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)
Tag Archive for: (MRK)
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.
Mad Hedge Biotech and Healthcare Letter
July 12, 2022
Fiat Lux
Featured Trade:
(THE LEADERSHIP BATON IS IN BIOTECH’S HANDS NOW)
(MRK), (SGEN), (CRSP), (VRTX), (BLUE), (BIIB), (LLY), (RHHBY)
Biotechnology companies have taken the reins and are expected to outperform the general market in the near future.
To date, the Nasdaq Biotech Index (NBI) has been up by 2.41% while the iShares Biotechnology (IBB) exchange-traded fund has climbed by 2.47%.
Numerous crucial factors place this industry in an advantageous position for growth. Alongside other segments of the pharmaceutical and healthcare industries, the biotechnology sector is essentially recession-proof.
With a roughly 40% fall in the biotech sector from 2021’s high, it’s highly likely for us to witness a boost in takeover activity in this space.
This is evident in recent reports of Merck (MRK) attempting to acquire cancer biotech Seagen (SGEN), as discussed in the June 30 issue of this biotech and healthcare letter.
The talks have progressed, and it appears that Merck is nearing the end of the process. The goal is to have the details worked out by the time the quarterly earnings report is released on July 28.
While no specifics have been made public, it is estimated that the larger healthcare company will pay a staggering $40 billion for this Seagen acquisition.
If this goes through, Merck will pay more than $200 per share for Seagen.
The news of this acquisition bolstered Seagen’s business as the stock rose by 4.6% at the time of the announcement.
This is welcome news given the perceived slowdown in biotech M&A activity since 2020. As a result, the idea fueled pessimism among investors who failed to see the big picture during this time period.
Analysis of 101 contracts signed by small, medium, and large biotechnology companies between January 2015 and June 2022 reveals that this year's contract volume and size are comparable to those of previous years.
In fact, there have been $17.7 billion in transactions so far in 2022. This translates to more than $13.9 billion in 2020 and $7.2 billion in 2021.
Some investors may be concerned about the quality of these acquisitions.
Even though the companies involved paid good premiums, the last 12 months' acquisitions were done at a big discount to the highest share prices of the businesses being bought.
To put it simply, there has been a problem with pricing in the sector as of late.
This is admittedly a "bittersweet" reality of recent biotech M&A transactions. As a result, market perceptions are clouded and investors are misled into believing that a much larger problem is brewing in the sector.
Executing megadeals is an obvious solution. This is why the Merck-Seagen merger is such good news for the industry.
The impact of this report suggests that large-scale M&A could be part of the path to the biotech sector's recovery.
The mere possibility of this transaction has already increased the SPDR S&P Biotech exchange-traded fund by approximately 20%.
In addition to Merck and Seagen, other biotechnology companies have been widely discussed as potential acquisition targets.
CRISPR Therapeutics (CRSP), which has a long-term partnership with Vertex Pharmaceuticals (VRTX), is a fan favorite. By the fourth quarter of 2022, the two intend to submit their sickle cell and beta-thalassemia treatment for approval.
Bluebird Bio (BLUE) is another company that has been on the radar whenever acquisition discussions begin.
This gene therapy and cancer biotech has been unnerving investors for months, even before the pandemic triggered an economic crisis, due to its lackluster performance. Despite this, its gene-editing program has enormous potential.
With a market capitalization of $368 million, it is an ideal candidate for Merck and even Moderna (MRNA). After all, both have been considering expanding its oncology program, and a dirt-cheap acquisition target appears to be an appealing option.
Biogen is another name associated with multiple interested parties (BIIB). Since its Alzheimer's treatment failed to materialize and deliver despite the biotechnology company exhausting virtually all available options to salvage the situation, the stock has yet to exhibit any signs of recovery.
After betting the farm on this candidate, Biogen has struggled to maintain its financial stability. In an effort to improve its cash flow and pay off its debts, the company has also been working overtime to advance the other programs in its pipeline.
Eli Lilly (LLY) and Roche (RHHBY), which have been working on their own Alzheimer's treatment, have recently been linked to Biogen.
With a market capitalization of $32 billion and a money-losing program, however, any transaction involving this biotech would require significantly more time.
Overall, it appears that biotechs are gradually regaining their footing. It is only a matter of time before all the pieces fall into place and the sector begins to move forward with full force.
Mad Hedge Biotech and Healthcare Letter
June 30, 2022
Fiat Lux
Featured Trade:
(A SOLID BIOPHARMA WITH A GAMECHANGER UP ITS SLEEVE)
(MRK), (SGEN), (AZN), (ABBV), (BMY)
The mounting uncertainty over fears of a global recession, heightened volatility, and ongoing geopolitical concerns resulted in the decline of the S&P 500 index, pushing it towards a bear market.
In this type of environment, investors can lean on solid dividend stocks to smooth out losses and generate some much-needed passive income.
A great biotechnology and healthcare stock that fits the bill is Merck (MRK).
For one, Merck’s business is solid, rising by 23% year-to-date. The company, with a market capitalization of $233 billion, is the fifth-biggest pharma stock globally.
It develops products for humans and animals, excelling and becoming a frontrunner in both fields.
Among its programs, the most noteworthy is the top-selling cancer drug Keytruda. This product continues to gain more indications despite already having over two dozen regulatory approvals under its belt.
In 2021, Merck launched five blockbuster products. Even its animal health sector posted double-digit growth in net sales for that period.
This also included its COVID-19 antiviral treatment, Lagevrio, which raked in $3.2 billion in sales in the first quarter of 2022 alone.
