Mad Hedge Biotech & Healthcare Letter
February 11, 2020
Fiat Lux
Featured Trade:
(NOVO NORDISK IS MINING GOLD WITH DIABETES)
(NVO), (LLY)
Diabetes is one of the fastest-growing and serious health conditions that affect the lives of over 50% of Americans, with 60 million more categorized as pre-diabetics. As expected, the market for diabetes treatments is saturated.
However, this biotechnology company has been hailed as one of the leaders in this sector: Novo Nordisk (NVO).
Novo Nordisk has long established itself as a major player in this lucrative market, with diabetes treatments in its portfolio primarily responsible for the 24% jump of the stock’s performance in 2019 -- an increase that has been sustained up until today.
The company’s lineup includes a number of insulin products such as Tresiba and NovoRapid, with Novo Nordisk supplying roughly 50% of the insulin distributed globally.
Meanwhile, its top-selling Type 2 diabetes drug Ozempic ranked first among all the drugs launched in 2018.
Capitalizing on the success of Ozempic as a blockbuster insulin injectable, Novo Nordisk has gained FDA approval to market this bestselling drug as a treatment to reduce the risk of major adverse cardiovascular (CV) condition among patients of Type 2 diabetes.
This is actually an impressive move since diabetics are more often than not also suffering from other comorbidities like kidney problems, obesity, and CV disease.
With this expanded indication involving CV risk reduction, Novo Nordisk’s cash cow will be on par with heavyweights like Bristol-Myers Squibb (BMY) and AstraZeneca’s (AZN) Farxiga as well as Boehringer Ingelheim Pharmaceuticals, Inc. (BIPI) and Eli Lilly’s (LLY) Jardiance.
Ozempic, which was first approved way back in December 2017 as a diabetes medication and launched in the market by 2018, has long been considered the company’s strongest moneymaker.
In fact, the first nine months of 2019 saw Ozempic bring in roughly $1 billion in sales worldwide.
Still riding the momentum of its diabetes treatments, Novo Nordisk also recently received another label upgrade that classifies its recently approved oral tablet Rybelsus as CV safe as well. Projected sales for this drug now lands somewhere between $2 billion and $5 billion.
In addition to CV diseases, Novo Nordisk has also enjoyed success on other fronts like obesity.
For instance, the company’s prescription weight loss shot Saxenda has been gaining sales momentum since its release in 2014.
The fact that Saxenda can also help improve blood sugar levels for pre-diabetic patients has made it the first of its kind across the globe.
Earning $540 million in 2018, which represented a 50% jump from its 2017 sales, Saxenda is estimated to own a 68% share of the obesity market.
Saxenda’s dominance was once again proven in its third-quarter earnings report in 2019 when the drug gained an impressive 56% increase compared to the same period in the previous year.
Novo Nordisk shares come with a bit of a steep price though, and investors are hesitant over the strong reliance of the company on its diabetes lineup. After all, 84% of its sales in the third quarter of 2019 came from this line of business alone.
However, the recent approval and expanded indication of Rybelsus as another groundbreaking Type 2 diabetes treatment both in the US and abroad makes Novo Nordisk a highly coveted investment.
Keep in mind that over 90% of diabetes cases fall under that type, so the company is poised to dominate not only a lucrative sector but also an addressable target market.
Apart from that, the early and mid-stage pipeline of Novo Nordisk offers a promising lineup.
The company has been consistent with its strategy, and that is focusing on its strengths then building on them. Right now, Novo Nordisk has a lot of up and coming candidates not only for its tried and tested diabetes market but for rare diseases as well.
Thus, Novo Nordisk sales are expected to continue its upward trajectory in 2020. If this trend continues, the company can double its earnings practically every five years.
Global Market Comments
February 10, 2020
Fiat Lux
Featured Trade:
(THE MAD HEDGE FUND TRADER’S FAVORITE ONLINE BROKER)
Today, I would like to make a suggestion on a stock that I believe should continue to get a bounce and follow through to the upside.
The stock is iRobot Corp (IRBT).
I would like to use the same structure as the trade we just put on with KEX.
That is the unequal straddle.
IRBT reported on February 7th, so there is no scheduled earnings event in the near future.
IRBT is trading around $52.54 as I write this.
The suggestion will be an unequal straddle with a bullish bias.
The idea will be to buy 2 calls for every 1 put.
