Mad Hedge Biotech & Healthcare Letter
May 7, 2020
Fiat Lux
Featured Trade:
(HOW CVS IS BASKING IN THE CORONA SUNLIGHT)
(CVS), (UPS)
Tag Archive for: (CVS)
Including a brand-name business to your stock investing portfolio is a wise way to handle even the steepest downturn in the history of trading.
Despite these recent catastrophic losses, history also reminds us that bear markets present buying opportunities -- with two pretty self-explanatory caveats.
One is that investors must only shell out cash to buy into high-quality businesses. The second warning is that investors should be patient in waiting for their investments to make money in the long run.
Those checking out the healthcare sector now have the opportunity to add a large-cap stock and the biggest pharmacy chain operator in the country: CVS Health (CVS).
Most of us are familiar with CVS Health since it's a widely popular retail pharmacy. Actually, CVS fulfills 1 of every 4 retail pharmacy prescriptions in the US. That’s roughly 26.6% of the entire population.
Now, my primary reason for suggesting CVS is that it’s the go-to place for customers during and even in the absence of the COVID-19 pandemic.
In a regular buying climate, the company is set to rake in long-term gains, thanks to the daily essentials in its catalog ranging from toothpaste to lifesaving prescriptions.
During this ongoing health crisis, CVS proved to be even more valuable to consumers. In fact, the company is expected to explore a new market once the country returns to its normal state.
With the spectrum of services offered by the company, CVS manages to cater to practically all the needs expected from the healthcare system.
Apart from its retail pharmacies and clinics, it also has a dedicated senior pharmacy sector that takes care of over 1 million patients every year.
CVS serves more than 37 million in terms of traditional healthcare insurance offerings while its pharmacy benefit manager operation looks after roughly 105 million individuals -- that’s nearly a third of the country’s population.
It was in late 2018 when CVS made a meaningful transaction courtesy of the acquisition of health insurer Aetna. The deal, which amounted to approximately $70 billion, was hailed as a game-changer for the retail giant.
Although it can be unusual to regard an insurance company as a fast-growing business, the addition of Aetna played a key role in CVS’ organic growth rate. This acquisition is estimated to provide a boost in the company’s sales, with the full impact of the deal expected to be realized sometime between 2020 and 2021.
In terms of revenue growth, CVS saw a 32% growth from its 2018 earnings to reach a total of $256.7 billion in 2019. Realistically though, this may not be the typical growth pace for the company. The jump may be primarily due to the Aetna deal.
CVS Health’s largest segment is still its pharmacy services division, which generated $141.5 billion in sales, recording a net income of $5.1 billion. Its retail sector raked in $86.6 billion while its healthcare benefits sector brought in $69.6 billion.
For 2020, CVS is anticipated to have a cash flow somewhere between $10.5 billion and $11 billion.
Although its business has been doing quite well despite the pandemic, with the company adding 50,000 positions just last March, CVS remains on the lookout for interesting business ventures.
One of its recent experiments is working with UPS (UPS) in the latter’s drone service called UPS Flight Forward. Basically, the two companies joined forces to fly prescription drugs to the customers in a Florida retirement community.
The “test” community is the biggest retirement community in the US called The Villages. This is located near Orlando, which is home to more than 135,000 residents.
This joint effort is anticipated to bolster the demand in nearby areas as well, with CVS and UPS eyeing the expansion of their operations in a month or so.
With almost 9,900 retail branches, 1,100 walk-in clinics across the country, and the addition of this new partnership with UPS, CVS has definitely earned its title as the “trust front door to healthcare.”
Pharmacies are not considered exciting businesses. Basically, these are convenience stores that just happen to offer prescription drugs as well.
Although that might be true, CVS Health is not your run-of-the-mill pharmacy. Truth be told, the chain’s terrifying efficiency is gradually replacing your doctor.
At the moment, CVS pays its shareholders $0.50 in dividends every quarter. While the payouts have not increased since 2017, the dividend still yields a decent 3.2% annually. It’s a respectable payout and one that’s not in any imminent danger despite the ongoing crisis.
Taking into consideration its valuation, CVS Health can be purchased for roughly over 7 times its Wall Street profit estimate for 2021.
No company of this caliber has been this cheap in the past decade.
Global Market Comments
June 21, 2018
Fiat Lux
SPECIAL BIOTECH ISSUE
Featured Trade:
(HERE COMES THE NEXT REVOLUTION),
(CVS), (AET), (BRK.A), (AMZN), (JPM), (CI),
(BIIB), (CELG), (REGN)
Technology and biotechnology are the two seminal investment themes of this century.
And while many tech companies have seen share prices rise 100-fold or more since the millennium, biotech and its parent big pharma have barely moved the needle.
That is about to change.
