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More Than Just A One-Trick Pony

When executed correctly and sufficient time is allocated, stock market investing can be highly rewarding. But, what can investors do to make the most of their opportunities in the market?

The short answer: Choose businesses that have or are building a strong competitive advantage.

Those investing in the biotechnology and healthcare sector know that buying companies with promising portfolios and diverse pipelines is vital.

After all, a solid lineup can generate and secure steady cash flow to fund R&D efforts as well as acquisitions to expand the pipeline. Consequently, this guarantees steady growth in revenues as existing products face patent exclusivity losses.

Within this sector, one of the companies with a strong portfolio and promising pipeline is Merck (MRK).

Merck has become practically synonymous with Keytruda—the #1 cancer drug in terms of sales globally. In the first 6 months of 2022 alone, this drug already raked in $10.1 billion in sales.

While several biotechnology companies would be content with this top-tier drug in its portfolio, Merck refuses to be a one-trick pony.

Leveraging its $222 billion market capitalization, the fifth-biggest pharmaceutical company on the planet has been steadily expanding its portfolio.

In fact, Keytruda only made up 33% of its total $30.5 billion sales in the first half of the year.

Merck has built a formidable oncology lineup and developed several blockbuster treatments in this space.

Its flagship, Keytruda, climbed 30% year-over-year in its second-quarter earnings report to record $5.3 billion for that period. Other cancer treatments improved their performance as well. Lynparza grew 17% while Lenvima rose 33%.

Amid these growths, Merck remains aggressive in expanding its oncology lineup. Earlier this year, the healthcare world has been abuzz with Merck’s plan to buy cancer-centered biotech Seagen (SGEN).

The deal, if it pushes through, would be reportedly worth $40 billion and add 4 already approved cancer drugs to Merck’s portfolio.

On top of these market-ready products, Seagen will also bring numerous late-stage candidates to the table.

Merck also recently inked a smaller deal with Orion Corporation. The agreement, worth $290 million, will grant Merck access to Orion’s drug candidate for prostate cancer.

Meanwhile, Merck just announced its plan to catch up with its peers in the COVID-era race. Specifically, the biotech giant has finally become more invested in entering the messenger RNA technology segment.

Earlier this week, Merck struck a $3.7 billion deal with Cambridge-based private biotech Orna Therapeutics for the latter’s novel take on mRNA called oRNA.

Basically, Orna’s approach involves altering the mRNA strands in such a way that it creates a circle instead of a line.

According to the firm, this will be a more effective way to apply the technology to mRNA-based vaccines and therapies.

This isn’t the first time Merck collaborated with a smaller firm to pursue mRNA technology.

As early as 2015, Merck has already been investing in this segment. In fact, it was one of the early partners of Moderna (MRNA), signing a series of agreements with the latter including collaborations on infectious diseases programs.

While some of the programs have been discontinued, Merck and Moderna continue to work together on a personalized cancer vaccine program.

Amid these efforts, Merck is still regarded as a laggard compared to its Big Pharma peers in terms of making huge investments in the mRNA space.

Recent mRNA collaborations include Sanofi’s (SNY) $3.2 billion deal with Translate Bio, Pfizer’s (PFE) massive investment in BioNTech’s (BNTX) technology, and GlaxoSmithKline’s (GSK) deal with CureVac (CVAC).

Nevertheless, the deal with Orna suggests a shift with Merck’s strategy.

Overall, Merck is a premier biotech and healthcare business with a strong portfolio and a promising pipeline.

Its profitability and expansion over the past years have been proven to be top-notch, and it’s not farfetched to expect the same or even better results in the future. I recommend buying the dip.

August 4, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
August 4, 2022
Fiat Lux

Featured Trade:

(A SELLOFF SURVIVOR READY FOR MORE GAINS)
(PFE), (SRPT), (PTCT), (GSK), (JNJ), (MRNA)

A Selloff Survivor Ready for More Gains

Biotech Letter

The broader market hasn’t been putting that much faith in drugmakers these days, and this could very well be a mistake.

While 2022 has not been particularly kind to equities recently, several names in the biotechnology and healthcare sector still managed to keep themselves safe from the selloff.

Pfizer (PFE), with its COVID vaccine sales, is one of them. Admittedly, this pharmaceutical giant has not shown substantial growth in the past monthS. Nonetheless, its quarterly updates and, more importantly, pipeline have exhibited notably encouraging signals.

As a massive underperformed in the past 20 years, Pfizer has taken aggressive steps to transform its strategy. The most obvious way to shake up the business is to eliminate the bulk of its noncore products.

