Mad Hedge Biotech and Healthcare Letter
September 14, 2023
Fiat Lux
Featured Trade:
(A PIGGYBACK RIDE TO THE FUTURE)
(BMY), (NVS), (PFE), (MDT), (ABT), (TMO), (HCA), (UHS), (DGX), (LH)
Tag Archive for: (BMY)
As I walked the sterile, fluorescent-lit hallways of a leading biotechnological institute last summer, I overheard snippets of a conversation that immediately piqued my interest: “human-pig kidney,” “game-changer,” and “investor's goldmine.”
We often think of medical advancements in terms of their immediate patient benefits. Yet, in this chance encounter, the talk of the town was how these breakthroughs could cascade into lucrative opportunities in the stock market.
But how close are we to realizing this future?
Imagine a world where organ shortages, a grim reality for over 106,000 hopeful recipients in the U.S., could become a thing of the past. This isn’t a whimsical daydream but a tangible reality we're inching towards.
The mastermind behind this evolution? Kidneys grown inside pig embryos with a human cell composition ranging between 50% to 70%. This meticulous procedure, entailing 1,820 genetically modified pig embryos transplanted into 13 surrogate mothers, brought forth five specimens that met research criteria.
Switching our perspective, from a purely financial lens, the world of biotechnology is ripe with promise. But with the emergence of this organ transplant technology, investors should sit up and pay attention.
Consider giants like Bristol Myers Squibb (BMY), Novartis AG (NVS), and Pfizer Inc. (PFE). Their R&D teams are burning the midnight oil to roll out immunosuppressive drugs, pivotal for post-transplant procedures. Influenced by such groundbreaking endeavors, their stock trajectory could be a sight to behold in 2023.
Transitioning to medical equipment, Medtronic plc (MDT), Abbott Laboratories (ABT), and Thermo Fisher Scientific Inc. (TMO) aren't just names in the medical devices sphere. They represent the zenith of innovation, manufacturing state-of-the-art equipment integral to organ transplant procedures. If this biotechnological marvel scales, they stand at the precipice of unprecedented growth.
Moving onto healthcare, HCA Healthcare, Inc. (HCA) and Universal Health Services, Inc. (UHS) are the custodians of transplant centers. Their potential upswing is directly proportional to the success of human-pig kidney transplantations. And not to be overlooked, Quest Diagnostics Incorporated (DGX) and LabCorp (LH) are at the heart of organ compatibility diagnostics. As this transplant technology forges ahead, they are poised for a meteoric rise as well.
However, a word of caution is due.
While the financial forecasts appear rosy, any discerning investor is well aware of the need to balance enthusiasm with caution. The stock market's volatile nature, coupled with regulatory shifts and unpredictable research outcomes, can be game-changers. It is extremely crucial to keep your finger on the pulse of the sector and maybe even conduct more in-depth research on the potential of each company before making investment decisions.
Also, beyond finance, it would be remiss not to address the elephant in the room. The melding of human cells into pig embryos has raised eyebrows and ethical concerns. With human cells found in the embryos' brains and spinal cords, it prompts uneasy questions about the potential integration into the pigs' cognitive or reproductive systems. How the scientific community and regulators address these concerns will undoubtedly influence both the pace and direction of research, as well as investor sentiment.
Looking back, my chance encounter in that research institute was an omen of the times to come. On the brink of a scientific revolution, we are witnesses to a watershed moment in healthcare. But for the astute observer, it’s not just about saving lives. It's about understanding how such advancements can recalibrate the entire financial landscape.
To encapsulate the mood, let me leave you with this quote from the infamous Marie Curie: "Nothing in life is to be feared; it is only to be understood. Now is the time to understand more so that we may fear less.”
Mad Hedge Biotech and Healthcare Letter
August 8, 2023
Fiat Lux
Featured Trade:
(A DISCOUNTED PHOENIX SET TO RISE)
(BMY), (JNJ), (GSK), (MRK)
The rollercoaster ride that is the equity market never fails to excite, surprise, and occasionally bemuse us. There's an erratic heartbeat in how it functions - illogical at times, downright whimsical at others. The upshot? Sometimes, great companies find themselves in the bargain bin of Wall Street – perfect for investors who love a good discount.
This is where Bristol Myers Squibb (BMY) comes in.
