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Pill Pushers in Peril

Once upon a time, in the not-so-distant 1980s, national pharmacy chains sprouted up across the American landscape like mushrooms after a rainstorm.

They nestled into every nook and cranny of our lives, from the bustling urban streets to the tranquil rural towns, becoming as ubiquitous as the local diner.

Fast forward to 2010, and their numbers had climbed from 18,600 to a staggering 22,500.

It was a golden era for these giants. Like a high school jock on prom night, Walgreens (WBA) and CVS Health (CVS) were on top of the world. Their share prices did the financial equivalent of bench pressing 300 pounds, ballooning to about 14 times their original size between 1995 and 2015, while the S&P 500 merely did a respectable fourfold increase.

Walgreens' wallet got a lot thicker, going from a total revenue of $42.2 billion in 2005 to a hefty $103.4 billion a decade later.

CVS wasn't far behind, with its treasure chest growing from $37 billion to an eye-watering $153.3 billion.

But as the saying goes, what goes up must come down. Today, the once invincible giants are feeling the squeeze, like a middle-aged man trying to fit into his high school jeans.

The tale of woe includes Rite Aid's (RADCQ) bankruptcy bow in October 2023, CVS's share price taking a more than 30% nosedive over two years, and pharmacists so fed up they're leaving their posts faster than rats from a sinking ship.

The crux of their dilemma? A dwindling stream of reimbursement rates from the pharmacy benefit managers, akin to trying to drink a milkshake through a cocktail straw.

Walgreens saw its adjusted operating income from its U.S. retail pharmacy division shrink by 31.1%, from $5.4 billion in 2016 to a more modest $3.7 billion in 2023.

In a similar bind, CVS saw its profits dip, leading to a drastic measure: closing up shop on hundreds of stores.

Despite these turbulent times, the enduring importance of chain pharmacies in the U.S. healthcare system cannot be overstated. They continue to play a crucial role, dispensing everything from life-saving medications to the latest in blood pressure tech.

The question now is, what's next for these once mighty titans? So far, we can see that both CVS and Walgreens are attempting a Hail Mary, broadening their healthcare horizons in hopes of justifying their sprawling presence across the nation.

Over the coming years, a significant transformation is expected to happen to Walgreens and CVS, with the brands likely to streamline their presence. With an extensive network of physical outlets, these companies are confronted with the inevitable: the need for a massive workforce and substantial resources, all of which escalate operational costs and complexities.

In an age where efficiency is king — think Starbucks (SBUX) with its pivot to drive-thru exclusives — it stands to reason that Walgreens and CVS might steer in a similar direction.

Actually, Walgreens has already dabbled in new solutions like drone delivery, a venture that aligns perfectly with the future of quick and efficient distribution of essentials, including medicines, to its customer base.

The next thing to consider is how dramatic this downsizing will be. Looking a decade ahead, we can anticipate a considerable shrinkage in their storefronts, possibly with a shift towards more compact, delivery- and pick-up-friendly formats.

As they move forward with these changes, one thing remains clear: the landscape of American healthcare and retail is evolving, and with it, these pharma giants need to adapt or risk being left behind in the annals of history, remembered as nothing more than relics of a bygone era.

The stories of these national pharmacy chains are far from over, but the next chapters promise to be as unpredictable as they are compelling. So grab your popcorn. This is one show you won't want to miss.

January 25, 2024

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
January 25, 2024
Fiat Lux

Featured Trade:

(FROM BIG TO BIGGER)

(UNH), (CI), (ELV), (CVS)

From Big To Bigger

Biotech Letter

Today, let's talk about where the smart money's at in our whirlwind economy – healthcare and insurance.

And who's the king of the hill in this game? None other than UnitedHealth Group (UNH).

It's not just any old company; it's a health insurance juggernaut that's been on a growth tear, doubling its value in just five years. That's definitely something to write home about.

With a market cap closing in at $500 billion and revenues of $372 billion in 2023, it's a force to be reckoned with. If it doubles again, we're looking at a $1 trillion giant. That's uncharted territory for healthcare stocks.

Before anything else, let's hop in our time machine for a sec.

Around 10 years back, UnitedHealth was a mere $75 billion baby. Fast forward to today, and it's ballooned to around half a trillion. We're talking about top-dog status in the healthcare world.

Now, let's get down to brass tacks. UnitedHealth's bottom line might not be the stuff of legends – a 6% profit margin over the past year.

But hold your horses – with over $300 billion in annual revenue, that 6% turns into a cool $18 billion-plus in profit.

And guess what? They've been raking in even more lately – $21.7 billion over four quarters.

"But will it double in value in a year or two?" you ask. Maybe not that fast, but hey, it's done it in five years before.

