Biotech Letter Archives

Survival Of The Solvent

The biotech industry likes to measure success in breakthroughs, but 2024 taught us to count it in survivors.

Sure, we saw remarkable wins in schizophrenia and obesity treatments - enough to keep Big Pharma writing checks that would make anyone pause.

But those layoff numbers? They keep climbing, and I've seen enough market cycles to know what that means.

Yes, the Nasdaq Biotechnology Index eked out a 5.4% gain in 2023, but don’t let that calm surface fool you.

Beneath it, some companies were taking on water faster than a paper boat in a tsunami. It’s not exactly the environment to make your local biotech cheerleader grin ear to ear.

Still, there is value in understanding what went wrong.

Take Kodiak Sciences (KOD) - and I mean that literally because the market sure did. They watched their high hopes for an age-related macular degeneration treatment encounter the brick wall of trial results that proved no better than existing standards of care.

The market’s reaction was swift and merciless, erasing more than 70% of Kodiak’s valuation. Back in my hedge fund days, we called this kind of drop a "character-building event."

Then there's Gossamer Bio (GOSS), which missed its endpoints in pulmonary arterial hypertension so badly you'd think they were aiming for a different disease altogether.

They learned the hard way that lofty ambitions can deflate at high altitudes when critical endpoints fail to materialize, leaving the company staring at a gaping hole where investor confidence used to be.

Bluebird Bio (BLUE)? They've been playing regulatory red light green light with their gene therapy platform.

Despite having the science that could make this possible, they struggled to justify the hefty R&D spending necessary to bring complex and costly treatments to a market that can turn stingy when results arrive late and uncertain.

Speaking of tough breaks, Sio Gene Therapies (SIOX) discovered the cruel reality that neurodegenerative pipelines rarely behave the way spreadsheets say they should.

And poor Codiak BioSciences (CDAK) - their exosome therapy platform imploded so spectacularly that they were forced to declare bankruptcy.

Even Galapagos NV (GLPG) found itself stuck reassessing once-promising late-stage candidates. Those strategic alliances they bragged about last year aren't looking quite so strategic anymore, either.

It would be easy to pin the blame on management missteps or scientific overreach, but the numbers are showing something else.

FDA’s Center for Drug Evaluation and Research did not exactly smile on the biotech crowd’s ambitions. In 2022, it approved 37 novel drugs. By December 2023, fewer than 30 had made the cut.

Want more sobering statistics? The probability of a drug making it from Phase I to FDA approval sits at 7.9%. In immuno-oncology alone, we've got over 1,500 active trials fighting for attention. Overcrowding would be an understatement.

Meanwhile, global biopharmaceutical R&D spending topped $200 billion in 2022 - that's a lot of investor cash burning through labs with no guarantee of return.

Remember the IPO party from a few years back? Well, 2023 saw fewer than 20 biotech IPOs brave the public markets. That's not caution - that's fear.

For those still interested in this sector - and I know you're out there - some of these disasters might offer lessons, or even opportunities.

The iShares Biotechnology ETF exists for those who prefer to spread their risk. Smart move, considering what we've seen this year.

Let's talk specific names. Bluebird Bio might still have a chance if they can get their regulatory act together and convince insurers to cover their therapies.

Sio Gene Therapies could find new partners - though I wouldn't hold my breath. Galapagos has Gilead (GILD) in their corner, which counts for something in this market.

So here's my take: hold Kodiak if you can stomach more volatility - they've already taken their biggest hits.

Same goes for Bluebird Bio, but only if you've got patience. Galapagos? Keep it, but watch those pipeline updates like a hawk.

Gossamer Bio? Time to consider an exit. Sio Gene Therapies lacks catalysts, and Codiak - well, bankruptcy speaks for itself.

The lesson from Kodiak, Gossamer, Bluebird, Sio, Codiak, and Galapagos is simple: brilliant science means nothing without solid analysis, realistic timelines, and serious cash. 2024 proved that point six times over.

Sure, everyone in biotech wants to change the world. The hard part? Staying solvent long enough to make it happen.