In the rear-view mirror of the past year, Bristol Myers Squibb hasn't exactly been the star of the stock market show. Its financial pulse has been somewhat weak, with lethargic revenue growth and, at times, flatlining completely. A big part of this has been the loss of patent exclusivity on a once superstar medication last year, causing its top line to struggle.
Flash forward to BMY dropping its Q2 2023 financial report, and the question is whether the company met the Street's expectations. Well, not exactly.
Let's dive into the numbers. The Q2 2023 revenue was a hefty $11.23 billion, albeit a 0.97% dip from the previous quarter and a 5.6% drop year-over-year. Non-GAAP net earnings clocked in at $3.7 billion or $1.75 per share, a quarter less than my earlier prediction.
The culprit? A steeper decline in Revlimid's sales than expected. The blockbuster sales were $1,468 million, a sizable 41.3% YoY drop, thanks to generics flooding the market and lower net selling prices in Europe.
Cue the traders and investors giving a thumbs down to the financials, sending the stock price spiraling down by 4.2% in just two days.
Over half a year, BMY's share price shrank by a whopping 16%, even with a bunch of positive clinical trial results and a flurry of medicine approvals.
Meanwhile, the bigwigs of the global cardiovascular and oncology drug market, Johnson & Johnson (JNJ), GSK (GSK), and Merck (MRK), have been doing a victory lap.
Still, there’s a silver lining here.
Bristol Myers is currently strutting around with a forward price-to-earnings (P/E) ratio of just 8. If you stack that against the pharmaceutical industry's average of 15.3, our friend Bristol Myers looks appealing. This is especially true when you consider the company is far from down for the count and has quite a few tricks up its sleeve to stage a solid comeback.
Projected revenue for Bristol-Myers Squibb for Q3 2023 lands somewhere in the ballpark of $10.8 billion to $11.92 billion, which, sure, marks a 4.5% dip from Q2 expectations. But hold onto your hats because Bristol-Myers Squibb's revenue is projected to comfortably clear the bar and pull in a cool $11.35 billion.
The heroes of this victory? Groundbreaking drugs like Yervoy and Opdualag have become hotter than a two-dollar pistol in the medical world.
We're talking about a Q2 2023 sales total of $154 million for Opdualag alone, up a jaw-dropping 165.6% from Q2 2022. And let's not forget this medical marvel only debuted in March 2022 and has been selling like hotcakes thanks to its performance in clinical trials.
What's more, Bristol Myers Squibb has been as busy as a bee, adding nine innovative medicines to its repertoire over the last three years. These new kids on the block are set to step up to the plate and replace older, soon-to-be patent-less drugs. They're also expected to drive sales growth into the stratosphere for the foreseeable future.
Bristol Myers Squibb is expected to report continuous growth, thanks to its proven clinical trials and potential to expand its labels. The company is already rolling up its sleeves to test the safety and efficacy of Camzyos for conditions like non-obstructive hypertrophic cardiomyopathy and heart failure with preserved ejection fraction (HFpEF).
As we look towards the horizon of 2025, Bristol Myers forecasts an impressive revenue of $10 billion to $13 billion from its freshest batch of products. Considering it pulled in $2 billion last year from these drugs, that's not too shabby. But don't think it’s resting on its laurels. The company is already testing over 50 clinical compounds across a smorgasbord of trials.
Let's also pay attention to Bristol Myers' attractive dividend profile.
The company currently offers a yield of 3.5%, dwarfing the S&P 500's average of 1.5%. Plus, it has bumped its payouts by 43% over the last five years.
With a cash payout ratio of around 42%, there's much room for this trend to continue into the foreseeable future.
Despite recent stumbles on the revenue and stock value front, BMY is no slouch. Its unyielding character and unwavering commitment to ploughing funds into fresh offerings signal a robust comeback on the horizon.
So, in the immortal words of an old Wall Street sage, it’s time to "Buy low, sell high,” and BMY is looking like quite a bargain right now.
Mad Hedge Biotech and Healthcare Letter
July 18, 2023
Fiat Lux
Featured Trade:
(BIG PHARMA, BIGGER OPPORTUNITIES)
(AMGN), (HZNP), (BMY), (GILD), (PFE)
The irresistible charm of pharma companies often boils down to their potential pot of gold at the end of the rainbow: the groundbreaking drugs they're tirelessly laboring to introduce. But let's not be reckless.