Buy to Open (2) February 28th - $52.50 calls @ $2.40. The 2 calls will cost $4.80
Buy to Open (1) February 28th - $52.50 put @ $2.50
The total debit will be $7.30 per position.
Based on the nominal portfolio, limit the trade to a 2 lot or a total of $1,460. This is a 1.5% risk based on the nominal portfolio.
The end result if you trade the suggested position size is that you will own (4) February 28th - $52.50 calls and (2) February 28th - $52.50 puts.
Mad Hedge Technology Letter
February 10, 2020
Fiat Lux
Featured Trade:
(THE MODERN AGE TECH FORCE MULTIPLIER)
(GOOGL)
In a blink of an eye – I missed my entry point again!
The earnings report gave us mixed messages, but the weakness in shares will naturally be short-lived.
Sometimes, people really forget to understand how powerful and dominant Google (GOOGL) really is.
As the stock kept running away from me and the math looked less and less appetizing, I decided to wait for the next go-around to execute a call spread on Google.
Even though sometimes Google gets slapped on the wrist for some minor blemishes on its earnings report, this time around they gave us new revenue disclosures and higher-than-expected share buybacks.
The stock cratered 2.82% to $1,440 a share in early trading last Tuesday but is still up around 25% year-over-year.
Google’s earnings per share of $15.35 was more than enough to beat expectations, but revenue was $46.08 billion, missing expectations of $46.94 billion.
Google's operating margin of 20% missed by 1%.
Google has been notoriously private about their revenue hoard but they did chime in with some more color when Google's CFO Ruth Porat, said, "to provide further insight into our business and the opportunities ahead, we’re now disclosing our revenue on a more granular basis, including for Search, YouTube ads and Cloud."
Google is still and will be at the forefront of any technological innovation of this generation buttressed by a staunch digital ad business to fund anything they want to do.
I looked into buying a call spread last Tuesday and the stock took off like a scalded chimp muddying option prices.
My big-picture thesis is unchanged, and I tell anyone and everyone in the aisles of Whole Foods to buy Google on any short-term weakness.
It’s uncanny ability to drive engagement and monetization across its 9 products with 1 billion plus users is a rare phenomenon.
Even though the law of large numbers creeps up to hurt the company, it still has strong engagement, advertiser value, and monetization possibilities.
Disclosure will give investors a more transparent way to calculate the monetization engines like Maps, Discover, and e-commerce suite of products.
What did we find out?
YouTube did $15 billion of revenue in 2019.
Google Cloud does $9 billion of annual revenue growing 50% year-over-year.
Google’s cloud business is practically the same size as Amazon Web Services (AWS) in 2016, but expanding slower than AWS did at that time.
The company has such a strong balance sheet that share repurchases were higher than expected at $6.1 billion vs. $4.0 billion.
Another sore point would be that headcount and capex in data centers, servers continue to be on the high side.
Google revealing numbers for YouTube and cloud for the first time is clearly because they felt comfortable in doing so.
I believe that they will start disclosing more detail going forward especially as the cloud division continues to ramp up and contribute meaningfully to its earnings.
And remember that it was only in July that Google said its cloud unit had just reached $8 billion in annualized revenue and planned to triple its sales force over the next few years.
Combined with installing Sundar Pichai as the new Alphabet CEO, this is a conscious move to provide more transparency to put its revenue drivers in the shop window.
Former Alphabet CEO and Google founder Larry Page and co-founder Sergey Brin stepped down from the positions last December, leaving Pichai as the big boss with power to make all game-changing decisions.
The aforementioned two still retain voting shares in the company.
The last talking point is that Google has been under intense scrutiny by federal and state regulators hoping to prove anti-competitive behavior.
A collection of 50 attorney generals from different states are investigating Google’s ad business.
But many experts believe that Google has a good chance of winning or stalling the feds, yet, the most likely outcome is that Google will be able to keep its business model but pay another massive fine which is a net positive.
Basically, Google’s narrative is intact, and any selling should be met by a wave of buying.