However, it’s not advisable to buy a company just because it has been underperforming and would then be sold at lower prices. Instead, it is critical to determine whether there’s a catalyst.

For Pfizer, the catalyst was clear: COVID.

The company was and still is at the heart of the coronavirus vaccine drives and treatments—a position that’s projected to be sustained for years to come.

The company has made a fortune from this program, and it’s still reaping the rewards in a massive way.

In the second quarter of 2022, Pfizer’s revenue climbed by 53% year-over-year to reach $27.7 billion. Based on the company’s record, this is the most significant quarterly sales during this period to date.

For context, its COVID vaccine, Comirnaty, raised $8.8 billion in sales. This is 20% higher than its reported sales in 2021 over the same period.

Meanwhile, Pfizer’s new COVID therapy, Paxlovid, recorded $8.1 billion in sales. Taken together, Paxlovid and Comirnaty comprise over half of the company’s total revenue for the second quarter.

Leveraging these growth opportunities, Pfizer has been steadily expanding its pipeline.

To date, the company has roughly 96 drugs in its pipeline. Of these, 6 drugs are in registration, while 29 candidates are queued for Phase 3 trials. There are 31 drugs in Phase 2 and 30 more in Phase 1.

Pfizer’s candidates range from treatments for inflammation, immunology, oncology, vaccines, and internal medicine to rare disease therapies.

Among the treatments in its Phase 3 study, two have been identified to bring in billions of dollars for Pfizer potentially.

One is PF-06939926, which is a treatment for Duchenne syndrome. The other is PF-06928316, which is for Respiratory Syncytial Virus (RSV).

Globally, 1 in 3,500 to 5,000 males suffer from Duchenne syndrome. This puts the number of patients at roughly 250,000, with about 10,000 to 15,000 found in the US. While it generally affects males, it can sometimes affect females as well.

In terms of market size, the Duchenne syndrome market is expected to be worth $4 billion in 2023 and $7 billion by 2027.

Currently, the major approved treatments for this condition are Sarepta's (SRPT) Exondys 51, Vyondys, and Amondys, as well as PTC Therapeutics (PTCT) Emflaza and Translarna.

PTC recorded $236 million in sales for Translarna, which is approved in Europe, and $187 million for Emflaza, approved in the US, for a total of $423 million in sales in 2021. Meanwhile, Sarepta’s overall sales reached $612 million for that same period.

Adding the rest of the minor competitors for Duchenne syndrome treatments, only $1.5 billion of the projected market value is held by the existing drugs. Clearly, there’s a lot of room for more companies to join the fray.

Meanwhile, RSV presents another lucrative market. According to the Centers for Disease Control and Prevention, this condition causes approximately 58,000 hospitalizations annually in the US.

Of these, 100 to 500 deaths are children under 5 years old and 14,000 are adults aged 65 and above. The average expense in managing adult patients alone has reached roughly $3 billion every year.

In terms of market value, the RSV market is projected to reach $4 billion by 2027. So far, the biggest competitors in this space are GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), and Moderna (MRNA).

While its rivals are challenging, Pfizer still estimates sales for its RSV vaccine to reach at least $1.5 billion annually.

Thanks to its COVID programs, Pfizer has been hailed as the undisputed leader of the pack in terms of reputation and credibility in research.

Needless to say, these factors would serve as a valuable growth lever for the healthcare giant for decades.

As one of the largest biopharmas in the world, Pfizer has established a reputation for outstanding innovation. Over the years, the company has delivered several revolutionary treatments to the market like Viagra or Lyrica.

Simultaneously, it developed Lipitor, reaching $14.5 billion in sales over 14.5 years.

Since then, it has become a highly reputable industry name. Its diverse and extensive pipeline demonstrates that it remains a company highly capable of innovating and maintaining its dominance.

July 14, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
July 14, 2022
Fiat Lux

Featured Trade:

(GOODBYE BIG PHARMA, HELLO BIG BIOTECH)
(GSK), (PFE), (BMY), (VTRS), (LLY), (JNJ), (AMGN), (GILD),
(MRK), (RHHBY), (AZN), (NVO), (ABBV), (SNY), (ABT)

Goodbye Big Pharma, Hello Big Biotech

Biotech Letter

The moment GlaxoSmithKline (GSK) completes the spinoff of its massive segments marketing drugstore staples, such as Tums and Advil, it will become the latest name to join the list of Big Pharmas shuffling their assets and rebranding itself into a pure-play biopharma stock.