December 17, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 17, 2024
Fiat Lux

Featured Trade:

(THE BIG BATCH THEORY)

(CTLT), (DHR), (RGEN), (AVTR), (NVO), (PFE), (LLY), (MRK)

The Big Batch Theory

Biotech Letter

If I had a nickel for every time someone said pharmaceutical manufacturing was boring, I could’ve started bidding against Novo Holdings for Catalent (CTLT) myself.

Sure, I’d still be $16.5 billion short, but you get the point—this deal is huge, and it’s about to make some smart money look even smarter.

Here’s the deal: Novo Holdings is shelling out $16.5 billion to snap up Catalent, a contract development and manufacturing organization (CDMO).

If that acronym sounds like alphabet soup, let me translate: CDMOs are where the real action happens.

These are the guys behind the curtain making sure your miracle drugs and life-saving treatments aren’t just ideas—they’re products hitting the market at scale.

The numbers don’t lie. The CDMO market sits at $146 billion right now.

Fast-forward to next year, and that balloons to $243.3 billion. By 2029, it’s cruising toward a cool $332 billion.

And if you think that’s impressive, just wait: the broader pharmaceutical outsourcing trend is nowhere near slowing down.

In 2014, Big Pharma still clung to in-house production for 66.3% of its output.

Today? That figure’s down to 51%, and dropping fast. Why? Because outsourcing lets the specialists handle the hard stuff—faster, cheaper, and more efficiently.

For investors, Catalent’s immediate upside is a no-brainer. The acquisition premium is pure gravy, but that’s not the whole story.

Rivals like Lonza Group (SWX: LONN) and Samsung Biologics are already feeling the heat.

The biologics CDMO market alone is expected to expand by $10.63 billion between 2024 and 2028, and you better believe those two are scrambling to stay ahead.

If you own shares, keep your seatbelt fastened. If you don’t, well… you might want to rethink that.

And here’s where it gets really interesting: Novo Holdings may be private, but its publicly traded golden child, Novo Nordisk (NVO), is set to ride this wave like a pro surfer.

They’re already a global powerhouse in biologics, and Catalent’s souped-up manufacturing capabilities are going to help them scale production with military-grade efficiency.

Lower costs, tighter operations, bigger margins—it’s like handing a Formula 1 car to an already championship-winning team.

So if you’re not watching Novo Nordisk stock, you’re doing it wrong.

Of course, it’s not just the big CDMO players who stand to win here. Companies like Danaher (DHR), Repligen (RGEN), and Avantor (AVTR) are quietly cashing in on this gold rush.

These firms supply the picks, shovels, and critical bioprocessing tools that CDMOs need to keep production humming.

As Catalent scales under Novo Holdings, demand for these essentials will go through the roof.

Zooming out, the pharma manufacturing landscape is evolving at a breakneck pace.

The CDMO market is expected to hit $530.3 billion by 2033, growing at a steady 7.7% CAGR.

That’s not speculative growth—it’s a structural shift, backed by demand for biologics, gene therapies, and personalized medicine.

In short, we’re entering an era where outsourcing is king, and companies with the infrastructure to capitalize on it are poised to dominate.

Don’t forget about the big dogs in Big Pharma, either.

Pfizer (PFE), Eli Lilly (LLY), and Merck (MRK) aren’t just spectators in this game. They’re snapping up CDMO capacity, investing in biologics, and doubling down on therapies with blockbuster potential.

The Catalent deal is just the latest chess move in a game where the stakes keep getting higher.

So what does this mean for you? If you’re holding Catalent, congratulations—your portfolio is about to get a nice bump.

But the real play here isn’t Catalent alone. It’s understanding that CDMOs, suppliers, and adjacent players are the unsung heroes of this industry transformation.

You want exposure to the companies enabling the next wave of medical innovation? This is where you look.

Novo Holdings just threw down the gauntlet, and the smart money is already moving. The pharmaceutical manufacturing sector isn’t boring—it’s booming.

So, while everyone’s chasing flashy biotech startups and blockbuster drugs, the real smart money is quietly following the companies that make those breakthroughs possible.

Catalent isn’t just a $16.5 billion deal—it’s proof that outsourcing is the new backbone of pharma’s future. Call it “The Big Batch Theory:” scale up, outsource smart, and watch the returns multiply.