So, could UnitedHealth hit that mind-boggling $1 trillion mark by 2030? I wouldn't bet against it.

After all, UnitedHealth isn't just playing in the health insurance sandbox. It's the biggest kid in the playground – the largest health insurer in the United States and the biggest healthcare company globally.

For context, its closest peers are Cigna (CI) with $90.44 billion in market cap, Elevance (ELV) with $111.87 billion, and CVS (CVS) with $95.08 billion. You get the picture.

But here's the juicy part – UnitedHealth loves to shop. It's like the Pac-Man of healthcare, gobbling up companies left and right.

Just last year, it bagged Amedisys for a cool $3.3 billion, hot on the heels of its $5.4 billion acquisition of LHC Group. Talk about making moves.

Now, for my fellow investors, here's the sweetener: UnitedHealth also pays dividends, with a 1.4% yield. It might not sound like much, but this company's got a knack for growing dividends. It's like owning a golden goose that keeps laying more golden eggs.

So, what's the secret sauce for UnitedHealth potentially hitting that $1 trillion valuation? Simple – growth, growth, and more growth. It's not just selling insurance; it's into analytics and isn't shy about snapping up companies to beef up its portfolio.

Let's talk numbers. Management is eyeing an annual earnings growth somewhere between 13% and 16%. If UnitedHealth keeps hitting these home runs, its stock value climbing higher isn't just a possibility – it's a likelihood.

"But is it a good buy?" I hear you ask. Well, trading at around 23 times its earnings, it's a bargain compared to the average healthcare stock at 28 times earnings.

Simply put, this baby's got room to grow, and investors might just be willing to pay a premium for this gem.

So, when will it hit $1 trillion? If UnitedHealth sticks to the S&P 500 index's average 10% annual growth, we're looking at 2030 for that milestone.

But knowing UnitedHealth, which often outperforms the market, it could be sooner if it keeps up its projected annual growth rate.

In a nutshell, UnitedHealth Group isn't just a safe bet – it's a potential goldmine. With its continued growth, strategic acquisitions, and reasonable price tag, it's a shining star in any investment portfolio.

Mark my words – this is one stock that could make its investors very, very happy by 2030.

December 5, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 5, 2023
Fiat Lux

Featured Trade:

(A UNION IN THE MAKING?)

(HUM), (CI), (CVS), (AET), (UNH)

A Union In The Making?

Biotech Letter

The healthcare market was recently abuzz with the news of a potential mega-merger that sent shares of Humana (HUM) and The Cigna Group (CI) into a nosedive - 5.5% and 8.1% respectively. This news, centered around a transaction combining stocks and cash, could significantly reshape the healthcare landscape.

But let's not get ahead of ourselves. After all, in the world of healthcare mergers, certainty is as elusive as a mirage.

Still, if you’re feeling a sense of déjà vu, it’s because this isn’t the first time Humana and Cigna have danced around the idea of a merger.

Recall 2015 when Humana flirted with the idea of a merger with Cigna but ended up cozying up to Aetna (AET) – a union that never saw the light of day, thanks to the US courts.

A similar fate befell an attempted merger in 2017, when Elevance Health (ELV), then known as Anthem, tried to acquire Cigna for $48 billion, only to be blocked by the courts.

Since these previous attempts, both Humana and Cigna have significantly grown.

Prior to this market shake-up, Humana boasted a market capitalization of $62.87 billion, with Cigna commanding a higher ground at $83.77 billion.

But as history shows, regulatory skepticism often casts a long shadow over such ambitious plans, with fears of increased costs for the American public. This skepticism has extended to smaller deals, such as UnitedHealth Group's (UNH), which faced hurdles in their acquisition attempts.

Yet, the potential merger between these healthcare giants teases the possibility of substantial cost savings.

When giants unite, the promise of cost savings looms large. Redundancies in corporate functions like HR, investor relations, and executive positions offer low-hanging fruits for cost-cutting.

But the real cherry on top is the potential for operational synergies – cross-selling opportunities and leveraging infrastructure for efficient service delivery.

Humana's stronghold lies in its Insurance unit and CenterWell, with the latter, including pharmacy, provider services, and home solutions, contributing 16.3% of last year's revenue.

In contrast, Cigna wades into deeper waters, with its substantial revenue streams from pharmacy benefits and home delivery pharmacy businesses.

Now, let’s look at the companies in terms of revenue. A side-by-side of Humana and Cigna's revenues offers an intriguing picture.

Humana's Medicare Advantage revenues soared from $59.47 billion in 2020 to $72.89 billion in 2022.

Cigna, however, has only inched forward in this space. Humana's evident dominance in Medicare Advantage, with a market share of about 18%, contrasts sharply with Cigna's modest 2%.

