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A Wonderful Company at a Fair Price

Another year, another set of challenges and opportunities for investors. How can you make sure that you’re starting the year right?

If you’re looking to dip your toe in the biotechnology and healthcare sector, it won’t hurt to look at what the experts, such as Warren Buffett, are doing.

With a 55-year track record of 21% in annual returns for its Berkshire (BRK.B) investors, I’d say the Oracle of Omaha definitely knows his craft.

One of his most famous pieces of advice is to buy “wonderful companies at fair prices,” and I think this pearl of wisdom perfectly fits Buffett’s favored high-yield aristocrat: AbbVie (ABBV).

More interestingly, AbbVie is currently undervalued primarily due to overblown fears of patent loss for its top-selling drug Humira in 2023 and another in 2026 for Imbruvica.

Admittedly, the anxiety of investors is not entirely unfounded.

After all, AbbVie must replenish roughly $20 billion worth of annual revenue from Humira alone in the following years as the drug loses its patents and faces declining sales.

Obviously, losing revenue from a primary growth driver could be a massive problem for any company.

It could even lead to stagnating numbers in the next couple of years — a situation that the likes of Gilead Sciences (GILD), despite its $90.58 market capitalization, have become all too familiar.

Nevertheless, AbbVie isn’t simply twiddling its thumbs, waiting for the inevitable patent loss to happen.

The company has been busy preparing for the Humira and Imbruvica patent cliffs. In fact, it has been working to diversify its portfolio steadily.

One of the steps it undertook was to leverage its cash flow and $238.35 billion market capitalization to boost its R&D.

This led to AbbVie holding one of the industry’s most robust pipelines to date.

Some of the most promising products in its portfolio are Humira successors Skyrizi and Rinvoq.

Together, these two treatments are estimated to generate more than $15 billion in sales by 2025.

And AbbVie isn’t done yet.

Following its wildly successful formula in Humira, AbbVie is also looking into expanding the indications for the drug’s successors.

So far, Rinvoq has been able to deliver on this promise. Recently, this Humira successor has received FDA approval as a second-line treatment for psoriatic arthritis.

With this second indication, more and more investors are starting to believe that AbbVie has yet another blockbuster in the making.

Let’s look at the market for Rinvoq’s latest indication.

In the US alone, there are approximately 1 million to 2 million patients of psoriatic arthritis. For simplicity’s sake, let’s just say that there are 1.5 million patients in the US.

Generally, the first-line of treatment typically fails for 20% of psoriatic arthritis patients. That leads to roughly 300,000 patients who would be in need of second-line treatment.

For the sake of accuracy, it’s vital to point out that there are already a number of psoriatic arthritis treatments available in the US, such as Otezla and Enbrel from Amgen (AMGN). Moreover, JAK inhibitors are still facing potential restrictions from the FDA, thanks to the issue with Pfizer (PFE).

So, we can conservatively say that AbbVie’s Rinvoq might only be able to capture an estimated 7% of the psoriatic arthritis market share.

This translates to approximately 21,000. The annual list price for Rinvoq is at $63,000.

Taking into consideration the negotiation tactics of health insurers for price adjustments, the drug might go down to an annual list price of $44,000 instead.

Based on these conservative assumptions, Rinvoq would rake in sales of over $900 million—falling only slightly below the $1 billion blockbuster mark.

While this only hits less than 2% of AbbVie’s anticipated $56.2 billion annual revenue, this trajectory is a massive success for Rinvoq.

Bear in mind that this Humira successor has been on track to generate over $1.5 billion in sales in 2021.

Hence, adding $900 million from its psoriatic arthritis indication would offer a whopping more than 60% jump in its annual revenue.

Considering its history and trajectory, AbbVie is expected to continue to outshine its rivals in the industry.

Actually, the growth consensus for this stock is at 4% to 6.5%.

While that does not sound very impressive, it’s important to remember that the long-term growth rate for the whole industry is only 4%.

That easily puts AbbVie ahead of at least 63% of its peers in terms of growth.

Aside from the fact that this blue-chip stock is an excellent way to enjoy a solid 4.3% yield these days, the company is proving to be effective in ensuring that it delivers market-beating returns in the long run.

Needless to say, AbbVie qualifies as a classic “wonderful company at a fair price.”

humira

December 21, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
December 21, 2021
Fiat Lux

Featured Trade:

(A BREAKOUT BIOTECH WITH A STRONG STAYING POWER)
(MRNA), (PFE), (BNTX), (MRK), (AZN), (VRTX), (CRSP), (GILD)

A Breakout Biotech With A Strong Staying Power

Biotech Letter

The biotechnology and healthcare sector has been ruthlessly hammered in 2021.