Merck also has roughly 77 programs queued for Phase 2 trials and 29 more for Phase 3 studies in its pipeline. These cover diverse projects ranging from vaccines, cardiovascular, and diabetes treatments to oncology and endocrinology therapies.
Needless to say, the continuous expansion of the company’s drug portfolio bodes well for its future. Moreover, Merck offers investors a 2.9% dividend yield.
To put that in perspective, 2.9% is about twice the S&P 500’s 1.6% yield.
While Merck is considered one of the top companies in the healthcare industry, reporting almost $50 billion in revenue in 2021, the business has been missing something in the past years: a big growth catalyst.
Despite its solid performance and steady expansion of existing products, Merck’s sales have only increased by roughly 15% from 2019 to 2021.
This might change soon.
Merck has been persistently linked with biotech company Seagen (SGEN) in an effort to bolster its oncology portfolio.
If this plan pushes through, it could be a massive game-changer for both companies.
With a market capitalization of over $32 billion, buying Seagen won’t be cheap for Merck. More than that, other names are supposedly interested in acquiring this company as well. However, it looks like Merck has the best shot at actually sealing the deal.
Growing its revenues impressively over the past 10 years, Seagen is an attractive target for any Big Pharma.
In fact, this biotech has grown from raking in only roughly $200 million in revenue in 2012 to $1.57 billion in 2021. It has also since then expanded its portfolio and broadened its pipeline. This means that the company’s 2027 revenue estimate of $6.9 billion and $10.2 billion by 2031 are within reach.
Seagen would be an excellent fit for Merck because of the overlapping interests of both businesses.
The deal would expand Merck’s oncology footprint, bolster its foothold in the market, and introduce new technology to its pipeline while simultaneously allowing Seagen to inject substantial cash flow to sustain and bring to market its innovative programs.
If this goes through, the deal would be expected to benefit Merck in the same way AstraZeneca (AZN) benefited from Alexion, AbbVie (ABBV) with Allergan, and Bristol-Myers Squibb (BMY) with Celgene.
While it’s risky to speculate on a potential acquisition, Merck remains a good buy regardless of the plans with Seagen.
Considering that the company’s dividend payout ratio is projected to be at 38% in 2022, its dividend seems to be safe and should be able to increase almost as fast as its earnings.
This means Merck could reasonably deliver high-single-digit yearly dividend growth, making it a stock with an excellent combo of income on the side and high growth potential.
Mad Hedge Biotech and Healthcare Letter
June 28, 2022
Fiat Lux
Featured Trade:
(A RESILIENT BUY-AND-HOLD STOCK)
(AZN), (MRK)
We officially entered a bear market when the S&P 500 continued to decline in value.
Falling by 23% since January, the index has battled constant pressure in 2022 as multiple issues like interest rate hikes and the war in Ukraine continue to make investors anxious over the future of the economy.
While the near-term prospects look gloomy for most businesses, there are several stocks that could be great buy-and-hold investments for the long term.
One of them is AstraZeneca (AZN), which has been in good shape to weather the turbulent conditions and still managed to generate solid results for its shareholders.
A critical factor in making AstraZeneca a top-performing growth stock is the broad range of drugs contributing to its top line.
The company has several blockbusters that generate over $1 billion in yearly revenue to fund its operations.
Needless to say, diversification is critical to appease investors to assure them that they’re not heavily relying on a single product.
Among the products under development for AstraZeneca, one of the most exciting prospects for this year is Enhertu.
Enhertu was just recommended in the European Union as a form of treatment for high-risk breast cancer patients.
This drug, developed with Japan’s Daiichi Sankyo, is anticipated to become another significant growth driver for AstraZeneca.
Breast cancer is the most widely reported type of cancer in the US. It takes over 40,000 lives annually.
Given the latest development and approval for Enhertu, this drug could potentially cover three times as many patients as the existing standard of care.
With the latest endorsement from the EU, Enhertu is estimated to reach $6.6 billion in peak sales. This is $2.5 billion more than the initial projection for this breast cancer treatment.
Aside from Enhertu, the European Union also endorsed Lynparza. This is another AstraZeneca treatment for breast cancer, which it developed jointly with Merck (MRK).
The expansion of its oncology business bodes well for AstraZeneca since it demonstrates a more diverse pipeline.
In 2021, the company acquired a highly sought-after rare disease biotechnology company, Alexion Pharmaceuticals, in an effort to expand its portfolio.
So far, this bet has paid off, with rare disease revenue from Alexion’s programs reaching a total of $1.7 billion in the first quarter of 2022.
To date, this particular segment comprises more than 15% of the total product revenue of AstraZeneca.
Another key strength of AstraZeneca is its strong pipeline and impressive innovation engine, with the company listing over 180 programs queued for development.
The latest developments in its promising programs involve potential breast and liver cancer treatments. In addition to its oncology lineup, the company is also developing new therapies for asthma.
Recently, the company disclosed the creation of a new R&D center in Massachusetts.
The plan is to establish a site for both AstraZeneca and Alexion’s workforces to integrate and work together. That could mean an expanded program for its rare disease portfolio.
In the first quarter of 2022, AstraZeneca’s renal, metabolism, and cardiovascular segments contributed $2.2 billion in sales, showing off a 14% increase from last year’s performance.
Meanwhile, oncology is still the top business of the company, making up 30% of its revenue of roughly $3.4 billion in the first quarter of the year.
Considering that Enhertu is still in its early phase, this number is expected to climb higher in the coming months.
Clearly, AstraZeneca has multiple growth opportunities within reach this year, making it an exciting stock to own.
Moreover, cancer care represents a continuous demand and will not be suspended for reasons like a recession or inflation.
As a leading oncology company, AstraZeneca is a relatively resilient investment despite the uncertainties.
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)
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.
