Mad Hedge Biotech & Healthcare Letter
December 17, 2019
Fiat Lux
Featured Trade:
(WHY THE M&A BOOM WILL SPILL INTO 2020),
(BMY), (CELG), (NOVN), (LOXO), (ROG), (ONCE), (MRK), (SAN), (ARQL), (THOR), (AMRN), (GSK), (AMGN), (GILD)
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The biotech industry is breaking out, with the sector witnessing tremendous growth in the later part of 2019. With the stocks surging, it looks like the new year is setting up to a strong start that could continue well up into 2020.
Despite the anxiety over the feared government price controls in the drug sector, the early thinking in the biotech world remains optimistic. In fact, the stage seems to be set for even bigger news come 2020. This prediction comes on the heels of the over $7 billion deals closed just this summer alone.
To date, approximately $100 billion total potential value of research and development have been spent by biotech companies since June 2019, with $11 billion paid upfront in cash.
Among those deals, the biggest so far is Bristol-Myers Squibb’s (BMY) $74 billion acquisition of Celgene (CELG). Another massive agreement is Novartis AG’s (NOVN) $9.7 billion acquisition of The Medicines Company (MDCO).
Eli Lilly and Co’s (LLY) $8 billion takeover of rare genetic mutation drug Vitakvi creator, Loxo Oncology (LOXO), also signified notable movements in the industry along with Johnson and Johnson’s (JNJ) $5.8 billion buyout of robotic surgery company Auris Health. Even Roche Holding AG (ROG) is expected to complete its $4.3 billion merger with gene therapy company Spark Therapeutics (ONCE) before the year ends.
Not far behind are Merck and Co’s (MRK) $2.7 billion acquisition of ArQule (ARQL) as well as Sanofi SA’s (SAN) $2.5 billion buyout of clinical-stage DNA base pair treatment company Synthorx Inc (THOR).
The majority of the deals were in the oncology space, with three times as many oncology deals made compared to the number two sector, the neurology sector. To put things in perspective, seven of the top 10 deals made in 2019 involved oncology treatments.
What can we expect in 2020?
A number of drug candidates remain in the pipeline, but one mid-cap biotech company is anticipated to make big bucks next year. The catch? It’ll need the help of a bigger and more established company to make it happen. That is, this promising company has become the most eligible buyout candidate for 2020.
Amarin Corporation (AMRN) has taken center stage when it became the first-ever company to hit positive results for its prescription omega-3 treatment, Vascepa -- a feat that none of the other biotech giants managed to accomplish. Actually, competitor GlaxoSmithKline (GSK) created its own omega-3 treatment, Lovaza, only to have it fail to reach its goal.
Barring any major setback, Vascepa is slated as the next blockbuster treatment in the cardiovascular disease space -- possibly even displacing Pfizer’s (PFE) Lipitor as the king of this segment. In fact, several major healthcare groups like the American Heart Association, American Diabetes Association, the European Society of Cardiology have already endorsed Vascepa as an effective treatment for LDL cholesterol.
The Amarin medication is projected to peak at $4 billion in annual revenues by 2028. Considering that its manufacturer’s reported third-quarter earnings this 2019 is only at $112.4 million, the approval of Vascepa will undoubtedly be a game-changer for its investors.
However, Vascepa’s incredible potential along with the fact that Amarin has no other drug candidate in its pipeline makes the company ripe for a takeover. For one, it’s not financially capable of juggling both the marketing of Vascepa and developing or building a solid pipeline to support its growth. With the omega-3 treatment’s projected blockbuster status, a bigger and more established company could undoubtedly be more fit to help it reach its potential.
Who are the potential suitors?
Three heavyweights have been repeatedly linked to Amarin: Pfizer, Novartis, and Amgen (AMGN). Since all three have a budding cardiovascular unit, it could be anyone’s game.
However, Novartis’ recent acquisition of The Medicines Company makes it the least likely candidate in the list right now. After all, the latter already has a potential blockbuster cholesterol-lowering drug in Inclisiran.