In fact, the largest exchange-traded funds that keep track of the biotechnology industry have been in the negative in the past months.

However, the string of bad news doesn’t automatically mean that none of the biotechs can deliver strong returns in the coming days.

An excellent example of a biotech that’s an exception to the general theme of the sector these days is none other than the famous Moderna (MRNA).

Moderna stock has already delivered a 434% gain in 2020. Meanwhile, it has so far recorded a 160% rise this year—a number that’s expected to go higher before 2021 ends.

These gains came after the biotech became one of the market leaders in the COVID-19 vaccine race, alongside Pfizer (PFE) and BioNTech (BNTX).

Considering how COVID-19 catapulted the stock to dizzying heights, some investors fear that Moderna’s performance will decline in a post-pandemic setting.

That’s not necessarily the case.

Viruses present complex problems. Right now, we’re dealing with yet another coronavirus variant, Omicron.

This latest strain appears to be more contagious than the previously discovered Delta variant, which was then reported to be more virulent than the original.

What’s the takeaway here?

COVID-19 isn’t going to disappear anytime soon. Since the vaccines and boosters seem to wane gradually, these are expected to become staples moving forward.

This means everyone will need ongoing protection, which translates to ongoing sales for vaccines and boosters for companies like Moderna.

Moreover, the continuous demand for new and more potent vaccines makes it a no-brainer that Moderna will once again deliver market-crushing performances in the next few years.

For context, the company estimates that Spikevax, its COVID-19 vaccine, will rake in roughly $15 billion to $18 billion in sales in 2021.

Orders for 2022 have been secured as well, with Moderna already locked in for over $22 billion worth of Spikevax doses through advance purchase deals.

This is still expected to rise, considering the vaccines under development for the new variants getting discovered.

But even when the panic and anxiety over the viruses subside, we can still reasonably expect roughly $15 billion in annual sales from Spikevax

After all, the vaccine and boosters are expected to become the norm eventually.

Believe it or not, though, the best reason to buy Moderna isn’t its coronavirus vaccine.

Outside Spikevax, Moderna has a long list of promising pipeline candidates under development—the majority of which are based on the mRNA technology that’s behind its potent COVID vaccine.

While that does not guarantee that all the candidates will gain approval, the fact that the technology has been proven to work on humans presents a bright future for these candidates.

The company has been actively advancing its programs using its cash on hand, with over half a dozen queued in Phase 2 trials.

A potential blockbuster is its cytomegalovirus (CMV) vaccine candidate.

CMV, a virus that can be deadly to unborn babies and individuals with compromised immune systems, currently has no vaccine.

This represents an untapped market with high demand. Conservatively speaking, Moderna can generate roughly $2 billion to $5 billion in peak sales for this vaccine if it gains regulatory approval.

Other impressive programs in the biotech’s pipeline are its HIV vaccine candidate and a personalized cancer vaccine, which Moderna has been developing with Merck (MRK).

Needless to say, both hold the potential to become game-changers not only for Moderna but also for the entire industry.

Aside from its personalized cancer vaccine, another relatively advanced program in its pipeline is its work with AstraZeneca (AZN) on the AZD8601 program.

The AZD8601 program aims to use mRNA therapies to encode for vascular endothelial growth factor-A in people who are supposed to go through a coronary artery bypass grafting.

In layman’s terms, AstraZeneca and Moderna want to develop a treatment that induces the heart blood vessels of heart bypass surgery patients to repair themselves.

However, the most exciting collaboration is Moderna’s work with Vertex (VRTX) to develop a cystic fibrosis (CF) treatment.

Considering that Vertex is practically a monopoly in the CF space, this can turn out to be a lucrative direction for Moderna as well.

In terms of competition, the biotech might go head-to-head against Vertex’s other partner, CRISPR Therapeutics (CRSP).

Until two years ago, Moderna was an obscure biotechnology company with no product out on the market.

Today, it is hailed as one of the biggest biotechs worldwide thanks to its market capitalization of roughly $120 billion, surpassing long-established names in the sectors like Gilead Sciences (GILD) and even Vertex.

Some investors point out that Moderna’s breakneck rise to the top might also mean a steady descent.

While I agree that its climb was faster than the usual biotech, I still believe that Moderna possesses the right tools to sustain its momentum for the years to come.