As appetizing as these stocks may be, they carry a hefty price tag. Moreover, the road to drug development is fraught with unexpected potholes that can leave a nasty dent in the stock's value.
Alternatively, you could pivot to buying a cluster of the more affordable ones.
After all, embracing the tried-and-true philosophy of "a penny saved is a penny earned" can be a winning strategy across diverse sectors, and pharma stocks are no exception.
Here are some options you can explore.
Hovering at $222, Amgen (AMGN) carries a price-to-earnings ratio slightly shy of 12. The firm is grappling with the challenge of a potential few-billion-dollar-a-year dip in sales for some of its drugs while making ambitious strides to enhance its annual revenue of $27 billion.
So far, the most notable beacon of hope for Amgen is its experimental obesity treatments, AMG133 and AMG786, positioned in a market that has the potential to skyrocket beyond a whopping $30 billion annually.
Meanwhile, in a bold move, Amgen has proposed a $27 billion acquisition of Horizon Therapeutics (HZNP).
This strategic takeover could directly bolster Amgen's earnings per share (EPS) by more than $5, significantly enhancing the firm's current annual EPS of $18.
Amgen remains resilient despite facing hurdles from the Federal Trade Commission, which has launched legal proceedings to halt the transaction. The company is not just fixated on Horizon; it has the bandwidth to explore other potential acquisitions or augment its stock buyback program.
Another stock to consider is Bristol Myers Squibb (BMY). Priced at a humble $63, it’s trading at a modest valuation, barely touching eight times its earnings.
The market trembles at the potential stagnation—or worse, reduction—of its annual EPS, currently soaring just above $8. This anxiety is fuelled by the projected multi-billion dollar decline in sales for several drugs as the sands of time run out on their patents. These drugs, after all, form a substantial portion of this year's anticipated revenue of $46.6 billion.
However, it's not all gloom and doom. Bristol Myers Squibb has not one, not two, but a whopping eight new drugs jostling their way through clinical trials. One to keep an eye on is milvexian, a stroke prevention formula that shows immense promise.
These innovative concoctions could eventually inject a stunning $30 billion into the company's annual revenue stream, with the stock potentially reaching an ambitious price target of $85, projecting a handsome upside of 32%.
Gilead Sciences (GILD) is one more stock to take into consideration. Trading at an enticing 11 times earnings, it’s a steal at $76.
Yes, some of its products are on the downhill, but here's the game-changer: Trodelvy, an innovative cancer treatment.
Anticipated to triple revenues, this treatment’s sales is projected to surge from a humble $1 billion this year to a staggering $2.7 billion by 2028.
This suggests an upward trajectory for Gilead's sales, hurtling from just shy of $27 billion this year to well over $30 billion by 2028. The earnings per share (EPS) is poised to see an annual gain of about 6%, potentially reaching nearly $9 by then.
There’s also Pfizer (PFE), priced at a modest $36 and trading just shy of 11 times earnings.
As the dark cloud of Covid-19 gradually disperses, the pharmaceutical titan projects a significant contraction in its annual vaccine sales - halving it down to nearly $14 billion this year, contributing to the overall $67.8 billion income.
But don't be too hasty to dismiss Pfizer's prospects. Its innovation pipeline is teeming with promising solutions like its groundbreaking meningitis therapy. Moreover, it's poised to breathe fresh life into its vaccine division by fusing a flu and Covid vaccine.
Come 2026, the company anticipates its vaccines will arm over 130 million Americans, a notable surge from this year's 79 million recipients of the Covid vaccine alone.
You may find a less treacherous path by adopting a strategic approach of integrating more economically priced pharma stocks into your portfolio.
These stocks may grapple with dwindling sales from established drugs and the relentless onslaught of generic brands.
Nevertheless, they also harbor promising new entrants that, if successful, could spark a significant rally.
All things considered, the companies mentioned above are not mere “cheap” stocks but intriguing opportunities laced with robust potential. I suggest you take advantage of the dip.