That paves the way for a new suitor in the form of Gilead Sciences (GILD). Just a few weeks ago, Gilead added Vascepa to one of its ongoing trials involving nonalcoholic steatohepatitis. Whether or not this signifies interest in buying out Amarin is anybody’s guess.
Heading into the next year, the biotech sector is expected to welcome the new year with strong fundamentals and great opportunities for outperformance. While the election may bring changes to policies, the ongoing growth and innovation in this industry make it impossible to be excited for what’s in store for the future.
After all, more and more life-extending and even life-saving treatments are getting discovered by the day. Aside from following the developments in the industry, why not use your knowledge to fatten your pocketbook along the way?
Mad Hedge Biotech & Healthcare Letter
October 8, 2019
Fiat Lux
Featured Trade:
(GET ON THE CELGENE BANDWAGON),
(CELG), (BMY), (GSK), (AMGN), (RHHBY), (ROG), (GMAB), (MOR)
If you’re looking for a biotech stock that just relentlessly grinds up every day, Celgene Corporation (CELG) has to be at the top of your list, one of the most dominant players in the industry today.
Thanks to its $74 billion merger with Bristol-Myers Squibb (BMY), the combined companies are expected to push out Amgen in the top spot by 2020. Perhaps a positive indicator that things are looking up is the 50.9% rise in Celgene stock this year.
While the deal with Bristol has been predictably riddled with setbacks and delays, the sale of blockbuster arthritis drug Otezla to Amgen last month over antitrust concerns has finally pushed the merger forward.
While waiting for the merger with (BMY) to be finalized by the end of 2019, Celgene has been busy coming up with ways to attract more investors.
One of the exciting efforts of the biotech giant is its recent collaboration with Immatics Biotechnologies. Celgene joins GlaxoSmithKline (GSK) in the T-cell treatment market. With these two behemoths providing resources for this field, researchers are hopeful that a breakthrough drug will be discovered soon.
This partnership with Immatics saw Celgene shell out $75 million to gain access to three of the smaller firm’s anti-cancer adoptive cell therapies. With Immatics’ focus on T-cell treatments, the collaboration with Immatics will provide Celgene a wider pool of candidates for their solid tumor programs.
Aside from the $75 million upfront payment, Immatics will also receive $505 million in milestone payments for every licensed drug if Celgene decides to exercise the option. That means Celgene will have the opportunity to pay for the full or partial rights on selected assets developed from the T-cell therapies.
Ideally, Immatics would earn over $1.5 billion from the collaboration plus tiered royalties on net profits. As for Celgene, the biotech company will share the rewards with Bristol-Myers.
This collaboration marks the biggest upfront payment received by Immatics since its creation in 2000. The company, which is a spinoff of Germany’s University of Tübingen, adds Celgene to its growing number of partners including Amgen (AMGN), Roche Holding Ltd.(RHHBY), Genussscheine (ROG), Genmab (GMAB), and Morphosys (MOR).
The Munich company’s work on adoptive cell treatments and bispecific antibodies also generated interest from the cancer center of the University of Texas.
Since its creation, Immatics has managed to raise $220 million in venture capital plus roughly $130 million in non-dilutive funding. The Celgene deal puts the company’s total capital at $420 million.
So far, Celgene has reported three quarters of consistently accelerating earnings per share increase and a quarter of notable sales growth. However, the Bristol-Myers deal has yet to be completed. More importantly, some blockbuster products face uncertain futures due to rival copycats.
One major factor contributing to the doubts surrounding the company’s future is the recent sale of Otezla. Since this drug has been Celgene’s major moneymaker for years, it remains to be seen how the company will cope with its loss.
Aside from Otezla, another Celgene blockbuster facing pressure is blood cancer treatment Revlimid. While the multiple myeloma drug reported an 11.4% jump in its second quarter sales this year, the company has yet to fully safeguard it from the patent challenges aiming to end its reign in the market.