The reorganization of this UK-based company is the culmination of years-long process that has transformed practically all the biggest pharmaceutical companies globally into biotechnology companies on steroids.

This type of transformation, which gets rid of sideline businesses, has been going on for years. Pfizer (PFE) dumped its chewing-gum segment back in 2002 and established another spinoff unit, Viatris (VTRS), with Mylan in 2020.

Bristol Myers Squibb (BMY) decided to spinoff its infant-formula division in 2009. In 2018, a new animal health company came to be from Eli Lilly (LLY).

By 2023, Johnson & Johnson (JNJ) expects to complete the creation of a spinoff company and unload its consumer health segment, which offers Tylenol and Band-Aids.

Essentially, they’re turning into Amgen (AMGN) and Gilead Sciences (GILD) but with more money and resources to churn out high-priced, complex treatments for rare diseases.

However, not all Big Pharma names plan to become pure-plays. For example, Merck (MRK) still intends to retain its animal health sector while Roche (RHHBY) wants to keep its diagnostics segment.

As for the rest, including AstraZeneca (AZN), Novo Nordisk (NVO), and AbbVie (ABBV), their plan is to focus on creating new drugs and marketing these treatments—nothing more, nothing less.

The idea of Big Pharma transforming into “Big Biotech” dates back to 1992, when Henri Termeer, the CEO of Genzyme—now owned by Sanofi (SNY)—was summoned to a Senate hearing in Washington to argue and justify one of the most expensive medicines ever put to market.

The medication in question was for a rare genetic condition called Gaucher disease. A year-long treatment for one person needed tens of thousands of human placentas, and the price tag? A jaw-dropping $380,000 annually.

Amid the demand to make the treatment cheaper, Genzyme stood by its decision and the price barely budged after two years.

The company’s tenacity and insistence on standing by its pricing altered the biopharma landscape. That is, drug developers realized that rather than marketing cheaper drugs to combat common diseases, they can focus on biotech-style treatments to target rare conditions.

At that time, Big Pharma companies were battling over pieces of massive markets. They allocated considerable funds to their commercial teams, hoping to outrank one another in crowded spaces.

Meanwhile, biotechs like Genzyme decided on a different strategy.

They concentrated on more innovative approaches. Actually, the biotech focused on biologics at that point. Then, the company simply ignored the pricing rules and set its own prices, which were considerably higher.

A more recent go-to proof of concept for this strategy is Abbott Laboratories (ABT), which was initially a diversified company that offered an extensive range of products like medical devices and even infant formula.

In 2013, the company spun off its branded pharmaceutical sector into AbbVie, which became a pure-play biopharma that focused on developing and marketing the arthritis drug Humira. Since then, Humira has transformed into one of the top-selling drugs in history.

More than that, AbbVie pays substantial dividends while its shares have delivered 500% returns since the spinoff. In comparison, the S&P 500 has returned roughly 220% within the same timeframe.

While this is a shift that investors have clamored to see in the healthcare sector, it also means that the transformations could turn companies with solid revenue streams that have become reliable despite the ups and downs of the drug discovery process into riskier bets.

Although treatments for rare diseases admittedly come with very high price tags, focusing on smaller markets brings with it the inherent risk that these buy-and-stuff-under-the-mattress blue chips could no longer deliver returns as consistently.

These days, though, the advancements have made faster and safer scientific breakthroughs much more plausible.

Companies have gained a better understanding of the human genome, oncology treatments, genetic diseases, and groundbreaking modalities like gene therapies.

The science has now caught up with the demand. More importantly, Big Pharma has finally woken up and started to leverage its resources to take advantage of the opportunities.

This gradual change can be seen in the surge of new treatments in the past years. From 2016 to 2020, the FDA approved an average of 46 new therapies annually.

This is more than half the number between 2006 and 2010 when the organization only approved an average of 22 new treatments every year.

Needless to say, these changes are also partly in response to the overall dissatisfaction of investors with the diversification strategies of Big Pharma.

Basically, the general message here is that Big Pharma should let the investors worry about diversifying their own portfolios and focus on developing safe and effective drugs.

pharma

June 23, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
June 23, 2022
Fiat Lux

Featured Trade:

(AN A-RATED STOCK FOR THE ANXIOUS INVESTOR)
(PFE), (AZN), (MRK), (NVO), (BNTX), (VLA), (GSK)

An A-Rated Stock for the Anxious Investor

Biotech Letter

Choosing businesses with size and scale in their favor is more often than not a wise move for investors.

