetis could market to farmers to help them make their farms more efficient.=
Another one is its $20 million deal with Fish Vet Group, which basically created the same platform as Performance Livestock Analytics but modified it for fish producers.
Looking at Zoetis’ acquisitions, the company is clearly building a diverse portfolio of products that go beyond pharmaceuticals.
It’s evident that it aims to enhance its leverage on tangential businesses like diagnostics and even farm management.
While these new revenue sources are definitely interesting, they’re not moving the needle just yet. Zoetis is still primarily relying on its sales of pet and livestock drugs.
Aside from developing a COVID-19 vaccine, Zoetis has been working on a strong drug pipeline.
Despite separating from Pfizer, the strategies it implemented in building its extensive and diverse portfolio of blockbuster products pretty much follow the same path and trajectory as its previous parent company.
For context, “blockbuster” drug is any product that generates a minimum of $100 million in sales annually.
Using this metric, Zoetis holds an impressive lineup of 13 blockbuster products.
In 2020, Zoetis released a “triple threat” product called Simparica Trio, which can protect dogs from heartworms, eliminate ticks and fleas, and treat and prevent hookworms and roundworms.
This is the first-ever product that offers combined protection for all three—fleas, heartworms, and ticks—in a single treatment.
Despite the financial impact of the pandemic, Simparica Trio still raked in an impressive $150 million in its first year.
Reviewing its future product pipelines, Zoetis has two more potential blockbusters slated this year: Librela and Solensia. These two will also be the first-of-a-kind treatments for osteoarthritis in cats and dogs.
Delving deeper, Zoetis holds No. 1 spot in the companion animals or pets, fish, and livestock cattle segments. It ranks No. 2 in the swine market and No. 3 in the poultry sector.
In total, Zoetis has more than 300 product lines launched in the market, and the company still has more lined up for release soon.
Akin to Pfizer’s approach, Zoetis’ style is to dominate in select core markets, developing numerous blockbuster brands that generate billions every year.
Admittedly, the human healthcare market is substantially more profitable than its animal counterpart, but for Zoetis, this also represents significantly less competition from other drug developers.
At this point, Zoetis is not only in a strong position in the animal healthcare industry, but also dominating in a market that still has incredible room for growth.
In 2020, the total pet industry market was estimated to be worth $99 billion in the United States alone.
More importantly, this segment is projected to climb in the mid-single digits in the next few years.
A key approach in Zoetis’ growth is its strategy to develop and sustain a product pipeline with an average lifespan or age of at least 30 years.
The company also constantly launches new drugs and announces enhancements to their current products.
These are seen in the over 1,100 new products and improvements Zoetis has introduced over the past five years.
Judging from the company’s performance and future plans, it’s reasonable to expect a $200 price target for Zoetis over the next 12 months, which would indicate about 26.50% upside potential based on the current trading levels.
Taking into consideration the potential 5% downside risk, shares could pull back to reach $153 before starting to rebound again.
Meanwhile, the highest price target for Zoetis could be $210.
Overall, I believe Zoetis is a stable company with strong upside potential in the next months, and growth investors would be remiss to ignore the achievements of this company.
Mad Hedge Biotech & Healthcare Letter
April 20, 2021
Fiat Lux
FEATURED TRADE:
(A DEPENDABLE BUT UNDERVALUED HEALTHCARE STOCK)
(UNH), (ANTM), (CI), (HUM), (CNC), (CHNG)
The ongoing seesaw fights in the stock market are causing too much drama that cunning investors can—and definitely should—steer clear from.
Instead of fretting over speculative and risky investments, it’s better off staying with tested and proven big-name companies that will remain solid buys for the years to come and continue to deliver positive results despite periods of uncertainty.
Among the huge names in the healthcare industry, United Health (UNH) is a strong contender that meets the criteria.
After almost a decade of delivering high returns, which shows off fast-rising earnings expectations, it’s interesting to see that the market has recently backed away from this blue-chip stock.
Nonetheless, the market’s skittishness offers an opening for investors looking to buy in the dip a company that pays dividends and promises to steadily boost your savings in the years to come.
Founded way back in 1974, UNH has become a top name in the healthcare industry, landing in seventh place on the Fortune 500 list.
To date, UNH has four main divisions handling its over 50 million members both in the US and across the globe: its private health insurance business UnitedHealthcare, its pharmacy benefits segment OptumRx, its healthcare services provider branch OptumHealth, and its analytics platform OptumInsight.
UNH has a market capitalization of $354 billion.
In comparison, the closest competitor is Anthem (ANTM), with $87.93 billion. In terms of market cap, the two are followed by Cigna (CI) with $85 billion, Humana (HUM) with $53.81 billion, and Centene (CNC) with $36.19 billion.
Amid the financial crisis brought about by the pandemic, UNH still reported a 6.2% jump in its revenue in 2020 to reach $257.1 billion.
The company’s most prominent growth driver is its Optum line, and UNH is making sure that this division continues to grow.
One of the most indicative moves towards that direction is UNH’s $7.8 billion acquisition announcement of technology and data analytics company Change Healthcare (CHNG), which should be completed by the second quarter of 2021.
In the agreement, UNH is offering Change Healthcare $25.75 for its shares, representing a premium of roughly 41% above the latter’s stock price.
UNH plans to merge Change Healthcare’s operation into OptumInsight, which currently handles hospital systems health plans, life sciences companies, and even governments.