While the effects of the Immatics collaboration and the recent developments on the Bristol-Myers merger have yet to concretely manifest themselves, Celgene is expected to display strength when the next earnings release of 2019 draws nearer.
In the third quarter report, the company is projected to post an earnings per share of $2.73. This would indicate a 19.21% year-over-year increase. Meanwhile, its earnings per share for the full year of 2019 is expected to rise by over 23% to reach $10.91. As for its revenue, Celgene is estimated to earn $17.44 billion this year, marking a 14.11% rise from 2018.
In terms of its merger with Bristol-Myers, the two pharmaceutical giants are anticipated to have a combined total of 10 drugs already in the late-stage testing phase and six drugs ready to be released soon.
Additionally, the companies disclosed that they have roughly 50 drugs slated for early and mid-stage testing. Among those, 21 are reported to be focused on oncology treatments.
Buy Celgene on the next 5% dip in the shares. It seems to be on a tear.
Mad Hedge Biotech & Healthcare Letter
October 1, 2019
Fiat Lux
Featured Trade:
(THE PLAYERS GUIDE TO BIOTECH INVESTING)
(AMGN), (PFE), (NOVN), (ABBV), (ABT),
(AGN), (ROG), (GSK), (CELG), (JNJ), (BMY)
You can’t watch a game without a program, and the lineup for biotech and healthcare is truly astonishing. No surprise then that the fields account for more or less than 17% of US GPD.
Here is a listing of the biggest $100 billion plus products you have never heard of. The good news is that you have just stumbled across a sector that will generate no less than a staggering $1.4 trillion in sales over the next five years.
That means it’s certainly worth your time getting to know this field. With this amount at stake, it’s no wonder companies manufacturing these blockbuster drugs are sparing no expense to fight off patent vultures.
A good example is Amgen (AMGN), which recently won its case to extend the patent life of rheumatoid arthritis biological Enbrel against Novartis AG’s (NOVN) biosimilar arm Sandoz. Since each extra hour added to patent life means millions of dollars (and sometimes billions) in sales, the additional 10 years of exclusivity for Enbrel is a massive victory for Amgen.
In a recent study released by Evaluate Pharma, Enbrel was ranked third in the top 10 biggest sellers up to 2024. The forward-looking consensus projection anticipates Amgen’s golden goose to hit roughly $140 billion in total revenues in five years – a truly impressive performance particularly for a drug that has been around for more than 20 years. However, Enbrel’s longevity pales in comparison to the other behemoths in the biopharma realm.
Up until 2018, Pfizer’s (PFE) Lipitor held the title of earning the highest lifetime sales in the industry. Since its launch in 1997, the cholesterol drug has raked in $164.4 billion in revenues so far with the number estimated to reach $180 billion by 2024. Lipitor’s success is highlighted more by the fact that it's under a small molecule status and holds approval for a very narrow indication.
Overtaking Lipitor to take the top spot is AbbVie’s (ABBV) rheumatoid arthritis treatment Humira, which closed with $20 billion in sales in 2018 alone. While some AbbVie investors frown upon the over-reliance of the company on Humira, it appears that the efforts to protect the drug has paid off big time.
With patent protection (132 approved patents!) safeguarding its exclusivity in the market, Humira is projected to reach a total of $240 billion in revenues by 2024. Clearly, the rewards they’ve been reaping show no signs of abating anytime soon.
More importantly, Humira’s robust sales, which makes up almost 70% of the company’s profits, has provided AbbVie with the financial capacity to finally get out of the shadow of parent company Abbott Laboratories (ABT) and come up with its own pipeline. As it happens, AbbVie’s efforts towards this direction have already started with the massive purchase of Allergan (AGN) for $63 billion this year.
Apart from Lipitor, Humira, and Enbrel, there are three more blockbuster products with sales that hit the $100 billion mark as of 2018 -- a figure that would make Ecuador proud to claim as their annual GDP. These are Roche Holding Ltd. Genussscheine’s (ROG) chemotherapy drug Rituxan, Amgen’s anemia treatment Epogen, and GlaxoSmithKline’s (GSK) asthma medication Advair.
