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Challenging The Magnificent Seven

If you thought the S&P 500’s dance floor was exclusively reserved for tech's Magnificent Seven, including the likes of Microsoft (MSFT) and Nvidia (NVDA), think again.

Galloping up from behind, with the confidence of a new sheriff in town, are Eli Lilly (LLY) and Novo Nordisk (NVO), blazing trails in the obesity drug market.

Eli Lilly, with its freshly minted weight-loss drug, has catapulted to an eye-watering market value of nearly $600 billion. That's a leap from less than $100 billion in just over five years – talk about a growth spurt!

On the other side, we have Novo Nordisk, hailing from Denmark and thus not a part of the S&P club. Nevertheless, they're no slouches, sporting a hefty $450 billion market cap, quadrupling in value over five years.

The latest to throw their hat into this lucrative ring is Roche Holdings (RHHBY). They've just penned a $3.1 billion deal to acquire Carmot Therapeutics. This isn't just pocket change – it's a clear signal Roche wants a piece of the weight-loss pie, currently dominated by Eli Lilly and Novo Nordisk.

Carmot Therapeutics, a U.S.-based outfit, is cooking up something special in the GLP-1 receptor agonists segment, a class of drugs stirring up both the market and cultural scene.

Roche, by acquiring Carmot, gains exclusive dibs on three promising drugs, all at different stages of trial.

Now, let's talk numbers.

Roche is shelling out $2.7 billion upfront with another $400 million on the line, based on performance milestones. Analysts reckon Roche is gunning for phase III trials to crash the Eli Lilly and Novo party.

But let's not kid ourselves – it's an uphill battle for market share, considering the head start the other two have.

As for the market's reaction? Roche's stock perked up by 2.5% in Switzerland, although it's still trailing by 15% this year. Eli Lilly and Novo Nordisk, meanwhile, saw a bit of a dip in early trading, despite a strong showing this year.

Ultimately, Roche’s goal isn’t just to focus on the drugs. Instead, the company is eyeing an integrated approach, combining pharmaceuticals, diagnostics, and expertise in cardiovascular and metabolic diseases. It's like putting together a high-stakes puzzle where every piece matters.

Furthermore, other pharma giants are joining the fray. For example, AstraZeneca recently entered a $2 billion deal with China’s Eccogene for a nascent obesity and Type 2 diabetes drug.

But here's the million-dollar question: Are we seeing a bubble in these slimming stocks? It's hard to pin down.

What we do know is that the global obesity epidemic isn't slowing down, and these drugs are showing results.

Take Lilly’s tirzepatide, for instance – it's making waves as both diabetes and obesity treatment, with trial participants shedding an average of 52 pounds.

The financial forecasts are staggering, projecting potential annual sales of $67 billion by 2032, and possibly $100 billion by 2030.

This means obesity drugs might outshine immuno-oncology treatments, another sector with sky-high prices and a vast patient pool.

But this prosperity brings a dilemma.

Eli Lilly's trading at a whopping 90 times this year's earnings forecast. Novo? They're at 39 times. These figures could spell an opportunity for the patient investor, or they could be a harbinger of overestimated growth.

To better navigate this, let’s consider the situation from a different angle. I suggest looking at the broader picture – the intersection of obesity with other conditions like heart disease and NASH. It's a fresh perspective, focusing on specific patient subgroups.

Taking this approach leads us to companies like Amgen (AMGN) and Viking Therapeutics (VKTX), each targeting a different slice of the obesity pie.

Amgen's got its eyes on obesity and heart disease, while Viking is tackling obesity and NASH. Early trials have shown promise, and these companies are exploring novel delivery methods like monthly injections and pill formulations.

It's worth noting that Amgen is more than just a one-trick pony – they've got Repatha for high cholesterol, which could be a game-changer if combined with their obesity treatment.

Viking, although smaller and riskier, is making waves with a drug that's shown significant liver fat reduction in trials.

So, what's the takeaway here?

Well, the obesity sector is ripe with opportunity, but it's also fraught with speculation and risk. Amgen, a solid bet with a 3.2% dividend yield, and Viking, a more speculative choice, are just two examples of the diverse strategies in play.