After all, these companies tend to be well established in their respective fields and hold a higher chance than their peers in terms of sticking around for a long time.

Pfizer (PFE) is an excellent example of a mature biopharmaceutical stock that could efficiently deliver great rewards to investors for many years.

However, the elephant in the room for this stock is whether the bumper profits from its COVID-19 vaccines will be sustained in the long term. These concerns have kept a lid regarding the company’s valuation.

If we strip out Comirnaty from the conversation, Pfizer will still have a decent valuation in relation to its share price today.

It has a current P/E of 11x and market capitalization to operating cash flows of 8.9x. In contrast, fellow vaccine maker AstraZeneca (AZN) has been trading at a negative P/E and a stressful market cap to operating cash flow of 27 times.

For added context, Big Pharma names Merck (MRK)’s P/E is 17x while Novo Nordisk (NVO) has been trading 37 times.

Going back to Pfizer, the company’s first-quarter earnings results for 2022 indicated a strong performance and reinforced its guidance this year.

For the full year of 2022, the company projects sales within the range of $98 billion to $102 billion.

To offer you a better picture of the scale of this growth, this would amount to 150% times the yearly sales between 2018 and 2020

It would actually be a quarter higher than the 2019 and 2020 sales combined.

If this roughly $100 billion forecast is achieved, Pfizer will become the first-ever pharmaceutical stock to reach that goal.

To put this in perspective, if we consider Pfizer as a country or a territory, then its GDP would be ranked 64th globally.

This would put it above Ethiopia and immediately behind Puerto Rico.

During this period, Pfizer recorded $25.7 billion in revenue, showing off an impressive 82% operational growth rate year-over-year and a 76% EPS growth.

Comirnaty, co-created with BioNTech (BNTX), raked in $13.2 billion, reporting a 282.1% spike for Pfizer

Meanwhile, the newly launched COVID-19 treatment, Paxlovid, generated $1.5 billion in revenue.

Pfizer’s consistent exponential growth, as shown in the first-quarter earnings, isn’t solely dependent on its COVID vaccines.

While Comirnaty and Paxlovid comprised over 50% of the $25 billion revenue in that period, sales from other segments continued to rise.

For example, stroke and blood clot treatment Eliquis generated $1.8 billion, up by 12% from its 2021 first-quarter sales of $1.2 billion. Meanwhile, heart failure treatment Vyndamax jumped by an impressive 41% to hit $612 million.

On top of its solid drug development pipeline, Pfizer has been leveraging its bumper cash flow to pursue bolt-on acquisitions of promising biopharmas.

Just last month, Pfizer acquired Biohaven Pharmaceuticals for $11.6 billion in cash. The smaller company’s primary treatment is Rimegepant, a migraine medication approved in both the US and Europe.

Aside from that, Pfizer threw its weight behind a fellow COVID vaccine maker, a French biotechnology company called Valneva (VLA).

Valneva’s most promising program is its late-stage development of a vaccine for Lyme disease.

When Pfizer announced its decision to add $95.6 million to the project plus up to $100 million in milestone payments, it triggered a massive 81% surge in Valneva stock price.

Pfizer and Valneva’s partnership for developing a Lyme disease vaccine started in 2020 when the bigger biopharma paid $130 million upfront.

This latest revision of their deal will not only up Pfizer’s stake in Valneva to 8.1% but also allow the French biotech to continue with its Phase 3 trial without the fear of straining its cash position.

Pfizer currently holds a distinct position in its history, with gushers of cash coming practically from all places.

These sums can only be expected to go higher with the anticipated listing of its consumer healthcare business, which it co-owns with GlaxoSmithKline (GSK). While there’s no official word yet on the deal, Pfizer’s plan to sell its stake could generate roughly $19 billion.

Moreover, the company maintains a respectable dividend yield of 3% and a net debt of roughly $10 billion, which can be completely paid off using its operating cashflows for three to four months.

This enables Pfizer to sustain a comfortable credit rating of “A” Stable from Fitch, thereby making it financially stable and safe from the ever-increasing interest rates.

Needless to say, Pfizer is the kind of stock that offers rare stability in this turbulent period.

June 2, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
June 2, 2022
Fiat Lux

Featured Trade:

(A SOLID BIOPHARMA FILLED WITH PROMISING CATALYSTS)
(GSK), (PFE), (INCY)

A Solid Biopharma Filled with Promising Catalysts

Biotech Letter

If the rumblings in the market have you laboring just to get a full night’s rest, know that you are not alone. What’s more comforting is that you are not defenseless in this situation.