In the first nine months of 2020 alone, OptumInsight generated over $1.9 billion, contributing to roughly 11% of UNH’s total bottom line.
The combination of these two will all but guarantee that UNH’s possession of the biggest and most powerful platform in the entire healthcare industry, with the acquisition projected to add approximately $470 million to the company’s adjusted earnings in 2022.
The decision to acquire Change Healthcare is part of the string of M&A deals executed by UNH to stay ahead of the game.
In 2019, it bought two companies to expand its operations: the DaVita Medical Group for $4.3 billion and Equian for $3.2 billion. Prior to these, UNH splurged on a $12.8 billion acquisition of Catamaran in 2015.
For 2021, UNH projects its earnings to increase, estimating its per-share profits to be somewhere between $16.90 and $17.40—and that estimate already took into consideration the headwinds involving COVID-19 that could still weigh on the company’s bottom line.
While this may appear optimistic, the truth is, generating strong results isn’t a novel accomplishment for UNH.
In the past three years, the company reported a net income of $10 billion or higher, with net margins recorded at 5% above its revenue.
Over the course of the last 12 months, UNH stock has climbed 24%, beating the S&P 500, which rose 18% during the same period. It also offers a decent dividend of 1.5%, which is admittedly slightly lower than the S&P 500 average at 1.6%.
Overall, UNH is a safe stock that you will not have to anxiously watch over and can hold in your portfolio for years.
More importantly, this company remains undervalued and still shows a lot of room for growth.
So if you’re a value investor looking with an interest in the insurance and healthcare services industry, then this market leader is a sustainable addition to your portfolio.
Mad Hedge Biotech & Healthcare Letter
April 15, 2021
Fiat Lux
FEATURED TRADE:
(BET ON THIS BIOTECH STALWART)
(BIIB), (LLY), (RHHBY), (SAGE)
Biogen’s (BIIB) move to develop the first approved treatment for Alzheimer’s disease remains the biggest story in the biotechnology industry.
Now, we’re down to the waiting part of the process as the US Food and Drug Administration reviews the drug, Aducanumab.
If successful, then Aducanumab could generate a whopping $12 billion in peak sales.
The approval could also push Biogen stock up to $400. Meanwhile, a failure could let it spiral to $200.
Aside from the United States, Biogen has also applied for approval in Europe and Japan.
Apart from Aducanumab, Biogen has another Alzheimer’s disease treatment candidate, Gosuranemab.
For comparison, Aducanumab targets the amyloid plaque in the brain while Gosuranemab targets another kind of brain protein, called tau. This candidate is currently undergoing a Phase 2 trial, with results expected to be released by June this year.
While there’s still not much to go on in terms of the efficacy of Gosuranemab, positive data from its study is estimated to push Biogen stock to reach into the $350 ballpark if we base it on previous movements involving Aducanumab.
Although Biogen is definitely the face of the race to find an approved treatment for Alzheimer’s disease, it’s not alone.
To date, its strongest competitors are Eli Lilly (LLY) with Donanemab and Roche (RHHBY) with Gantenerumab.
Outside its Alzheimer’s disease programs, Biogen has been working with Sage Therapeutics (SAGE) on another potential blockbuster.
The two companies have been developing a depression drug, Zuranolone, and the data so far have offered promising results.
Like Gosuranemab, Biogen expects data on the study in the first half of 2021 as well.
If the study on Zuranolone turns out positive results, then Biogen shares are projected to jump by as much as $72.
While all these are promising, less aggressive investors may not find Biogen a suitable investment at this point. Evidently, the stock brings with it a lot of risks.
Aside from the uncertainty of its Alzheimer’s programs, there’s also the ongoing patent battle involving one of its top-selling drugs, multiple sclerosis treatment Tecfidera.
When the company lost its patent exclusivity, the FDA started to approve generic versions of Tecfidera.
This is a major concern for Biogen since Tecfidera is a substantial revenue source.
For context, this drug generated $4.4 billion in sales in the US in 2019 alone. By 2020, sales dropped to $2.6 billion.
Now, sales for this drug are estimated to reach only $1.6 billion in 2021.
While Biogen appealed its loss of patent exclusivity, the company has already taken steps to continue benefiting from Tecfidera’s success.
An obvious effort is the launch of a newer and more potent multiple sclerosis drug, Vumerity.
To attract patients and retain its customers, Biogen has been marketing Vumerity as a more powerful and effective version of Tecfidera.
In terms of the uncertainty brought by Aducanumab, it’s true that gaining FDA approval would have the Biogen stock skyrocketing.
However, rejection won’t be as devastating to the stock. While shares are expected to fall if that happens, the suffering would be short-term.
In the long run, Vumerity will gradually gain traction and eventually reach the level of success of Tecfidera, while the rest of Biogen’s pipeline programs hold the potential to add to the company’s revenue stream.
After all, Biogen is one of the first names that comes to mind when you hear the word “biotech.”
Founded in 1978, this biotechnology company has amassed a market capitalization of more than $40 billion and multiplied its annual profit to over 200%.
While its gamble on finding a treatment for Alzheimer’s disease is a risk that not a lot of investors would be willing to take, Biogen still holds one of the most promising pipeline programs in the industry and a portfolio of existing drugs with notable potential.
Going forward, approval for Aducanumab would mean a massive year for shareholders of Biogen.
If not, then this is still a respectable company with strong rewards and worth investing in, especially if you buy the dips.
