Mad Hedge Biotech and Healthcare Letter
August 15, 2024
Fiat Lux
Featured Trade:
(THE INCREDIBLE BULK)
(LLY), (NVO), (RHHBY), (AMGN), (PFE), (VKTX)
Well, slap me silly and call me a contrarian. A few years back, when Eli Lilly's (LLY) market cap was under $500 billion, everyone thought it was just another faceless pharma giant on the Street.
But holy molecule, Batman! Today, Lilly isn't just knocking on the door of the trillion-dollar club—it's about to blow it off its hinges. Let's dive into Lilly's Q2 2024 earnings, shall we?
Revenue? Up 36% year-on-year to $11.3 billion. Operating income? Nearly doubled to $3.72 billion. Net income? $2.97 billion, up 86%. EPS? $3.28 on a GAAP basis, or $3.92 if you like your numbers massaged.
Now, I've seen more bubbles pop than a kid with a roll of bubble wrap, but this isn't froth - this is rocket fuel.
Lilly's guidance for 2024 is now $45.4 billion - $46.6 billion in revenue. That's $3 billion more than they were projecting a few months ago. Talk about sandbagging.
No wonder Lilly's share price has shot up 18% in the past few days.
Next, let's take a look at what’s driving this growth: tirzepatide, which is marketed as Mounjaro for diabetes and Zepbound for obesity.
In Q2, Mounjaro raked in $3.1 billion, up from $1.8 billion in Q1. Zepbound, which only hit the market in November, brought in $1.24 billion, more than doubling its Q1 performance.
Combined, that's $4.34 billion in a single quarter from one molecule. To put that in perspective, that's more than some entire countries' GDPs.
But Lilly isn't a one-trick pony. Let's take a quick tour of their other divisions.
Oncology grew to $2.16 billion, up from $1.67 billion last year, largely thanks to breast cancer therapy Verzenio.
This drug could hit $5 billion in sales this year, putting it firmly in blockbuster territory. Not bad for a drug that doesn't even cure baldness.
Immunology saw Taltz and Olumiant bring in $825 million and $228 million, respectively.
With mirikizumab finally approved last October and lebrikizumab likely to overcome its manufacturing hiccups, this division could double in size by decade's end.
It's like watching a caterpillar turn into a butterfly, if butterflies were worth billions of dollars.
Even neuroscience, which saw a dip to $339.5 million from $387.2 million last year, has a potential game-changer up its sleeve.
Donanemab, now approved as Kisunla for Alzheimer's, could bring in $5 billion annually.
Add in remternetug, another Alzheimer's therapy in the pipeline, and we could be looking at a $10 billion per year business by 2030.
That's a lot of people remembering where they left their keys.
Now, I know what you're thinking. "So, what’s the catch?" Well, you're not wrong to be skeptical. This is pharma, after all, and things can go south faster than a New Yorker fleeing to Florida for tax reasons.
The main risk? Competition. Every pharma company worth its salt is working on GLP-1 agonists.
Novo Nordisk (NVO) is already in the game with semaglutide (Wegovy and Ozempic), and others like Roche (RHHBY), Amgen (AMGN), and Pfizer (PFE) are nipping at Lilly's heels.
There's also the possibility of long-term side effects we haven't seen yet, or the risk that the healthcare system buckles under the weight of demand for these pricey drugs.
After all, we're talking about drugs that cost more per year than a decent used car.
But here's the thing: Lilly has a massive head start. They're not just leading the race – they're lapping the competition.
And they're not resting on their laurels either.
They've got orforglipron, an oral GLP-1 agonist, in Phase 3 trials. Then there's retatrutide, nicknamed "triple-G," which has shown even more impressive weight loss results than tirzepatide.
So, where does this leave us? Well, I expect Lilly to become the first trillion-dollar pharma company. Yes, you read that right. A trillion dollars.
Is their valuation justified? Based on current numbers, probably not.
But we're not betting on current numbers, we're betting on the future. And let me tell you, Lilly's future is dazzling.
Remember, just a few years ago, a $20 billion-a-year drug was considered the pinnacle of pharma success.
Tirzepatide could blow past that mark before the decade's out. And that's just one drug in Lilly's impressive arsenal.
Of course, there's always the risk that another company could swoop in with an even better GLP-1 agonist. My money's on Roche, Pfizer, or Viking (VKTX) if anyone's going to pull it off.
For now, though, Lilly's the thoroughbred in this race, and I wouldn't bet against them unless I suddenly developed a burning desire to live in a cardboard box.
That being said, predicting where this wild market is heading? That's like trying to catch lightning in a bottle while blindfolded and riding a unicycle.
But in the case of Lilly, I think even a blind squirrel could see this nut coming.