November 30, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 30, 2021
Fiat Lux

Featured Trade:

(BEYOND THE COVID-19 VACCINE)
(AZN), (PFE), (BNTX), (REGN), (GILD), (INCY), (MRNA)

Beyond the Covid-19 Vaccine

Biotech Letter

Even altruism has its limits.

Adding to the list of things we didn’t expect to happen in 2021, AstraZeneca (AZN) has followed the footsteps of Pfizer (PFE) and BioNTech (BNTX) and decided to begin making money off its COVID-19 vaccine.

The news is an about-face from the Cambridge-based company’s previous pledge to not profit from this while the pandemic is still ongoing.

Given AstraZeneca’s decision, there’s a possibility that it no longer believes that COVID-19 remains a threat of global proportions—or it at least thinks the issue has become more manageable.

It remains to be seen how the company will react to the emergence of the Omicron variant, and if it plans to push through with this decision.

While AstraZeneca’s agreements with different countries won’t allow it to come right out of the gate and just start slapping massive profits all over the place, the company plans to begin “progressively transitioning” to profitability following its third-quarter call.

Moreover, the company assured that its COVID-19 vaccine would remain reasonably priced for low- to middle-income countries. This means that it plans to jack up the price in wealthier nations instead.

However, AstraZeneca isn’t doing this for purely financial reasons.

According to the company, profits from the vaccine will be allocated to another COVID-19-related effort, its antibody therapy called AZD7442—a treatment that’s expected to compete with therapies from Regeneron (REGN) and Gilead Sciences (GILD).

Regardless of how they spin this recent turn of events, the key takeaway is that they’ll start making money off the vaccine.

Although changing their tune about the COVID-19 vaccine might get them some flak, it’s crucial to bear in mind that AstraZeneca is a for-profit company. This is the natural course for them to take vis-a-vis their products.

Besides its work on COVID-19, AstraZeneca has been pouring money on R&D over the past 12 months to fund different clinical trials for its oncology, cardiovascular, and immunology segments. To date, the company’s spending on research and development has climbed by 27.5% year-over-year to reach $3.54 billion in the first 6 months of 2021.

This move to invest heavily in developing new drugs for severe medical conditions is anticipated to secure a solid future revenue and continuous growth in earnings per share for the company.

Given its pipeline and history, AstraZeneca is actually projected to grow by over 20% annually over the course of the next five years.

One result of this effort is the expansion of the company’s top-selling cancer drug, Imfinzi.

At the moment, Imfinzi is approved as a lung cancer treatment. However, it can soon boost its sales to include biliary tract cancer in its indications.

There are roughly 50,000 individuals diagnosed with biliary tract cancer annually in the United States, Japan, and Europe, with the number hitting 210,000 across the globe.

In terms of profitability, we can look at Incyte’s (INCY) Pemazyre, which was approved in 2020. Sales of the drug grew four-fold in the first 9 months to reach $48 million.

Admittedly, Imfinzi’s market share will rely on its efficacy and safety results.

However, the treatment has a track record of delivering a superior standard of care and guaranteeing that it has the same safety profile as chemotherapy.

Hence, it’s reasonable to say that we can conservatively expect Imfinzi to capture at least 15% of the whole biliary tract cancer market. This would be roughly 30,000 patients worldwide.

Currently, Imfinzi’s price tag is at $180,000 in the US, but the drug might be cheaper in other countries.

Based on the market potential of its biliary tract cancer indication, this additional indication could rake in an additional $600 million annually for AstraZeneca once it gains regulatory approval.

Although this is merely less than 2% of the projected $36.1 billion total revenue for AstraZeneca in 2021, adding $600 million would still be a notable tailwind to the $2.5 billion estimated earnings from Imfinzi.

While its COVID-19 vaccine did not deliver the same outstanding efficacy results as the mRNA vaccines of Moderna (MRNA) and Pfizer / BioNTech, it’s still one of the handfuls of major pharmaceutical companies that managed to develop and distribute an effective product.

Overall, vaccine decisions aside, AstraZeneca appears to be in a great place with a robust oncology portfolio. Therefore, this stock looks like a solid buy with several upcoming price catalysts in 2021 and 2022.

November 16, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 16, 2021
Fiat Lux

Featured Trade:

(FORGOTTEN COVID-19 STOCK STILL ALIVE AND KICKING)
(GILD), (REGN), (MRNA), (AZN), (JNJ), (PFE), (BNTX), (MRK)

Forgotten Covid-19 Stock Still Alive and Kicking

Biotech Letter

At times, it can be rewarding to go against the tide. This can also be applicable to the stock market.