Ignore this shift, and you’re leaving money on the table.

Now, if you’ll excuse me, I need to check my CDMO positions. Just like a perfectly run batch, they’re growing fast—and that’s exactly how I like it."

December 12, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 12, 2024
Fiat Lux

Featured Trade:

(BREAKING THE MOLD)

(MRK), (PFE), (GILD), (AZN), (DSNKY), (JNJ)

Breaking The Mold

Biotech Letter

Did you know that in the 1890s, scientists tried to cure cancer by injecting patients with... bread mold? (Spoiler alert: it didn't work.)

Fast forward to 2024, and Merck just announced something that makes moldy bread look like, well, moldy bread: their new cancer drug achieved a 100% complete response rate in its Phase 3 trial.

That's doctor-speak for "the cancer completely disappeared in every single patient." Not 99%. Not 99.9%. One hundred percent.

The drug in question is zilovertamab vedotin, and it belongs to a fascinating family of medications called antibody-drug conjugates, or ADCs.

These drugs are essentially molecular delivery trucks - the antibody part knows exactly where to go, while the drug part carries the cancer-fighting payload.

It's a bit like having a microscopic postal service that only delivers to cancer cells, except instead of Amazon packages, it's delivering something more lethal.

The story of how Merck got their hands on this drug is equally interesting.

In 2020, they wrote a check for $2.75 billion to acquire a company called VelosBio. To put that number in perspective, that's enough money to fund a small space program, or if you're feeling particularly eccentric, to buy 5.5 million laboratory mice (a purchase that would probably raise some eyebrows at the bank).

The global market for ADCs hit $7.72 billion in 2023, and some analysts predict it could reach $44 billion by 2029. I asked three different economists to explain these projections and got four different answers, but they all agreed on one thing: it's a lot of zeros.

And, as expected, the competition in this field is intense. Pfizer (PFE) bought Seagen for $43 billion. AstraZeneca (AZN) and Daiichi Sankyo (DSNKY) partnered up for Enhertu, while Gilead Sciences (GILD) nabbed Immunomedics and their wonderfully named drug Trodelvy.

Even Johnson & Johnson (JNJ), which most people associate with baby shampoo and that bottle of Band-Aids in their medicine cabinet, jumped into the fray by buying Ambrx Biopharma.

Then there's Mersana Therapeutics, partnered with Merck. They're smaller than the pharmaceutical giants, but in biotech, size isn't everything. (I once visited a lab where groundbreaking cancer research was happening in a space roughly the size of my kitchen.)

What makes Merck's achievement particularly remarkable is its rarity. In the world of cancer research, getting a 100% response rate is about as common as finding a unanimous decision on social media. It represents a fundamental shift in how we treat cancer, moving from traditional chemotherapy to these precisely targeted treatments.

For investors wanting a piece of this molecular magic, here's the thing: success in biotech isn't like picking a winning racehorse (though both can make your palms equally sweaty).

It's about finding companies that have mastered the three-ring circus of innovation, partnerships, and research pipelines. And yes, I've spent enough time in research facilities to know that "pipeline" is just a fancy word for "stuff we hope works but haven't broken yet."

Merck's perfect score suggests they've cracked one particular code, but companies like Seagen (now part of Pfizer), AstraZeneca, and Daiichi Sankyo are all pushing boundaries in their own ways.

Despite the competition, Merck's recent achievements still look the most promising. The company's breakthrough with zilovertamab vedotin suggests they're not just throwing darts at a laboratory wall - they're onto something big. So when their stock dips, smart money takes notice.

Similarly, Seagen, now under Pfizer's umbrella, looks particularly promising, especially given their established track record in the ADC space and Pfizer's deep pockets. Add them to your watchlist, too.

AstraZeneca and Pfizer, meanwhile, merit a steady "hold" position in your portfolio - like that reliable sourdough starter that keeps producing even if it's not particularly exciting at the moment.

Both companies have proven ADC programs and the resources to weather market volatility, even if they're not currently serving up the kind of headline-grabbing results that Merck just delivered.