So, strap in because it’s going to be one hell of a ride, and this particular acorn might just grow into the mightiest oak on Wall Street. You wouldn’t want to miss out on the shade it'll provide in the years to come.
Global Market Comments
August 15, 2024
Fiat Lux
Featured Trade:
(TESTIMONIAL)
(ELECTIONS IN DAYS GONE PAST)
Hi John,
I made it to Cortina on my European vacation paid for entirely by my successful trades this year from the Mad Hedge Fund Trader.
Today, we hiked to Lago di Sorapis and I am now enjoying a Dolomiti on the veranda. I will depart tomorrow to continue through the Alps to avoid the heatwave in southern Italy.
Tonight, I will be searching for a few Bond girls….but haven’t seen any yet.
Best regards,
David
You may have noticed that the 2024 presidential election has reached a fever pitch, so it is time to fill you in on the deep background of this all-American practice.
I come from a background that is drowning in history. I am the end product of pilgrim stock who landed in Massachusetts in 1630. I am descended from two of the witches executed at the Salem Witch Trials, a connection to which friends attribute my marketing predicting prowess. We have traced ourselves back to 17 ancestors who fought in the Revolutionary War.
The original John Thomas served on George Washington’s staff at Valley Forge and was responsible for building log cabins for the troops. We sued the government to overturn a portion of Andrew Jackson’s 1830 Indian Removals Act and won. We still know the names of all the slaves we owned because the wills were registered with the county courthouse. We fought on both sides of the Civil War.
So I feel well qualified to comment on elections past. In the late 18th century, only “men of property” were allowed to vote. You had to own 25 acres of land with a house, or 50 acres unimproved. Only about 5% of the population qualified. The great irony of the Tea Party movement, which wants to return the country back to our old ways, is that virtually none of them would have been permitted to vote back then.
The US was largely a rural agricultural country in those days. Voters often had to ride on horseback for days to vote at the county seat, frequently through frigid November snows. Some congressional seats were decided by the casting of a mere 10 or 20 votes.
Candidates greeted the hungry and exhausted travelers with feasts of venison on a spit and a concoction of dark rum, honey, and cloves, haranguing them with speeches while they ate.
Often, the candidates who put on the best spread and got the most voters drunk won the election. These frequently degenerated into drunken brawls, and more than one county courthouse was burned down. This led to laws mandating election “dry” days, which are still in force in many parts of the country today.
Look at the long lines snaking out of polling stations today, and citizens enduring eight-hour waits, I am reminded of how much the country has changed in 242 years.
But it is also clear how much it has remained the same.
Elections were Much Simpler in the Old Days
“I used to tell lies. But I’ve given it up, because the field has become overrun with amateurs,” said the great American 19th century humorist, Mark Twain.
(PSO), (IBM), (CHGG), (LPL), (NVDA), (AMZN)
What if textbooks could read you as well as you read them? That's the promise of AI-powered learning.
But what exactly does this AI-powered future look like?
First, forget those dusty, static tomes of your school days. Instead, get with the times and think of textbooks that learn with you, adjusting their content and pace to match your individual needs.
They'll pinpoint your strengths and weaknesses faster than a Wall Street analyst spotting a market trend, and deliver personalized lessons and feedback in real-time.
These digital marvels will assess a student's grasp of calculus quicker than you can say "derivative," serving up personalized content faster than a short-order cook on amphetamines.
We're talking real-time feedback, custom-tailored lessons, and engagement levels that'll make social media look boring.
For the class dunce, it's extra help. For the whiz kid, it's brain fuel.
Basically, using AI textbooks is like having a tutor that never sleeps, doesn't charge by the hour, and won't judge you for showing up in your pajamas.
And trust me, this isn't some pie-in-the-sky idea that only appeals to educators. In fact, it's already shaping up to be a multi-billion dollar goldmine for sharp-eyed investors.
Let's start with the big picture. The broader education technology (EdTech) market is on track to explode to a mind-boggling $404 billion by 2025.
We're not talking about a gentle uptick here. This is the kind of growth that makes the Gold Rush look like a garage sale.
Zoom in a bit, and you'll see the “AI in Education” market is estimated to grow at a jaw-dropping CAGR of 47% from 2021 to 2027, reaching $3.68 billion by 2023.
And the global textbook market? It's set to hit a cool $20.6 billion by 2026, growing at a steady 3.4% CAGR from 2021.
But here's the kicker: AI-powered textbooks are poised to disrupt this entire industry faster than you can say "digital transformation."
Don't just take my word for it, though. Look at what's already happening in the real world.
Carnegie Learning's MATHia uses AI to make math less painful than a root canal. DreamBox Learning adapts to students faster than a chameleon on a disco floor.