One biopharma bestseller that leapfrogged a lot of other drugs in the market is multiple myeloma medication Revlimid -- aka the drug that built Celgene (CELG). With an entry date of 2008, this drug is the newest one on the list. While Revlimid’s sales are impressive, what’s actually quite exciting is the fact that its projected revenues easily outstrip its already notable sales of $53.69 billion.
By 2024, this Celgene blockbuster is estimated to reach $123.64 billion in sales. There’s a caveat to this though as Revlimid’s success in the years to come is dependent on how Celgene plans to deal with generic competition chomping at the bit and ready to attack once the drug reaches its 2022 patent expiration date.
Another big-ticket drug that might see a bit of a decline in sales soon is from Johnson & Johnson (JNJ). While the company has always been aggressive when it comes to dominating the market for its Crohn's Disease drug Remicade, an investigation by the Federal Trade Commission (FTC) might put a damper on things soon. According to recent reports, JNJ has been suspected of contracting payers to ensure market control and stave off competitors.
Meanwhile, the three horsemen of Roche, namely, Rituxan, cancer and eye disease medication Avastin, and breast cancer treatment Herceptin, reached a collective amount of $365 billion in total sales. These three are anticipated to stay put on top of the industry in the next five years as well, thanks to their competitive pricing and aggressive strategies to protect their patents.
Rounding out the list is Amgen’s Epogen, which is expected to add $107.90 billion to the already astounding $115.87 billion it generated for the company. Meanwhile, GSK’s Advair, which brought in $113.61 billion, is expected to pour in an additional $104.20 billion by 2024.
Interestingly, the majority of the top 10 franchise drugs are biologics except for Sanofi’s (SAN) ulcer treatment Zantac, Bristol-Myers Squibb Co’s (BMY) heart medication Plavix, Advair, and of course, Lipitor. In fact, this is considered as the primary reason for their capability to fight off potential copycats for years.
In some cases, their monopoly of the market has allowed them to expand to include various other indications in their coverage. The massive sales of biologics are also rooted in their ability to demand big-ticket reimbursements. Unlike their generic competitors, brand recognition alone makes it more convenient for patients to ask for compensation.
Needless to say, the success stories of these drugs make it quite obvious why these biopharma companies employ a battalion of legal experts to fend off the rise of generics. While the onslaught of biosimilars cannot be helped, these lawyers ensure that patients opting for these versions of the medication would find it incredibly difficult to ask for biosimilar reimbursements.
The Winner So Far
Global Market Comments
June 12, 2019
Fiat Lux
Featured Trade:
(MONDAY, JUNE 24 MELBOURNE, AUSTRALIA STRATEGY LUNCHEON)
(AMGEN’S BIG LUNG CANCER BREAKTHROUGH),
(AMGN), (GSK), (MRTX)
I recently heard that some of my hedge fund friends were loading up on Amgen (AMGN) and now I know why. It’s a company I know well because my UCLA biochemistry professor was its first chairman.
Amgen has accomplished a major medical breakthrough. The company has revealed that its experimental drug, AMG 510, exhibited the ability to significantly shrink the size of tumors by 50%. The results were obtained from early-stage trials performed on advanced lung cancer patients.
In a nutshell, AMG 510 could become the first-ever approved treatment that can target a mutated gene called KRAS which is one of the most common mutations involved in non-small cell lung cancer (NSCLC). The American Cancer Society identified NSCLC as the leading cause of cancer death, accounting for a stunning 85% of lung cancers.
For decades, researchers have been searching for ways to address KRAS mutations, with the sought-after solution dubbed as the "the great white whale of drug discovery." With the first proof-of-concept presented a mere six years ago, the rapid development of Amgen’s new drug has impressed researchers in the field.
Simply put, this drug will be a game changer for particular types of cancer. Subsequently, its success would mean massive profits for Amgen shareholders.