Remember those 19th-century scientists with their bread mold? Turns out, they were onto something, even if their execution was a bit... moldy.

And while I wouldn't recommend their treatment methods today (please don't raid your fridge for experimental purposes), their spirit of innovation lives on in every precisely-targeted ADC molecule. After all these years, I guess you could say cancer treatment has finally risen above its moldy beginnings.

December 10, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 10, 2024
Fiat Lux

Featured Trade:

(THE INSURANCE COMPANY ALWAYS RINGS TWICE)

(UNH), (CI), (CVS), (HUM), (AMGN), (BIIB), (GILD)

The Insurance Company Always Rings Twice

Biotech Letter

Got an interesting call yesterday from an old college buddy - let's call him Bob. We go way back to our UCLA days, before I headed to Tokyo and he went into tech.

He was fuming because UnitedHealth (UNH) just denied his family's third claim this year, something about an "experimental treatment" for his daughter's rare condition.

Coming from a guy who just cashed out of his third startup, hearing him rant about insurance bureaucracy was pretty rich.

Still, his situation got me thinking. After hanging up, I dug into what's really happening with insurance stocks, and the picture isn't pretty.

UnitedHealth Group, our nation's biggest health insurer, just had its worst week in years - dropping 9.5% after one of their executives was tragically murdered, which sparked an unexpected spotlight on their claims practices.

Cigna (CI) and CVS Health (CVS) caught the same downdraft, falling 4.5% and 5% respectively.

But here's what really caught my attention: UnitedHealthcare's denial rate for Medicare Advantage claims has more than doubled since 2020, hitting 22.7% last year.

Interestingly, this spike happened right as they rolled out new automation processes. Funny how that works, isn't it?

Experian Health's latest report shows this isn't isolated - 73% of healthcare providers are reporting more denials than ever, with processing times stretching longer and longer.

The cost of this trend? The Council for Affordable Quality Healthcare estimates $31 billion annually in administrative expenses alone.

Meanwhile, biotech companies find themselves in an awkward position. They're developing treatments that cost more than a house in the Hamptons and then need these very same insurers to make them accessible.

Amgen's (AMGN) been crushing it with their human therapeutics portfolio, pulling in $28.2 billion in revenue last year.

Biogen's (BIIB) making serious moves in neurological treatments, though their path has been rockier - just ask anyone who followed the Aduhelm saga.

Gilead Sciences (GILD), our antiviral champions, have managed to stay above the fray, partly because their HIV and hepatitis treatments have become standard of care.

But even these giants must wonder:: as insurers tighten their prior authorization screws, what happens to patient access?

These biotechs spend billions developing breakthrough treatments - Amgen alone dropped $4.4 billion on R&D last year - only to face the insurance industry's equivalent of "computer says no."

The irony isn't lost on anyone: insurers need innovative treatments to justify their premiums, while biotech needs insurance coverage to justify their R&D spending.

It's a delicate dance that's worked reasonably well so far, but these rising denial rates have everyone on edge. Just last quarter, we saw several biotech earnings calls dominated by questions about insurance coverage rather than clinical trials.

So what should we do? Well, I say UnitedHealth and Cigna are "holds" right now - the current turbulence needs time to settle.

CVS Health is showing broader operational challenges that suggest it might be wise to consider selling. But Humana (HUM), with their strong Medicare Advantage presence, looks promising.

On the biotech side, Gilead looks like an excellent stock to buy on the dip. Its leadership in antivirals and solid pipeline make it compelling.

Amgen and Biogen? Keep them on your watch list while they try to find their footing in this situation.

Bob texted me again this morning - turns out he's filing an appeal with help from one of Silicon Valley's top healthcare attorneys. Typical Bob, bringing a cannon to a knife fight.

But maybe that's exactly what this sector needs right now - some heavy artillery to shake up the status quo.

For those willing to dodge the crossfire, there might just be some spoils of war worth picking up. After all, fortune favors the bold—and sometimes, the heavily armed.

December 5, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 5, 2024
Fiat Lux

Featured Trade:

(GRANT EXPECTATIONS)

(TXG), (ILMN), (TMO), (DHR)

Grant Expectations

Biotech Letter

The first time I visited the National Institutes of Health (NIH), I got lost trying to find the bathroom and ended up in a lab where someone was studying glow-in-the-dark zebrafish.