One thing's for sure: As competition heats up, prices for obesity meds are likely to drop, mirroring the trajectory seen with other high-priced drugs.

The obesity drug market is a complex, rapidly evolving beast. It offers a blend of incredible potential coupled with considerable risk.

For investors willing to ride out the storm, the rewards could be substantial. Meanwhile, for those seeking exposure to the growing sector without the associated risks, a diversified investment strategy could be key.

November 16, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 16, 2023
Fiat Lux

Featured Trade:

(A GENE GENIE AGAINST CHOLESTEROL)

(VERV), (CRSP), (BEAM), (NVO), (AMGN), (REGN)

A Gene Genie Against Cholesterol

Biotech Letter

CRISPR technology, long heralded as a game-changer in genomics, stands on the brink of a major leap forward. For years, its potential has simmered, but now, it's poised to ignite, promising scientific breakthroughs and significant investment opportunities.

Several pioneering companies employing CRISPR for editing human genomes are at the forefront of this revolution. Their goal? To treat, and potentially cure, a range of genetic diseases. The approaches are twofold: ex vivo, where genes are edited outside the body, and in vivo, with modifications made directly within the body.

Investing in CRISPR gene-editing stocks, however, is not for the faint-hearted. These stocks are characterized by high risk and volatility, demanding a specific investor profile: one that is aggressive and comfortable with risk. For such investors, a company worth considering is Verve Therapeutics (VERV).

Verve stands out, partly due to its relatively modest size with a market capitalization of $732 million. This contrasts sharply with industry peers like CRISPR Therapeutics (CRSP) and Beam Therapeutics (BEAM), valued at $4.47 billion and over $2 billion, respectively. The reason behind Verve's smaller scale is its developmental stage, which lags behind its counterparts.

Established in 2018, Verve has been hailed as a potential leader in next-generation gene therapy, particularly base editing.

You can think of base editing as using a fine-tipped pen to precisely change just one letter in the DNA sequence, without cutting the DNA strand.

In our DNA, there are four "letters" (bases) – A, T, C, and G. Base editing lets scientists directly convert one letter to another (like changing an 'A' to a 'G') without cutting the DNA. This is like fixing a typo in a sentence by carefully erasing one letter and writing in the correct one.

This method is often more precise than CRISPR and less likely to introduce errors because it doesn't involve cutting the DNA strand.

Verve has capitalized on this technology, in-licensed from base-editing pioneer Beam Therapeutics. The company's flagship candidate, VERVE-101, targets heterozygous familial hypercholesterolemia (HeFH), a rare cholesterol disorder.

Needless to say, the stakes are high. The HeFH market is projected to balloon to nearly $60 billion by 2033, positioning VERVE-101 as a potential one-time functional cure and a standard of care in this lucrative market.

Recently, Verve announced that there was a substantial reduction in patients' high cholesterol levels in the first human test of base editing. Despite this, the stock experienced a sharp 41% drop, possibly a misinterpretation of the positive news in an unfriendly biotech market.

The data presented showed Verve's treatment leading to a 40%-55% decrease in harmful LDL cholesterol levels in patients with genetically high cholesterol levels. Verve's approach targets and inactivates the defective gene responsible for high cholesterol levels.

The treatment, however, faced challenges. Two of the Verve-101 trial participants suffered heart attacks, one of which was fatal.

It's crucial to note that the trial specifically included older patients with advanced heart disease, who were already at a heightened risk for cardiac events. The overall safety measures in the study were satisfactory, though, so the FDA has since authorized an expansion of the Phase 1 trial.

Notably, Eli Lilly (LLY) reviewed the trial's results before deciding to buy an option to partner on the Verve treatment. Lilly's decision on teaming up on the cholesterol treatment is expected next year, following the completion of Phase 1 trials.

Additionally, Verve plans to initiate trials for another base-edited therapy, VERVE-102, in the first half of 2024, potentially offering enhanced patient outcomes.

Verve’s trial results match that seen with established medications such as Novartis' Leqvio (NVS), Amgen's Repatha (AMGN), and Regeneron Pharmaceuticals' Praluent (REGN), which are all approved long-term drug therapies.

However, despite the availability of statins and new treatments, a significant portion of these patients fail to maintain healthy cholesterol levels due to cost, treatment adherence issues, or inconsistent healthcare access.