Mad Hedge Biotech and Healthcare Letter
June 27, 2023
Fiat Lux
Featured Trade:
(THE INCONSPICUOUS STAR)
(BMY)
Do you remember the 1999 cinematic sensation "The Matrix?" Neo, the protagonist, had a choice: swallow the red pill to wake up to reality or the blue one to slumber in illusion. Perhaps our market could do with a similar reality check—swallow the red pill and recognize the true value of companies with hefty margins and cash rivers.
After all, not so long ago, the markets were all singing praises for pharmaceutical stocks, idolizing them for their deep cash coffers and ironclad resilience against inflation.
But in the theater of investment, the curtain has suddenly dropped on them, as the market's affection has pirouetted towards the exuberant dance of AI stocks, evoking memories of the late '90s tech bubble.
Yet, for the savvy value investors in the audience, this shift is less of a tragedy and more of a golden intermission.
They now have a chance to secure prime seats at discounted prices, notably at the performance of the pharmaceutical powerhouse, Bristol Myers Squibb (BMY).
As the market narrative unfolded this year, BMY's plotline took a 9% twist, veering away from the 12% uptick of the S&P 500 (SPY). I've earlier peeked behind BMY's curtains, shedding light on its promising pipeline.
So why does BMY steal the spotlight?
Bristol Myers Squibb is not merely an actor but a maestro orchestrating symphonies in cardiovascular, oncology, and immunology sectors. The jewel in its crown is its leading role in the lucrative and burgeoning realm of immuno-oncology.
Behemoths like BMY have a magic wand—they can either acquire promising new drugs or cultivate them in their own labs, thanks to their deep wells of expertise.
BMY has been striking high notes with its margin, powered by star-performing drugs like the cancer-fighting Opdivo and cardiovascular medicine Eliquis, both of which enjoy patent protection until 2028.
In the last act (over three years), BMY has introduced nine new characters to its play, which are predicted to rake in a whopping $4 billion in this year's box office sales.
These factors ensure BMY's marquee stays lit. Notably, it has earned an A+ profitability grade, with sector-leading EBITDA margin and return on equity of 43% and 23%, respectively.
Even though the first quarter's revenue seemed to tread water YoY (with a 1% dip after adjusting for currency effects), BMY's newest cast members have outshone the rest. This is demonstrated by new product revenue that soared from $350 million YoY to a hefty $723 million in Q1.
Peering into the future, BMY's management anticipates that the revenue from these nine new stars will breathe new life into their portfolio, contributing between $10 billion and $13 billion in annual sales by 2025.
This troupe includes the cardiovascular prodigy, Camzyos, which has been stealing the limelight with promising efficacy data. Given its record thus far, we can expect a considerable upside to its fair value of $66.
Despite the looming specter of generic pressures, Bristol Myers Squibb is in the throes of a grand product launch.
Aside from Camyzos, the newly launched stars anticipated to push BMY to greater heights include cancer combatant Opdualag (an extension of the Opdivo franchise), hematologic treatments Reblozyl, Abecma, and Breyanzi, and immunological medications Sotyktu and Zeposia.
Bristol's multi-pronged attempts to capture significant market opportunities should help navigate the stormy seas of the long-term patent cliff.
As a finale, BMY flaunts a sturdy BBB-rated balance sheet, featuring a safe net debt to TTM EBITDA ratio of 1.5x. It offers a respectable 3.5% yield, and the dividend is comfortably protected by a 29% payout ratio, with a 5-year CAGR of 7%.
BMY also has a trick up its sleeve to return capital to shareholders tax-savvy via share buybacks, currently having $7 billion in remaining buyback authorization. At a forward PE of just 8.2, BMY essentially gets a 12% earnings yield on share buybacks.
Lastly, I find BMY to be priced just right at $65.66 with the aforementioned PE of just 8.2. This valuation seems unfairly low for a company with a strong line-up of newer drugs.
While only a modest 4% EPS growth is predicted for the company this year and low single-digit EPS growth over the next couple of years, BMY management could stir up the plot and boost the bottom line with share buybacks at the current discounted price.
BMY, currently being snubbed by investors, provides a fantastic opportunity for value and income investors to scoop up high-quality stocks at the perfect price.
Its robust balance sheet, high margins, and portfolio of new drugs all add up to make BMY a compelling long-term buy for investors.
With the stock priced at a discount and offering a well-covered, attractive yield, income and value, investors could see significant returns over the long term.
