Mad Hedge Biotech and Healthcare Letter
September 29, 2022
Fiat Lux
Featured Trade:
(TAKING ON THE WEIGHT OF THE WORLD)
(LLY), (NVO)
Tag Archive for: (NVO)
This is not your run-of-the-mill weight-loss story.
The number of obese American adults has climbed from 13% to 43% in the last 60 years. That’s approximately 100 million individuals in the United States alone.
The average American male currently weighs about 200 pounds, up from 166 back in 1960, while the average female is at 171 pounds, up from 140.
Obesity, or just being overweight, has several ripple effects. This carries the risk of diabetes, cardiovascular issues, and even cancer. It can also interfere with a person’s work, sleep, and other day-to-day activities.
Many factors have been studied as potential reasons behind obesity, but it has become very clear that solving the epidemic would need more than simply diet and exercise.
Taking on this challenge are Eli Lilly (LLY) and Novo Nordisk (NVO), competitors that came up with a promising drug, known as incretins, to hopefully solve the issue.
Amid all the dietary fads, supplements, and exercise trends we’ve seen, we are on the cusp of finally getting safe and effective drugs for this condition.
We can go as far as claiming that these could very well be our best hope in the fight against obesity. This epidemic has been threatening the way of life of over 100 million Americans and roughly half a billion people globally.
Nobody has ever witnessed the weight loss offered by this new category of drugs, called incretins.
Scientific research has enabled people to shed over 20% of their weight. Needless to say, incretins could become the top-selling drugs in the history of the pharmaceutical industry.
For context, a drug is tagged as a “blockbuster” when it manages to record $1 billion in sales annually. To date, the top-selling drug worldwide is Humira from AbbVie (ABBV), with roughly $20 billion in yearly sales.
If each obese American sought treatment (and given the projected prices of these drugs) the yearly sales for incretins would hit at least a trillion dollars.
Obviously, insurers would refuse to pay these sums, which is why studies have been conducted to show how these drugs could effectively prevent critical conditions like diabetes and heart disease. That is, it will be considered a maintenance drug.
Marketing incretins as treatments for diabetes and obesity could rake in $50 billion to $60 billion in sales over the next decade. As of the moment, the market is dominated by a duopoly of Eli Lilly and Novo Nordisk.
Recently, Eli Lilly gained much attention after its diabetes drug Mounjaro received FDA approval. While the product was given the green light earlier in 2022, the company has also become more aggressive in marketing it as an anti-obesity treatment.
When it goes to market, Mounjaro is expected to go head-to-head against Novo Nordic’s Wegovy. Both target basically the same market, but Eli Lilly’s candidate showed better results.
According to Eli Lilly, patients given the highest dosage of Mounjaro recorded an average weight loss of 22.5% over roughly 18 months.
In terms of sales potential, Wegovy reached $183 million in the first quarter of 2022. With Eli Lilly hot on its heels, investors should expect a slide in Novo Nordisk’s sales for this product.
When Mounjaro was initially released, it was expected to reach peak sales of $15.4 billion. However, the drug’s effectivity and potential to address weight loss boosted predictions to $25 billion.
The reason for the increase in confidence in Eli Lilly’s drug is pretty simple. Offering treatment to 1.6 million Americans yearly would generate $20 billion in sales in the US alone—which only comprises 2% of the estimated population of obese individuals in the country.
Either way, it’s a massive market. Dominating a small portion would already move the needle for any biopharmaceutical company. Hence, I recommend you buy the dip for these companies aiming to solve the obesity epidemic.
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)
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
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.
Mad Hedge Biotech and Healthcare Letter
June 14, 2022
Fiat Lux
Featured Trade:
(MULTI-PRONGED STOCKS POSITIONED FOR LONG-TERM SUCCESS)
(LLY), (NVO)
The majority of the global population lives in nations where obesity and being overweight kill more individuals than being underweight.
Over 40% of the US population is categorized as obese, with drugs barely scratching the surface, as only about 3% of the obese patients take them.
More alarmingly, 39 million children under 5 years old were obese or overweight in 2020.