This is where the biotech company’s solution shines. Verve's ultimate goal is to develop a one-and-done treatment to lower cholesterol in the 50 million adults at risk for cardiovascular disease.

While Verve remains a preclinical-stage biotech, its prospects are promising. Its market cap, though modest compared to the commercial opportunity of a functional cure for HeFH, hints at significant growth potential.

With Lilly's track record in developing drugs for underserved conditions, Verve emerges as a compelling investment for those with a high tolerance for risk and an eye on future biotech breakthroughs. I suggest you put this stock on your watchlist.

November 14, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 14, 2023
Fiat Lux

Featured Trade:

(REWRITING BIOPHARMA’S TRADITIONAL SCRIPT)

(AZN), (JNJ), (BMY), (NVO)

Rewriting Biopharma's Traditional Script

Biotech Letter

In the high-stakes game of pharmaceutical innovation, AstraZeneca (AZN) isn't just playing to win; it's rewriting the rulebook.

A century-old company, born in the quiet labs of 1913 Sweden, AstraZeneca has become a linchpin in today’s cutting-edge medical advances. This isn't merely a story of corporate survival; it's a journey of transformation, emblematic of how old-world tenacity meets new-world innovation.

As we navigate the intricate world of biotechnology and healthcare, where even giants like Johnson & Johnson (JNJ) and Bristol Myers Squibb (BMY) wobble despite outperforming estimates, AstraZeneca emerges as a study in strategic agility.

Picture this: a company whose shares have seen a 5.7% dip this year, yet it stands as a beacon of opportunity for the discerning investor.

Trading at 15.6 times expected earnings over the next 12 months, it beckons with a valuation that whispers promise, floating below its five-year average.

Needless to say, these aren’t only financial figures but signposts pointing towards a rare investment opportunity in a volatile marketplace.

Let’s delve into the heart of AstraZeneca’s financial anatomy.

Twelve medicines in its arsenal are each marching towards the $1 billion revenue mark this 2023. Tagrisso, its flagship drug, contributes a mere 13.1% to its first-half revenue, showcasing a diversified portfolio that's resilient and well-balanced.

However, innovation isn't without its hurdles.

AstraZeneca faced a 16% decline in Soliris revenue due to patient transitions to newer treatments.

Here lies a lesson in the pursuit of progress – commitment to innovation and affordability can sometimes be a double-edged sword, affecting short-term gains but setting the stage for long-term sustainability. Still, AstraZeneca isn’t one to dwell on its losses for long.

Now, let's turn the page to AstraZeneca's audacious new chapter: entering the fiercely competitive arena of weight-loss medication.

Through a licensing agreement with China’s Eccogene, it's poised to develop an oral medication in the same class as Novo Nordisk’s (NVO) Wegovy drug.

But, the key factor that distinguishes AstraZeneca’s efforts is the pricing, which the company aims to be roughly half the current cost today.

To put things in perspective, Wegovy is priced at $1,349.02 per package. This figure unfolds into a weekly cost of $269.80. When extended over the span of a year, the drug becomes a more substantial financial commitment at $16,188.24.

Notably, the success of Wegovy has catalyzed Novo Nordisk's shares to soar by almost 50% this year.

Given the demand and AstraZeneca’s plan to adjust the price point, this is more than a simple business move for AstraZeneca; it's a venture that could redefine the accessibility of treatments for conditions like diabetes and obesity, impacting over 1 billion people globally.

In the crucible of the pandemic, AstraZeneca partnered with Oxford University to forge a path in the global health crisis, delivering over 3.5 billion doses of a COVID-19 vaccine worldwide.

Looking ahead, AstraZeneca’s leaders view obesity as another pandemic, signaling a strategic shift that melds business acumen with a commitment to global health.

Meanwhile, the latest earnings report from AstraZeneca is proof of its resilient business model.

Amid a 5.7% dip in its shares, the company's outlook is bullish, with an expectation of a low-teens percentage increase in total revenue excluding COVID-19 drugs.

This projection, backed by a 6% year-over-year revenue growth to $22.3 billion and an adjusted core EPS increase of 13% to $4.07, isn't only impressive; it's a narrative of sustained growth amidst adversity.