It pays to buy stocks that will still be worth something to your investment portfolio in uncertain periods, even if these end up getting torn apart a bit due to political and economic issues.

One of them is GlaxoSmithKline (GSK).

With a massive market capitalization of over $104 billion, GSK is recognized as one of the most prominent biopharmaceutical players in the healthcare sector.

Primarily due to its extensive portfolio of drugs and services, ranging from amoxicillin to antidepressants, this company raked in roughly $46 billion in 2021.

This shows off a quarterly increase in revenue by 40% in the past five years, with a quarterly free cash flow rise of 378%. Among other factors, these figures are indicative of GSK’s long-term health.

Regarding its revenue-making capacity for shareholders, the company’s forward dividend is recorded at $2.92, putting its yield at approximately more than 5%. This is higher than the average recorded by the market, which is 1.2%.

While this sounds great, investors should be aware that GSK’s dividend doesn’t necessarily come with the guarantee of climbing over time.

Actually, the company’s payout has only increased by 13.3% over the past 10 years. So, it’s reasonable to believe that the figure would most likely stay the same.

Nevertheless, GSK has more revenue streams to add in the short term. The company has 5 varying treatments queued for registration.

That is, if they gain regulatory approval, GSK would have 5 new drugs to launch soon.

On top of these, the company has a myriad of late-stage candidates in its pipeline that hold the potential to advance in the following years as well. Evidently, GSK isn’t short on promising growth catalysts.

In another move to bolster its pipeline, GSK recently announced its plan to buy Affinivax for roughly $3.3 billion. If everything goes well, GSK will add this Boston-based company to its portfolio to expand its vaccine programs by the third quarter of 2022.

This move is one of the many decisions GSK made in preparation for the impending spinoff of its consumer healthcare business, Haleon, which is anticipated to happen by July 2022.

The plan is to have 80% of GSK’s holdings in Haleon be spun off to its shareholders while the company retains 20% to strengthen its financial standing. Pfizer (PFE) will get the remaining ownership.

Considering the brands under Haleon, including Sensodyne, Panadol, and Centrum, this future spinoff is projected to become a world leader in the field of consumer healthcare. Clearly, GSK shareholders would benefit greatly from this plan.

Another recent move to broaden its pipeline is GSK’s $1.9 billion agreement with Sierra Oncology.

This deal, which is also expected to reach completion by the third quarter of 2022, will add bone marrow cancer drug candidate Momelotinib to GSK’s pipeline.

Momelotinib targets myelofibrosis patients with anemia. The estimated number of individuals with myelofibrosis in the US alone is 20,000.

While there’s no fixed number on the drug’s target market, we can only look at the history of patients.

Typically, 40% of myelofibrosis patients are already battling anemia upon diagnosis, and virtually all of them eventually develop the condition.

Conservatively, I can say that 70% of the total patient population has anemia. This would amount to roughly 14,000 eligible patients.

At the moment, only a handful of treatments target myelofibrosis. One of the most popular is Jakafi from Incyte (INCY).

However, Jakafi and chemotherapy fail to yield results consistently, Momelotinib could become a viable option for the target population.

As a relatively new candidate, it’s reasonable to assume that Momelotinib could seize only 35% of this market or roughly 4,900 patients.

So far, there’s still no pricing information for Momelotinib, but the $120,000 average expense for cancer treatment annually is a good indicator in terms of an estimate.

Taking into consideration other factors like patient assistance programs and the adjustments in prices from negotiations with health insurers, then Momelotinib could reach pricing of $80,000 for each patient.

This could total approximately $400 million in yearly sales in the US alone. Since the US comprises 40% of drug spending worldwide, there is an excellent chance that Momelotinib will reach $1 billion in annual sales.

Putting this in perspective, $1 billion in additional revenue yearly would amount to a 2.2% boost over GSK’s $45.9 billion expected revenue in 2022.

Needless to say, this Sierra Oncology deal is more than enough to move the needle for the company.

Overall, GSK has an exciting year ahead. With the Haleon spinoff and the continuous growth of its pipeline, it’s easy to see why this company is an excellent long-term investment.

gsk

April 21, 2022

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
April 21, 2022
Fiat Lux

Featured Trade:

LET’S GET READY TO RUMBLE)
(MRNA), (PFE), (BNTX), (AZN), (ABBV), (MRK), (BMY), (TAK), (GILD),
(SNY), (ALNY), (NVS), (REGN), (IONS), (GSK), (BIIB), (CRSP)

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