"Wrong door," the researcher said, "but at least you didn't walk in on the fruit fly mating experiments."

Such wrong turns seem oddly fitting now as the NIH, with its $45 billion research budget, navigates its own unexpected direction under new director Dr. Jay Bhattacharya.

This reminds me of a conversation I had with a university tech transfer officer who once described the grant distribution process as "academic musical chairs but with billion-dollar stakes."

Bhattacharya seems determined to change the tune, proposing limits on how many grants individual researchers can hoard like squirrels before winter.

It's a move that has some biotech companies sweating through their lab coats, particularly 10x Genomics (TXG), whose financial statements show a quarter of their revenue sprouting from NIH grants like bacteria in a petri dish.

The last time someone tried to cap grants—back in 2017—the scientific community reacted as if someone had suggested replacing peer review with a Magic 8-Ball.

The proposal was quietly buried in the bureaucratic equivalent of a drawer labeled "Ideas We'd Rather Forget." But like that mysterious experiment growing in the back of the lab fridge, it's back.

Meanwhile, Robert F. Kennedy Jr. has been making noise about trimming the NIH's organizational chart. While Kennedy's influence carries weight, Congress still holds the purse strings, and they've historically treated the NIH like their favorite child at allowance time.

Bhattacharya's critique of the NIH's traditionally cautious approach to funding feels like watching someone suggest skydiving to their risk-averse aunt.

He's pushing for more high-risk, high-reward projects, which could be a windfall for companies playing in cutting-edge sandboxes like CRISPR and AI-driven diagnostics.

Illumina (ILMN) and 10x Genomics are practically salivating at the possibilities, while established institutions might find themselves feeling like that last teenager picked for the dodgeball team.

The global picture adds another layer of intrigue to these changes. While we're debating grant caps and organizational reshuffling, China has been quietly doubling its biotech investments over the past decade, particularly in regenerative medicine and precision oncology.

If NIH reforms stumble, U.S. companies could find themselves playing catch-up. For those who want to take part in the action, this presents an opportunity to diversify.

International markets with increasing government funding for biotech offer new avenues for growth. Global biotech ETFs could also serve as a hedge against domestic uncertainties.

Against this backdrop, diversification becomes key. Consider companies with revenue streams less tethered to NIH funding.

Thermo Fisher Scientific (TMO) and Danaher (DHR), for example, boast a global footprint that cushions them against domestic policy shifts.

After all, the global life sciences tools market, valued at $52 billion today, is projected to grow to $95 billion by 2030, with a Compound Annual Growth Rate (CAGR) of nearly 15.89%.

Emerging frontiers like gene therapy and personalized medicine also deserve attention. These fields aren’t just buzzwords—they’re the future of biotech.

ETFs focused on genomic innovation, like the ARK Genomic Revolution ETF (ARKG), provide exposure to high-growth sectors while spreading risk.

So, what’s the play here? Well, investment opportunities in this space will depend on your appetite for disruption.

10x Genomics presents an intriguing case at $15.90. Yes, up to 25% of its revenue comes from NIH funding, making it vulnerable to policy shifts.

But this same connection positions them perfectly to benefit from Bhattacharya's high-reward research initiative. The upside potential here is massive for those willing to weather some volatility.

Illumina stands out at $144.15 as a different kind of opportunity.

Their lock on the genomic sequencing market combined with aggressive R&D investments offers that rare combination: steady performance with genuine growth potential. Think of it as smart defense for your biotech portfolio.

Then there's Thermo Fisher Scientific, trading at $529.63. Their global reach and diverse revenue streams make them remarkably resilient to NIH policy changes.

The stock won't double overnight, but it offers the kind of reliability that lets you sleep soundly.

In the end, the NIH's transformation under Bhattacharya feels a bit like watching a scientist redesign an experiment mid-trial. Some see doom and gloom in these changes, while others spot golden opportunities.

But if you ask me whether the biotech glass is half empty or half full, I'd say we're missing the point entirely—in this industry, the glass has always been refillable.