You can thank the convergence of big data, supercomputing, and the sequencing of the human genome, which overnight, have revolutionized how new drugs are created and brought to market.
So far, only a handful of scientists and industry insiders are in on the new game. Now it's your turn to get in on the ground floor.
The first shot was fired in December 2017 when CVS (CVS) bought Aetna (AET) for an eye-popping $69 billion, puzzling analysts. A flurry of similar health care deals followed, with Berkshire Hathaway (BRK.A), Amazon (AMZN) with its Verily start-up, and J.P. Morgan (JPM) joining the fray.
March followed up with a Cigna (CI) bid for Express Scripts, a pharmacy benefits manager. Apple (AAPL) has suddenly launched a bunch of health care-based apps designed to accumulate its own health data pool.
What's it all about? Or better yet, is there a trade here?
No, it's not a naked bid for market share, or an attempt to front run the next change in health care legislation. It's much deeper than that.
In short, it's all about you, or your data to be more precise.
We have all seen those clever TV ads about IBM's (IBM) Watson mainframe computer knowing what you want before you do. In reality we are now on the third generation of Watson, known as Summit, now the world's fastest super computer.
Summit can process a mind-numbing 4 quadrillion calculations per second. This is computing muscle power that once was associated with a Star Trek episode.
Financed by the Department of Defense to test virtual nuclear explosions and predict the weather, Summit has a few other tricks up its sleeve. It can, for example, store every human genome and medical record of all 330 million people in the United States, process that data instantly, and spit out miracle drugs almost at whim.
You know all those lab tests, X-rays, MRI scans, and other tests you've been accumulating over the years? They add up to some 30% of the world daily data creation, or some 4 petabytes (or 4,000 gigabytes) a day. That's a lot of zeroes and ones.
Up until a couple of years ago, this data just sat there. It was like having a copy of the Manhattan telephone book (if it still exists) but not knowing anyone there. Thanks to Summit we now not only have a few friends in Manhattan, we know everyone's most intimate details.
I have been telling readers for years that if you can last only 10 more years you might be able to live forever, as all major human diseases will be cured during this time. Summit finally gives us the tools to achieve this.
Imagine the investment implications!
The U.S. currently spends more than $3 trillion on health care, or about 15% of GDP, and costs are expected to rise another 6% this year. To modernize this market, you will need to create from scratch four more Apples or six more Facebooks (FB) in terms of market capitalization. You can imagine what getting in early is potentially worth.
Crucial to all of this was Craig Venter's decoding of his own DNA in 2000 for the first time, which cost about $1 billion. Today, you and I can get 23andMe, Ancestry.com or Family Tree DNA to do it for $100, with most of the work done in China.
Of course, key to all of this is getting the medical data for every U.S. citizen on line as fast as possible. The Obama administration began this effort seven years ago. Remember those gigantic overstuffed records rooms at your doctor's office? You don't see them anymore.
But we have a long way to go, and 20% of the U.S. population who don't HAVE any medical records, including all of the uninsured, will be a challenge.
To give you some idea of the potential and convince that I have not gone totally MAD let me tell you about Amgen's (AMGN) sudden interest in Iceland. Yes, Iceland.
There, a struggling, young start-up named deCode sequenced the DNA of the entire population of the country, about 160,000 individuals. It tried to monetize its findings but it was early and lost money hand over fist. So, the company sold out to Amgen in 2012 for $415 million.
Until then targeting molecules for development was based on a hope and a prayer, and only a hugely uneconomic 5% of drugs made it to market. Using artificial intelligence (yes, those NVIDIA graphics processors again) to pretest against the deCode DNA data based it was able to increase that hit rate to 75%.
It's not a stretch to assume that a 15-fold increase in success rates leads to a 15-fold improvement in profitability, or thereabouts.
Word leaked out setting off a gold rush for equivalent data pools that led to the takeover boom described above. And what happens when the pool of data explodes from 160,000 individuals to 330 million? It boggles the mind.
As a result, the health care industry is now benefiting from a "golden age" of oncology. Average life expectancy for chemotherapies is increasing by months at a time for specific cancers.
All of this is happening at a particularly fortuitous time for drug, health care, and biotech companies, which are only just now coming out of a long funk.
Traders seemed to have picked up on this new trend in May, which is why I slapped on a long position in the iShares Nasdaq Biotechnology ETF (IBB) (click here for a full description).
Like many companies in the sector it is coming off of a very solid one-year double bottom and is going ballistic today.
The area is ripe for rotation. Other names you might look at include Biogen (BIIB), Celgene (CELG), and Regeneron (REGN).
If you have grown weary of buying big cap technology stocks at new all-time highs, try adding a few biotech and pharmaceutical stocks to spice this up. The results may surprise you.
As for living forever, that will be the subject of a future research piece. The far future.