Mad Hedge Biotech and Healthcare Letter
April 25, 2023
Fiat Lux
Featured Trade:
(SMALL BIOTECHS, BIG OPPORTUNITIES)
(PFE), (SGEN), (MRK), (RXDX), (BMY), (BIIB), (ETNB), (KRTX), (MORF), (IDYA)
The biopharma sector has seen a flurry of merger and acquisition activity recently, and the trend seems to continue. This is good news for smaller biotech stocks looking to capitalize on the trend.
In the first quarter of 2023, the total healthcare and life sciences M&A in the United States reached roughly $71 billion, more than double the $28 billion seen in the same quarter in 2022. Notably, this figure includes Pfizer's (PFE) acquisition of Seagen (SGEN) for $43 billion.
Still, the situation isn't as dire as it may seem especially considering that in 2022, the total M&A spending in the U.S. dropped to about $300 million year over year from the $400 billion recorded in 2021.
The main culprit behind this trend appears to be higher interest rates, which have made financing a deal less appealing for buyers, particularly when there is the potential for a less optimistic profit outlook due to a slowing economy.
Even with these concerns, pharmaceutical deals have been far from stagnant since the end of the first quarter.
Merck (MRK), a biopharmaceutical company with a market capitalization of $288 billion, announced that it would purchase Prometheus Biosciences (RXDX) for roughly $11 billion, representing a premium of about 75% over the pre-announcement price. The announcement had a considerable impact on Prometheus stock, which saw a surge in value.
Shareholders of Prometheus enjoyed significant gains as Merck seeks to replace its revenue stream from cancer treatment Keytruda, which generates just over $20 billion annually.
Keytruda's patent is set to expire in 2028, leaving room for competitors to gain market share and making Merck's acquisition of Prometheus a critical move. For context, Prometheus's ulcerative colitis product alone has a total available market worth roughly $30 billion.
This deal could be just the beginning of a wave of new mergers and acquisitions in the biotechnology and healthcare industry. Experts note that we are entering a "smart optimism" period in the sector.
It makes sense for larger pharma companies to explore mergers and acquisitions in the current market for several reasons.
For one, many larger companies are seeking to revamp their drug pipelines. Take Bristol Myers Squibb (BMY), for example, which has a market capitalization of $146 billion. Sales of its myeloma treatment, Revlimid, likely peaked at just over $12 billion in 2021. As the patent for Revlimid expires, the company is expected to lose market share, causing sales to plummet to the low hundreds of millions.
While the company has several new drugs in development, it may still seek to acquire smaller firms to safeguard its future. However, given that Bristol has just over $9 billion in cash, any significant acquisitions it pursues could require taking on debt. Such a move would not be unprecedented, as Pfizer financed roughly 70% of its Seagen purchase with long-term debt.
Another big name that could be on the lookout for an attractive deal is Biogen (BIIB), a company with a market capitalization of $42 billion. Biogen is reportedly interested in the neuropsychiatric and inflammatory sectors and could strike a deal as early as the latter half of 2023.
Looking at things from a seller's point of view, many of these companies are now much less valuable than they once were on the public market and, therefore are easier targets for acquisition.
The SPDR S&P Biotech ETF (XBI) has taken a 50% hit from its all-time high set in February 2021. This is mainly due to higher interest rates, which have diminished the perceived value of future profits. Since many small biotechs are valued based on their projected earnings well into the future, this has significantly affected their stock prices.
Some biotech companies have been eyed as potential takeover targets due to their reduced market value.
One is 89bio (ETNB), with a market cap of $1.2 billion and a stock price falling by more than 50% from its all-time high, could be a potential target.
Similarly, Karuna Therapeutics (KRTX), which has a market cap of $7.4 billion and has seen a decline of almost 30% from its all-time high, is also considered an acquisition candidate.
Morphic Holding (MORF), with a market cap of $1.8 billion and a drop of more than 35% from its all-time high, and Ideaya Biosciences (IDYA), which has a market cap of $706 million and has lost almost half its value from its all-time high, could also be targeted for acquisition.
Overall, this is a promising period for the sector. So, take a moment to consider some of the smaller biotech firms in the market. Suppose these companies have a hard time finding interested buyers. In that case, there is still hope for shareholders as there's a chance that a larger corporation may step in and make an acquisition, leading to a substantial payout.