Despite these differences, a merger isn't outside the realm of possibility.

For example, CVS (CVS) managed to successfully acquire Aetna for $69 billion back in 2018, with the two companies eventually turning into CVS Health.

While that merger proved that big deals could happen, the odds for Humana-Cigna are not exactly in Vegas betting territory.

Speculations about Cigna offloading its Medicare Advantage operations could make this merger more palatable to regulators, but it's far from a sure bet.

Another question to think about amidst these talks is why the market reacted like someone yelled “fire” in a crowded theater.

Well, it all boils down to the fear of overpayment.

Cigna, being larger, could potentially swallow Humana. But Humana, with its stronger financial health and market positioning, is seen as the more desirable entity.

The valuation metrics – price to earnings, price to adjusted operating cash flow, and EV to EBITDA – further complicate this perception, as Humana commands a premium.

With a potential merger announcement might be on the horizon, investors should approach this with a blend of skepticism and intrigue. The market is jittery, perceiving a possible merger as potentially detrimental to shareholder value.

However, should the merger succeed against the odds, the combined prowess of Humana and Cigna could spell a profitable future for investors. Knowing that the healthcare sector is never short of surprises, this potential merger, should it come to pass, could be one for the history books.

November 21, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 21, 2023
Fiat Lux

Featured Trade:

(A PRESCRIPTION FOR CAUTION)

(VTRS), (PFE), (JNJ), (LLY), (BMY), (TEVA), (ABBV), (CVS)

A Prescription For Caution

Biotech Letter

In the rollercoaster world of pharmaceutical stocks, 2023 has been like riding the Cyclone at Coney Island – thrilling for some, nauseating for others.

Take Pfizer (PFE), for instance. It’s seen its stock take a nosedive by 43.4%. That’s the kind of drop that makes you check if your wallet’s still there. Then there’s Johnson & Johnson (JNJ), trailing behind with a 16.4% decline. Not as dramatic, but still enough to make your stomach lurch.

Meanwhile, there’s Eli Lilly (LLY), playing the hero as it rockets up by an extraordinary 66.8%, thanks to its new weight-loss drugs. At this point, investors are practically throwing ticker-tape parades.

However, even with Eli Lilly’s star performance, the S&P 500 Pharmaceuticals index still shows a downturn of 2.3%.

Now, as we've seen earnings reports trickle in, a trend has started to stick out: positive results aren’t shielding drugmakers from a sell-off. Look at Pfizer and Bristol Myers Squibb (BMY), both hovering near their 52-week lows.

Still, investors are giving the biotechnology and healthcare stocks the side-eye for several reasons.

The new Medicare drug-price negotiation program is like a strict parent setting a curfew – it’s potentially restricting pricing power for certain medications. Plus, as interest rates climb, the allure of high dividend yields is diminishing faster than my motivation to hit the gym.

In this skeptical market, however, there are some optimistic investors who are digging through the bargain bin, hoping to strike gold.

Enter Viatris (VTRS), trading at just 3.3 times earnings and boasting a 5.1% dividend yield. It sounds promising, but only a few brave souls are recommending a buy.

Basically, this situation with Viatris is pretty much like finding a designer shirt at a discount store – sure, it’s cheap, but will it fall apart after two washes? Let’s take a closer look.

Viatris’s backstory is a bit of a soap opera. Born from the merger of Mylan and Pfizer's Upjohn unit, it carries the baggage of Mylan's EpiPen pricing scandal.

Since rebranding, Viatris has been trying to find its footing. Despite a shiny new business plan, which involves selling off assets for a potential $9 billion, investor confidence remains shaky at best.

Notably, its decision to exit the biosimilars market, where heavy hitters like Teva Pharmaceutical Industries (TEVA) and AbbVie (ABBV) play ball, has been seen as a bold move. Considering the potential of that market, it felt like leaving a high-stakes poker game just when the chips were starting to stack up. And with CVS Health (CVS) eyeing this lucrative space, Viatris might find itself wishing it had stayed at the table.

These past months, investors have been capturing this drama through a meme – comparing 'adjusted Ebitda' to 'free cash flow' with images of Jennifer Aniston and Iggy Pop. It’s a cheeky way of saying that Viatris’s financial projections might be wearing rose-colored glasses.

Looking ahead, Viatris is aiming for $2.3 billion in free cash flow next year, buoyed by recent sales. But the big question is: can it turn these assets into growth, or will it continue its high-wire act?

Reviewing its recent moves and their effects on the market, the Viatris saga has turned into a cautionary tale for investors in the pharma world – it’s a reminder that sometimes the threat of a nosedive is as real as the thrill of a skyrocket.

So, what’s the takeaway for those of us with skin in the game?