The announcement of AMG 510’s promising results saw a jump in Amgen shares of 6.1% delivering a new two-year high. While this product remains in its initial phase, the fact that this cancer drug addresses a vital unmet need in oncology makes it a prime candidate in becoming the next blockbuster drug for Amgen.
Aside from lung cancer, this drug is also aimed at providing treatment for colorectal cancer and nearly uncurable pancreatic cancer (of which Steve Jobs died). To date, AMG 510 sales are estimated to initially reach more than $1 billion a year and peak at $2 billion.
With the extremely massive market for this particular drug, it comes as no surprise that Amgen is not alone in the race.
So far, two more biopharma companies are looking to develop similar medications: GlaxoSmithKline Plc (GSK) and Mirati Therapeutics (MRTX). While the former has yet to reveal the covalent inhibitor drug it’s currently developing, reports indicate that Mirati’s work involves a drug called MRTX849. Aside from these, no other information has been released by the two companies.
While these are encouraging results vis-à-vis its oncology department, how is Amgen doing so far this year with the rest of its business?
Based on its earnings report in the first quarter of 2019, Amgen recorded $5.6 billion in total revenues. This matches the amount the company reported during the same quarter in 2018. Despite the promising projects in its pipeline, Amgen’s product sales saw a 1% dip globally.
However, its new products showed double-digit increases in the first quarter. Osteoporosis and hypercalcemia drug Prolia reported a 20% increase while cardiovascular medication Repatha also showed a 15% revenue jump during the first quarter. Even the revenues for relapsed multiple myeloma treatment Kyprolis showed a 10% rise in this period.
As for its earnings per share (EPS), Amgen is coming in at $12.53. This indicates an EPS growth of 14.8% this year, which could lead to a projected 5.25% EPS growth for 2020.
Meanwhile, Amgen’s positive outlook particularly with AMG 510 as an additional blockbuster drug in its portfolio prompted the company to adjust its earnings expectations for this year. In terms of its expected revenue, Amgen raised it from $21.8 billion to $22.9 billion range to $22 billion to $22.9 billion.
Mad Hedge Technology Letter
December 19, 2018
Fiat Lux
Featured Trade:
(HOW TECH IS EATING INTO HEALTHCARE COSTS)
(VEEV), (CRM), (GSK), (AZN), (MRK), (NVS), (DBX), (OKTA), (TWLO)
It’s undeniable that American healthcare costs are a big part of a family’s monthly expenses.
Rising deductibles and out-of-network fees are a few of the out-of-pocket costs that can singe a hole in the average joes’ pocket.
It was only in 2016 when healthcare insurance costs eclipsed more than $10,000 a year per person, and over the past 12 months, 68% of people surveyed admitted that future healthcare costs would probably consume a larger part of their earnings.
The result is that healthcare companies are making money hand over fist.
Is there something that I deduce from this lucrative part of the economy that has the potential to feed into the tech sector?
The tidal wave of money spilling into the healthcare industry has also given impetus to these firms hoping to buttress their networks and IT with modern tech infrastructure to take advantage of the efficiencies on offer.
Building the best cloud services geared towards specific industries has been a winning formula and the generated momentum will continue into the next calendar year.
Prime models can be seen all over the tech ecosphere and they will be big winners of 2019.
One example is Twilio (TWLO) who has quietly risen the bar for communication cloud products.
A panoply of small companies can now offer professionalized email, text message, automated voice mail services amongst other services that do the work of 100 employees.
Recently, I touched on a cloud company named Okta (OKTA) responsible for managing the facilitation of passwords.
This identity management company was formed by a group of former Salesforce executives.
In my book, a Salesforce (CRM) credential is a golden stamp of approval for newly formed cloud-companies seeking to develop new cloud products in broad industries.
Why?
Salesforce’s client relationship management platform (CRM) is ubiquitous and the most popular enterprise software.
The way they develop their model is by launching and acquiring new e-commerce and marketing services - which lure in customers into its walled gardens.
Salesforce also applies its artificial intelligence platform Einstein to harness customer relationships and help businesses carry out decisions based on data alone instead of testosterone and emotion.