This is why it is no surprise that more and more companies in the biotechnology and healthcare sector are working on obesity treatments. After all, obesity is the starting point of a lot of serious diseases.
Obesity is a primary risk issue for diabetes, heart disease, stroke, some types of cancer, and several severe conditions—most of which are among the leading reasons behind premature deaths.
However, a key factor to consider here is that obesity is preventable. Hence, dealing with this condition could help patients manage better potential severe conditions.
Needless to say, the market for this condition can also be lucrative. In the US alone, the annual expense for obesity medication reached approximately $173 billion in 2019.
This is because the medical bills of an adult with obesity are at least $1,861 higher than someone with a healthy weight.
So far, two names have emerged as major players in the obesity market: Eli Lilly (LLY) and Novo Nordisk (NVO).
Noticeable weight loss was observed in clinical trials of treatments that Novo Nordisk and Eli Lilly initially developed for diabetes.
Consequently, these announcements pushed the stocks higher despite the backdrop of a relatively flat Nasdaq Composite recently.
For Eli Lilly, the company disclosed that results of its Phase 3 trials for its diabetes drug Tirazeptide showed that the highest dose would lead to a 21% to 25% weight loss or an average of 52 pounds within 18 months.
The possibility that Tirzepatide, which is already sold under Mounjaro as a Type 2 diabetes treatment, can also be marketed as a weight-loss drug has been prodding Eli Lilly stock.
At the moment, Eli Lilly was only able to test Tirzepatide against Novo Nordisk's Wegovi. The former notably outperformed the Danish candidate on most factors.
If Tirzepatide gains FDA approval as an obesity drug, then Eli Lilly can launch it commercially by mid-2023.
Given the size of the market and the drug’s promising results, Tirzepatide is estimated to reach over $10 billion in obesity sales alone, in addition to the more than $12 billion projected in diabetes sales.
Aside from obesity, Eli Lilly is also looking into testing Tirzepatide for other linked conditions like heart failure, stroke, and other cardiovascular diseases.
If these work out, then the additional markets would contribute over $14 billion in sales by 2030.
Meanwhile, Novo Nordisk also released promising results for its investigational treatment named Kagrisema.
While Eli Lilly is considered a dominant force in the diabetes market, Novo Nordisk is a strong challenger. Some would say that this Danish company is the global leader in the segment.
That could very well be the case because a company can be considered a global controller if it holds around 30% of the market.
While the diabetes sector tends to be complex since it’s segmented, Novo Nordisk indisputably holds 30% of the primary market. Moreover, it holds 40% to 50% of a diabetes sub-market focused on insulin products.
With that said, it was hardly unexpected that Novo Nordisk was the first to market an FDA-approved drug for obesity: Wegovi.
Wegovi, the same drug tested by Eli Lilly against Tirzepatide, was launched in June 2021. This treatment enabled obese patients to lose roughly 15% of their body weight.
Since Eli Lilly has been working on a more effective drug, Wegovi sales are expected to reach approximately $5.5 billion by 2025 and eventually lose stake to competitors and Novo Nordisk’s own next-generation treatment Kagrisema.
The diabetes and obesity markets present substantial growth opportunities in the years to come.
It is projected that roughly 415 million people are suffering from diabetes globally, and the number is anticipated to increase to 642 million by 2040, representing a 3% annual rise.
In the US alone, it is expected that the prevalence of diabetes will rise by 54% to over 54.9 million people between 2015 and 2030.
This means the anti-obesity treatments market is estimated to expand more aggressively at a CAGR of roughly 15% in the next 5 years.
Both Eli Lilly and Novo Nordisk are well-established biopharma businesses that offer high-quality products across various areas.
They are both leaders in diabetes and obesity markets with impeccable growth opportunities. Their pipelines are well diversified, and neither relies solely on one product, making their businesses attractive and less risky.
I suggest that those looking for long-term investments put these stocks under their radar and start building up positions on pullbacks, as these are excellent companies to own in a well-balanced portfolio.