It seems wise to keep our eyes peeled and not jump on any bandwagons too hastily. Viatris, amidst its strategic transformations and market challenges, is worth watching with a careful eye. While its cash flow looks steady through 2027, thanks to planned asset sales, the long-term picture is as clear as mud.

As we navigate the unpredictable waves of the pharmaceutical market this year, let’s remember – it’s not just about holding on for the ride. It’s about knowing when to get on, when to get off, and maybe, just maybe, when to enjoy the view from the sidelines with some popcorn in hand. I say hold off from buying Viatris shares at the moment.

September 26, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
September 26, 2023
Fiat Lux

Featured Trade:

(THE WEIGHT OF INNOVATION)
(NVO), (LLY), (CI), (CVS)

The Weight of Innovation

Biotech Letter

In a world teetering on the brink of healthcare overload, the emergence of Novo Nordisk (NVO) and Eli Lilly's (LLY) revolutionary obesity drugs, Ozempic and Wegovy, is akin to sailing in uncharted waters. These drugs are heralded as the harbinger of unprecedented advancements in biotechnology and healthcare, but they also cast shadows of potential financial turmoil on the horizon.

The air is thick with anticipation as Wall Street analysts predict a financial windfall for the drugmakers, with the drugs promising up to 20% body weight reductions and a significant decrease in the risk of heart attack or stroke.

The demand is skyrocketing, and the projections are staggering. The obesity market is poised to grow substantially, with a forecasted compound annual growth rate (CAGR) of 31.3%. However, lurking in the shadows is a looming healthcare crisis, a silent specter waiting to engulf insurers, employers, and government programs in a financial maelstrom.

GLP-1 receptor agonists are more than just another pharmaceutical innovation; they are a beacon of hope for the 40% of U.S. adults grappling with obesity. But, the beacon comes with a hefty price tag, with Novo’s Wegovy listed at over $16,000 a year.

By 2030, the spending on GLP-1 obesity treatments is anticipated to reach an astounding $50 billion, suggesting a financial storm likely to peak between 2025 and 2027.

This turns the Medicare landscape into a battlefield, with debates raging over the ban on paying for weight-loss drugs and the potential ramifications of their inclusion. It’s a complex dance, where the potential benefits of combating obesity are entwined with immediate financial challenges, creating a paradox that could reshape the foundations of healthcare economics.

Meanwhile, Medicaid, the safety net for approximately 87 million Americans, is caught in the eye of the storm as well, with the surge in spending on GLP-1 drugs from $547 million in 2021 to $1.1 billion in 2022 painting a vivid picture of the impending financial turbulence.

The complex interplay between state eligibility prerequisites and legal challenges underscores the intricate process of assimilating novel pharmaceutical breakthroughs into prevailing systems.

The employer-based insurance market is walking a tightrope, balancing competitive benefits and premium affordability. The introduction of the new obesity medicines is a catalyst, intensifying the existing tensions and raising questions about the sustainability of covering new medications without robust clinical evidence.

The industry is in a conundrum, with the need for expansive coverage clashing with the realities of cost management.

This narrative is not just a tale of numbers; it’s a human story, interweaving the lives of patients, taxpayers, and the evolving pharmaceutical terrain. It’s about the omnipresent advertising campaigns and the cultural phenomena surrounding these drugs, reflecting societal shifts in perceptions and expectations regarding healthcare solutions.

Novo Nordisk and Eli Lilly are at the forefront of this transformation, advocating for expanded coverage and emphasizing the long-term savings associated with addressing obesity. The discourse is filled with contrasting perspectives, with companies like Cigna Group (CI) and CVS Caremark (CVS) exploring the balance between clinical validity and financial viability.

The journey is fraught with uncertainties and challenges, with the potential rise in premiums and the quest for pricing solutions being critical elements in the unfolding saga. The healthcare system is at a crossroads, with the long-term benefits of obesity drugs poised against the immediate financial ramifications.

The emergence of Ozempic and Wegovy is a mirror reflecting the complexities and intricacies of the biotechnology and healthcare sector. The balance between innovation and sustainability is a delicate one, and the path ahead is interwoven with threads of hope, anticipation, financial prudence, and societal well-being.

Overall, the burgeoning obesity market presents a compelling case for investment in Novo Nordisk and Eli Lilly. The transformative potential of their weight loss drugs is substantial, promising to reshape the contours of obesity treatment. While the road is interspersed with uncertainties and challenges, the prospective growth and escalating demand for these innovative treatments underscore a lucrative opportunity. I suggest you buy the dip.

December 8, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 8, 2022
Fiat Lux

Featured Trade:

(THE MASTODON OF HEALTHCARE)
(UNH), (HUM), (CI), (ELV), (CVS)

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