This all means that Salesforce executives have their finger on the pulse of the cloud landscape and know how to build a cloud business from scratch which is valuable.
They know what certain industries require to mushroom and can deploy resources in the quickest way possible while surrounding themselves by hordes of software engineers who can be poached for a certain fee.
The framework being in place is a massive bounty for these executives who just line up the dots then motor on to an industry confirmed by the data.
And remember that 99.9% of people do not have access to this proprietary data.
Consequently, they know more about corporate America than most Fortune 500 CEOs.
Marrying up the healthcare industry to the cloud was just a matter of time.
Veeva Systems (VEEV) is a cloud-computing company focused on pharmaceutical and life sciences industry applications.
Founder and CEO of Veeva Systems Peter Gassner cut his teeth at Salesforce serving as Senior Vice President of Technology.
His job was building the salesforce.com platform including product, marketing and developer relations.
Gassner has effectively transplanted the Salesforce platform model and applied it to the life sciences industry and has done a great job doing it.
The Veeva Commercial Cloud includes a CRM platform that aids drug company’s management of clients.
The Veeva Vault is a tool that tracks industry regulations, clinical trials, and recommends actionable habits in the cloud.
Veeva's CRM platform is powered by the Salesforce1 app development platform and is integrated into the broader Salesforce Marketing and Service Clouds.
The first mover advantage has offered all the low-hanging fruit for Veeva.
The lack of competition surely never lasts but the extra time to pad their lead is only a positive to its business model.
Veeva has already lured in some of the health industries biggest names such as GlaxoSmithKline (GSK), AstraZeneca (AZN), Merck & Co. (MRK), and Novartis (NVS).
These heavy hitters are meaningfully tied to its ecosystem, and it is safe to say that these relationships are only scratching the surface and have the potential to expand as Veeva installs more add-on tools into its platform.
The popularity shows up in the numbers with Veeva’s 3-year sales growth rate hovering around 30%.
Even better, the profitability of Veeva is indicative of the strength in its business model. They are simply at the right place at the right time to capture the momentum from the digital crossover in the healthcare industry.
Many similar names like Dropbox (DBX) are enormous loss-making enterprises but Veeva has shrugged off this stereotype that many cloud companies of its size can’t be profitable.
The effect of being strategically placed in a position to cherry pick the lucrative healthcare industry has also seeped into the strong profit margins of Veeva able to grow it to over 32%.
Touching more on the profitability, EPS has kicked into gear sequentially rising 80%, and the long-term outperformance is backed up with a 3-year EPS growth rate of 41%.
This cloud company is incredibly profitable for its size, and part of that is the absence of competition which increases pricing power.
Dropbox does not have that luxury of favorable pricing schemes which cripple profitability and leads to attrition and just as harmful – a price war.
Veeva’s forecasts for next year blew past Wall Street’s estimates and the company is modeling for EPS of $1.58 and revenue around $856 million in 2019.
Gassner has even publicly acknowledged that he expects 2019 revenue to come in between $1 billion and $1.1 billion which is a full year ahead of schedule.
The bullish guidance is a clue that the overall cloud story is alive and kicking, and there is absolutely no weakness whatsoever.
Making this story even more compelling is that in the last five years, profits are up six-fold, revenue is up four-fold, and the number of new products is up three-fold.
As we advance into 2019, I believe Veeva is a buy-on-the-dip candidate because of its favorable market position, rapidly expanding margins, and its low enterprise value of $11 billion which deems it, as I daresay, a lucrative buyout target for larger industry cloud players like Salesforce.
The tech industry has a habit of coming full circle become of its network effect of capital, talent, and management.
I would be interested in dipping my toe into any of Salesforce’s offspring because these models are built to scale and are waiting on the doorstep to seize revenue from industry migrating to digital.
Okta did it, and Veeva Systems made the leap of faith too, confirming that the Salesforce method is a path to untold profits for cloud-based software companies.
When the market can finally digest the macro rigmaroles, shares for this innovative and hyper-growth cloud company is set to take off.