Forgotten names or companies with shares that got hammered can eventually transform into remarkable investment opportunities. After all, it's always wise to invest in a quality stock when it loses some serious altitude.

Now, let's take a look at a biotechnology and healthcare business that has been performing poorly in the past 12 months but still holds a promising chance of bouncing back: Gilead Sciences (GILD).

This biotechnology giant is still reeling after its recent regulatory setback involving Filgotinib, a potential treatment for rheumatoid arthritis.

Initially, Filgotinib was slated as Gilead Sciences' next blockbuster drug. Unfortunately, the US FDA didn't agree with those plans.

The regulatory body rejected the treatment, pointing out the risks of patients developing male fertility problems as one of the significant reasons.

By November 2020, Gilead Sciences completely abandoned the Filgotinib project, at least in the United States.

Prior to this, Gilead Sciences took center stage when its Remdesivir, sold under the brand name Veklury, was identified as an effective COVID-19 treatment.

While this product has taken the back seat since other treatments from the likes of Regeneron (REGN) and especially vaccines from Moderna (MRNA), Johnson & Johnson (JNJ), AstraZeneca (AZN), Pfizer (PFE), and BioNTech (BNTX) have emerged, it still generated impressive numbers.

In the second quarter alone, Veklury brought in $829 million in revenue.

Gilead Sciences anticipate sales to reach somewhere between $2.7 billion and $3.1 billion for this drug in 2021.

Arguably, though, the biggest draw in buying Gilead Sciences stock is its HIV pipeline.

To date, the company holds roughly 75% of the market share in the US and approximately 50% in Europe.

What's even more promising is that the company's top-selling HIV product, Biktarvy, still has vast room to grow.

This is impressive considering that Biktarvy raked in approximately $2 billion in sales in the second quarter of 2021, showing off a 24.3% year-over-year jump.

Looking at its trajectory and considering that the drug generated $7.3 billion in 2020, Biktarvy sales are estimated to hit $11.7 billion in 2026.

More than the company's incredible dominance in cornering the HIV market, Gilead Sciences also has an excellent pipeline with over three dozen clinical programs queued.

Inevitably, one of its major concentrations is expanding its HIV portfolio.

In fact, it has recently teamed up with fellow biotechnology giant Merck (MRK) to collaborate on a potential HIV treatment—a candidate that's anticipated to equal if not surpass Biktarvy's fame.

One more potential blockbuster in the HIV market is Lenacapavir, which is an injection regiment that Gilead Sciences recently submitted for approval to the FDA.

If granted the green light, this will be administered once every 6 months, making it the first-ever long-acting regimen for HIV patients.

Meanwhile, the company is also growing its Hepatitis B franchise to avoid being too dependent on a single market.

So far, Gilead Sciences estimates about $1 billion in sales for this lineup in 2022, making the Hepatitis B portfolio a reliable part of the business.

Another growing section of the business is its cell therapy segment, with Yescarta and Tecartus nearing their peak performances at $1 billion in sales yearly.

Even its newly developed cancer cell therapy Magrolimab looks promising, with the potential to rake in another $1 billion in peak sales as well.

Needless to say, Gilead Sciences' new products and expansions have been displaying realistic potential to drive billions in added yearly revenue.

Overall, Gilead Sciences is a stable and profitable biotechnology and healthcare business.

It's a large-cap biopharmaceutical organization and market leader that has been solidly performing well for over 3 decades, with an influential presence in more than 35 countries.

Despite its recent challenges, Gilead Sciences remains an excellent buy, especially on the dip.

November 11, 2021

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 11, 2021
Fiat Lux

Featured Trade:

(A HIGH-QUALITY DIVIDEND STOCK WITH MORE ROOM TO GROW)
(LLY), (INCY), (GILD), (ABBV), (PFE), (NVO), (BIIB)

A High-Quality Dividend Stock With More Room to Grow

Biotech Letter

Investors can enjoy long-term recurring income and stability with dividend stocks. However, paying out dividends is largely discretionary.

Each business frequently determines whether it’s in a good position to hand out part of its profits to shareholders.

One method to assess a dividend’s safety is reviewing a company’s history and whether it makes regular payouts. The longer its track record shows a consistent payment, the more preferable the business.

There’s a stock particularly known for paying dividends every year for over a century in the biotechnology and healthcare sector: Eli Lilly (LLY).

While Eli Lilly’s dividend yield is only 1.5% at its current share price, which is a bit over the S&P 500’s average reported at less than 1.3%, the company has been paying out dividends since 1885.

Apart from its consistent payouts throughout the years, Eli Lilly also holds promising potential for future hikes.