And Duolingo? They're making language learning more addictive than your favorite smartphone game.
Needless to say, AI isn’t just about cool tech toys anymore. It’s also reshaping how we learn.
Studies show these interactive, personalized experiences can boost student engagement by up to 60%.
And it's not just the tech nerds who are excited. A survey by EdWeek Research Center found that 66% of teachers believe AI can personalize learning for students.
When was the last time 66% of teachers agreed on anything?
Meanwhile, venture capitalists, those professional gamblers of the finance world, poured a record $16.1 billion into EdTech in 2020.
That's not just putting your money where your mouth is—it's stuffing your entire wallet down your throat and asking for seconds.
So, who are the players in this educational gold rush? Let's start with the old guard.
Pearson PLC (PSO) is using AI for everything from adaptive learning to automated grading. They’re looking to partner with IBM (IBM) and its Watson AI, creating a brain trust that would make Einstein look like a slack-jawed yokel.
Chegg (CHGG) is another one to watch. It uses AI to solve problems and catch plagiarists quicker than a frat house can empty a keg.
But it's not just the education-specific players making moves.
Tech giants are stepping into the classroom. LG Electronics (LPL) is expanding into the education sector faster than a teenager's excuse for missing homework.
NVIDIA (NVDA) is providing the raw computing power, Amazon (AMZN) is offering the cloud infrastructure, and IBM is bringing its AI expertise to the table.
It's like the Avengers of AI, but instead of saving the world, they're trying to make sure little Timmy finally grasps fractions.
And the future of edtech? It's so bright, you might need to wear shades in the classroom.
We're talking VR field trips to ancient Rome, AI tutors that make Socrates look like a slacker, and learning analytics that can predict academic success better than a helicopter parent.
I know that for some of us, passing notes was high-tech classroom communication. Obviously, everything we know about school has changed since then.
Now, AI is writing the whole textbook. I suggest you start studying this sector now, or risk being left back a grade in the school of profitable opportunities.
Mad Hedge Technology Letter
August 14, 2024
Fiat Lux
Featured Trade:
(POSITIVE SIGNAL FOR THE TECH RALLY)
($COMPQ), ($TNX)
We received highly bullish news from the fiscal policy side today.
Conditions are everything in the short-term which is why macro events sometimes steal the whole show by destroying or propping up market sentiment.
Scare events can shock investors and become the impetus to take profits to protect capital.
Fortunately, the data from the CPI index has most likely given the green light for the US Central Bank to officially initiate its easing cycle next month.
My guess is that Fed Governor Jerome Powell cuts by 25 basis points and it could turn out to be a hawkish cut.
This is massively bullish for tech stocks ($COMPQ) leading up to the next earnings report in October.
This sets the backdrop for tech stocks to motor towards the upper left in upcoming months.
Lower rates ($TNX) translate into lower costs of capital for tech stocks to borrow money for paying stuff like salaries, software, and hardware.
The high-rate environment has translated into a dearth of companies going public and has stifled the creative juices at the formative stages of Silicon Valley.
That last jobs report offered new signs of a cooling labor market, which stoked fears that the Fed may have waited too long to start lowering interest rates after keeping them at a 23-year high for the last year.
A milder inflation reading released Wednesday removes one of the last hurdles the Federal Reserve needed to clear before cutting rates in September.
The Consumer Price Index (CPI) increased 2.9% over the prior year in July, down from June's 3% annual gain in prices. On a "core" basis, which strips out the more volatile costs of food and gas, prices in July climbed 3.2% over last year — down from 3.3% in June. That was the smallest increase since April 2021.
The new numbers are the latest confirmation that inflation is in fact dropping off a cliff after heating back up during the first quarter of the year, a development that prompted the Fed to warn at one point that rates would likely stay higher for longer.
Fed Chair Jerome Powell made it clear at the end of last month that a cut in September was “on the table” as long as the data supported it. He and other policymakers have said they want to be sure that inflation is in fact moving “sustainably” down to their 2% goal.
Tech stocks have positively correlated with interest yields since 2020, which is counterintuitive.
What this really means is that the growth rate of tech has overpowered the 5% Fed Funds rate which is quite impressive.
That high rate was supposed to pummel tech stocks and that fear-mongering failed to materialize.
No doubt the AI boom delivered a helping hand to tech shares as well.
Tech stocks were one of the few sectors in the public market that remained attractive in the face of aggressive rate hikes.
With the Fed almost to the point of reversing hawkish policy, I do believe it is “all systems go” for tech stocks in the short-term and this removes yet another possible black swan event off the table.
I am bullish on tech shares in the short-term.
“I believe you have to be willing to be misunderstood if you're going to innovate.” – Said Founder of Amazon Jeff Bezos