Mad Hedge Biotech and Healthcare Letter
May 19, 2022
Fiat Lux
Featured Trade:
(A RELIABLE STOCK THAT CAN WITHSTAND ANY GLOBAL SHOCKWAVE)
(JNJ), (PFE), (VTRS), (MRK), (OGN), (ABBV), (ABT), (NVO)
Investing is a long-term bet that requires patience and a strong risk appetite to enjoy eventual big wins.
In a world filled with uncertainties and gambles in the ever-evolving stock market trends, risk-averse investors are on the lookout for secure and stable options.
After all, who wouldn’t want to invest their hard-earned cash in a stock that can survive even the most intense macroeconomic shocks?
The name that easily fits these criteria in the biotechnology and healthcare sector is Johnson & Johnson (JNJ).
Reviewing JNJ’s five-year price movements from 2017 until 2022, a steady bullish trend of roughly 46% growth can be seen.
This trend has continued amid the slowdowns, with the stock delivering consistent growth and recovery despite serious dips.
In early 2020, when the COVID-19 outbreak wreaked havoc on the global economy, JNJ tanked along with other stocks. However, the company steadily showed signs of recovery mere weeks following the outbreak.
By 2021, JNJ managed to record a substantial increase of 11.4%. More importantly, it was able to sustain that trend throughout the year.
In March 2022, when the Ukraine-Russia crisis disrupted the economy, several businesses in the industry once again crashed due to supply chain and logistical issues. Amid these disruptions, JNJ still managed to stay on its growth path and develop contingencies to protect its assets.
Widely known as a global healthcare titan, JNJ holds a market capitalization that is hovering close to roughly half a trillion dollars.
As the parent company of the top-rated brands like Benadryl, Listerine, and Neutrogena, JNJ’s market operations are trifurcated into three main segments: MedTech, Pharmaceutical, and Consumer Health.
In November 2021, the company disclosed its plans to spin off its consumer arm into a separate publicly-traded company.
Similar to the move of Pfizer (PFE) with its Viatris (VTRS) spinoff and Merck (MRK) with Organon (OGN), JNJ’s goal is to reclassify a number of its international OTC drugs from its Consumer Health branch to form part of the pipeline of the new spinoff company.
Needless to say, the company’s notably diversified portfolio provides its with a competitive advantage in this highly volatile market.
Meanwhile, its other two segments are also contributing to JNJ’s growth. Its Pharmaceutical branch recorded a 6.3% increase in revenue in the first quarter of 2022, while its MedTech segment grew by 5.9%.
In total, JNJ’s sales for the first quarter of 2022 rose by 5% to reach $23.4 billion. This also boosted the company’s earnings per share to $2.67.
Riding the momentum of its strong first-quarter showing this year, JNJ once again demonstrated why it is hailed as a Dividend King.
The company hiked its quarterly dividend by 6.6% to $1.13 per share, making this the 60th consecutive annual dividend increase.
Considering that the company has been paying out dividends since 1963, this latest increase is indicative of how safe JNJ is for investors who want to multiply their cash while earning a regular income via dividends.
Moreover, JNJ is a clear frontrunner in the healthcare world and continues to work on innovative solutions to keep it ahead of its competitors.
Taking a closer look at the broader competitive field of healthcare industry players that are considered similarly sized, like AbbVie (ABBV), Abbott Laboratories (ABT), and Novo Nordisk (NVO), JNJ has the most significant market capitalization.
In this aspect, the company is the largest among its direct rivals. Therefore, it essentially reinforces its capacity to raise finances.
Given its perpetual bullish climb since its trade initiation back in 1982 and its addition to the Dow Jones Industrial Average (DJI), JNJ stock has been long known to hold strong credibility.
Actually, JNJ and Microsoft (MSFT) are the only two American companies with an AAA credit rating, a grade above the United States government itself.
This means that JNJ has such a strong sense of certainty in debt repayment that it holds a lower probability of default than the US government—an entity allowed by law to print money.
Overall, JNJ has proven to be an excellent option for risk-averse investors searching for growth and profitability.
It has strong financial fundamentals and a commanding market position, making it a highly stable and secure investment.
Moreover, its diverse portfolio minimizes the risk exposure of the company. All these make JNJ a great buy. Hence, it would be a wise move to buy the dip.