At the moment, the quarterly payout of Eli Lilly is $0.85, which is 75% higher than its 2015 payout of $0.49.

This number can still climb thanks to its robust revenue growth of 19.2% year over year, with its current approved drug portfolio generating $13.55 billion in the first six months of 2021.

In the first two quarters of the year alone, several products recorded year-over-year sales growth of over 20%.

Eli Lilly isn’t content in growing its dividend, though. It’s also working on expanding its drug portfolio.

Among its existing drugs, the company has been maximizing Olumiant to include more indications.

One of the recent advancements involving Olumiant is Eli Lilly’s work with Incyte (INCY), which utilizes the drug as a treatment for COVID-19 patients.

In fact, the FDA has recently approved the use of Olumiant with or without the need to combine it with Gilead Sciences (GILD) Remdesivir.

However, Olumiant’s application as a COVID-19 treatment isn’t the most promising expansion for this drug.

Just recently, Eli Lilly and Incyte disclosed that Olumiant could be used as a treatment for an autoimmune disorder more commonly known as alopecia areata—an indication that could very well transform the drug into the company’s next blockbuster.

In a nutshell, Olumiant can help alopecia patients regrow their hair at a more rapid speed and consistent rate than other competitors.

So far, the drug has recorded an 80% hair growth among those who tested it.

In the previous months, the FDA included Olumiant and AbbVie’s (ABBV) Rinvoq in the list of JAK inhibitors that needed to carry a warning label sharing their severe potential side effects like blood clots and even cancer.

Despite this, Eli Lilly’s product proved to be safe for alopecia patients.

If approved for alopecia, Olumiant could become a groundbreaking treatment sought after by roughly 147 million people across the globe who suffer from the condition.

For context, the global market for alopecia is projected to grow in revenue from $ 7.6 billion in 2020 to reach over $ 14.2 billion by 2028 annually.

Alopecia areata, which is the target market of Eli Lilly, is expected to hold about 35% of the total. This puts the addressable market for Olumiant at $5 billion by 2028.

Considering that another name has been working to dominate the market, Pfizer’s (PFE) Cibingo, we can realistically assume that Eli Lilly will get at least 15% of the market share worldwide.

This would mean roughly $750 million in yearly revenue for Olumiant’s alopecia market alone.

Other than its work on alopecia areata, Eli Lilly has another potential blockbuster. This time, the treatment is targeting the diabetes sector.

The company has an up-and-coming treatment called Tirzepatide, which could not only expand Eli Lilly’s diabetes market share but also provide a strong competitor against Novo Nordisk’s (NVO) top-selling Ozempic.

Tirzepatide is the successor of Eli Lilly’s bestseller Trulicity, which logged $2.99 billion in the first half of 2021 and is set to lose patent protection by 2027.

Looking at Tirzepatide’s trajectory, the drug is projected to reach peak annual sales worth $10 billion—an amount that could easily offset the gradual decline in sales by Trulicity.

Even the company’s breast cancer drug, Verzenio, is set to show off impressive growth soon. In the first half of 2021, the treatment raked in $610 million in sales, demonstrating a 53.8% increase year-over-year.

Considering Eli Lilly’s efforts to distinguish its breast cancer treatment from Pfizer’s Ibrance, Verzenio is anticipated to generate $4.6 billion in annual sales by 2024.

Another exciting development is Eli Lilly’s Alzheimer’s disease treatment Donanemab.

Although Phase 3 data are expected to be released in 2023, this candidate is already reported to be a superior treatment than Biogen’s (BIIB) controversial Aduhelm.

These are some of the results of Eli Lilly’s efforts to continue expanding in the diabetes area, as seen in its ramped-up R&D spending.

So far, the company boosted its research investment by 21% year-over-year to reach $3.36 billion.

While doing this isn’t exactly a guarantee of commercial success, it’s undoubtedly a solid strategy to protect and enhance its pipeline.

Overall, Eli Lilly is a high-quality stock with a verifiable and impressive history of innovation.

Given the promising lineup of approved drugs and pipeline candidates of Eli Lilly, it’s reasonable to expect roughly a 15% yearly earnings growth from the company over the next 5 years.

October 14, 2021

Biotech Letter

Mad Hedge Bitcoin Letter
October 14, 2021
Fiat Lux

Featured Trade:

(WHAT’S NEW IN BIOTECH)
(CGTX), (BIIB), (LLY), (ABBV), (NVS), (TAK), (PYXS), (PFE),
(AZN), (GILD), (GSK), (IMGN), (ISO), (TMO), (BIO)

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