While the Diary of a Mad Hedge Fund Trader focuses on investment over a one week to a six-month time frame, Mad Day Trader, provided by Bill Davis, will exploit money-making opportunities over a brief ten minute to three-day window. It is ideally suited for day traders, but can also be used by long-term investors to improve market timing for entry and exit points. Read more
“If the Starbucks secret is a smile when you get your latte... ours is that the Web site adapts to the individual's taste.” – Said Founder and CEO of Netflix Reed Hastings
Global Market Comments
February 10, 2020
Fiat Lux
Featured Trade:
(MARKET OUTLOOK FOR THE WEEK AHEAD, or BATTLING THE CORONAVIRUS),
(SPY), (CCL), (RCL), (WYNN), (DAL), (VIX), (VXX)
I am writing this to you from the first-class cabin of Quantas Airlines on the nonstop flight from Melbourne, Australia to San Francisco, a 14-hour flight. While my flight from the US to the Land Down Under was packed, the return was half empty, great for free upgrades.
It has been a daunting day. I was originally scheduled to transfer on my flight from Perth to Sydney. But my plane there was found to be contaminated with Coronavirus and had to be decontaminated. I quickly rerouted.
I ended up sitting next to a research doctor who worked for San Francisco based-Gilead Sciences (GILD) and was returning from Wuhan, China, the epicenter of the virus. Since all flights from China to the US are now banned, he had to route his return home via Australia.
What he told me was alarming.
The Chinese are wildly understating the spread of the Coronavirus by perhaps 90% to minimize embarrassment to the government, which kept the outbreak secret for a full six months.
Bodies are piling up outside of hospitals faster than they can be buried. Police are going door to door arresting victims and placing them in gigantic quarantine centers. Every covered public space in the city is filled with beds and the roads are empty. Smaller cities and villages have set up barriers to bar outsiders.
He expected it would be many months before the pandemic peaked. It won’t end until the number of deaths hits the tens of thousands in China and at least the hundreds in the US.
The good news is that Gilead Sciences has an antiviral agent it developed for the other Coronaviruses, MERS and SARS, years ago which may be effective against the present epidemic. The company has already sent a planeload of the drug to China for immediate testing, which my new friend escorted.
The world has learned a lot since the West African Ebola outbreak of 2013. The Coalition for Epidemic Preparedness Innovation (CEPI) set up in response to that disease is now leading the charge against Corona.
A lab in Australia was able to isolate the virus in a month. The AIDS virus took ten years. It only required another day to sequence the genome. That has greatly shortened the time for the development of a vaccine and a cure. It will take a year to mass produce enough vaccine to inoculate the world. That will be too late to save the many in China who have already perished.
Needless to say, the impact on the global economy will be immense. As we learned from the trade war, take China out of the equation and many things don’t work anymore.
The country’s GDP growth rate is expected to plunge from 6% to 2% this quarter, and possibly zero. Factories have closed, disrupting supply chains globally. The car industry is most affected, with Hyundai in South Korea already shutting down production for lack of parts.
Travel and tourism shares, like airlines (DAL), casinos (WYNN), and cruise lines (CCL), (RCL) have also been hard hit.
US stocks are taking notice, but slowly. It seems that massive Quantitive Easing by the Federal Reserve is enough to head off even a global pandemic, at least for now. This will not last. We have already seen one 600-point down day and a (VIX) spike to $21. There will be more.
Despite the fact that we may be facing the end of the world, the Mad Hedge Trader Alert Service managed to catapult to new all-time highs.
My long volatility positions I picked up when the Volatility Index (VIX), (VXX) was a lowly $12, brought in a double or a triple for most holders in a mere two weeks.
My Global Trading Dispatch performance rose to a new high at +358.96% for the past ten years. My trailing one-year return rose to +48.59%. We closed out January with a respectable +3.11% profit. My ten-year average annualized profit ground back up to +35.31%.
All eyes will be focused on Corona, the virus, not the beer. The weekly economic data are virtually irrelevant now.
On Monday, February 10 at 1:00 PM, US Consumer Inflation Expectations are out.
On Tuesday, February 11 at 12:00 PM, JOLTS Job Openings for December are released.
On Wednesday, February 12, at 12:00 PM, Federal Reserve Chairman Jerome Powell testifies in front of congress.
On Thursday, February 13 at 8:30 AM, Weekly Jobless Claims come out. US Core Inflation for January is published.
On Friday, February 14 at 10:30 AM, Retail Sales for January are printed. The Baker Hughes Rig Count follows at 2:00 PM.
As for me, after my epic voyage home, I’ll be catching up on my sleep, dealing with the 16 hours of jet lag from Western Australia.
Good luck and good trading.
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