In conclusion, AstraZeneca's journey isn’t confined to financial returns; it's about being part of a narrative that’s shaping the future of healthcare innovation. I recommend you buy the dip.

November 7, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
November 7, 2023
Fiat Lux

Featured Trade:

(OUTSMARTING OPIOIDS)

(VRTX), (LLY), (NVO), (BIIB)

Outsmarting Opioids

Biotech Letter

Amid the stark realities of America's opioid crisis, with a staggering 80,000 annual fatalities due to overdose, the pharmaceutical industry is on the brink of a significant shift.

Vertex Pharmaceuticals (VRTX) stands out with its investigational drug VX-548, which promises a novel approach to pain management without the addiction risks of opioids. As the year winds down, this biotechnology company is poised to reveal findings from four clinical trials that could catapult VX-548 into the market spotlight.

Needless to say, the stakes couldn't be higher for Vertex.

The commercial success of VX-548, particularly in the chronic pain market, could mark a significant turning point. While generic opioids are cost-effective for short-term use, their potential for addiction and other risks make a non-addictive alternative like VX-548 an attractive proposition for insurers and patients alike.

Drawing parallels to the recent rise of GLP-1 obesity drugs by Eli Lilly (LLY) and Novo Nordisk (NVO), VX-548 could potentially mirror their impact.

Successful trials could see VX-548 generating annual revenues of $5.1 billion by 2030 — a substantial addition to Vertex’s current cystic fibrosis portfolio, which pulls in just shy of $10 billion.

Yet, it's essential to temper enthusiasm with a dose of reality. After all, the biotech sector is no stranger to the pitfalls of high expectations.

Past failures in the nonopioid pain sector underscore the importance of cautious optimism. Nerve growth factor inhibitors, once hailed as a breakthrough, faltered due to safety concerns, highlighting the unpredictable nature of drug development.

VX-548 aims to circumvent these issues with its unique mechanism of action that targets pain signaling at the peripheral nervous system—potentially a significant advantage over central nervous system-targeting opioids.

So, investors must weigh the risk-reward ratio of betting on Vertex ahead of these results.

This treatment’s success in acute pain management could result in a significant uptick in Vertex's stock value. Analyst projections suggest a potential increase of $58 per share if VX-548 matches opioid efficacy, with an $88 increase if it surpasses it. Should the chronic pain trials yield positive results, the stock could climb an additional $119 per share.

However, like I said, it's crucial to approach these numbers with caution. The market's response to trial outcomes can be unpredictable, and the memory of recent high-profile disappointments, such as Biogen's (BIIB) Aduhelm, still lingers.

In light of this, the downside should not be understated — a failed trial could see Vertex's stock take a substantial hit, potentially up to 20%.

Nevertheless, the financial health of Vertex remains strong even sans this pain management candidate. In fact, its top-selling TRIKAFTA/KAFTRIO patents are secured through 2037, accounting for a dominant 89.9% of sales.

This foundation provides a buffer against the inherent risks that come with drug development. With operating margins at a solid 45.6% and a GAAP EPS increase of 30.8% quarter over quarter, Vertex displays a financial resilience that may be reassuring to interested investors.

Taking everything into consideration, investors stand at a crossroads, with the potential of VX-548 offering both promise and uncertainty. The decision to invest now hinges on more than just the outcomes of the trials; it requires strategic consideration of the broader market, potential competitors, and the overarching trends in pain management.

As Wall Street watches with a trained eye, the early indications from Vertex’s trials suggest that VX-548 has a fighting chance to succeed where others have faltered.

If its subsequent tests affirm its potential, VX-548 could not only transform the company’s financial landscape but also mark a significant advancement in the fight against the opioid epidemic — a win for both public health and discerning investors. I suggest you buy the dip.

October 19, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
October 19, 2023
Fiat Lux

Featured Trade:

(THE UNSUNG HERO OF PHARMA DISTRIBUTION)

(MCK), (CI), (UNH), (PFE), (MRK), (LLY), (NVO), (CAH), (COR)

The Unsung Hero Of Pharma Distribution

Biotech Letter

McKesson (MCK) is the silent behemoth of the U.S. corporate world that's likely slipped under your radar. As the ninth-largest U.S. company by revenue, it doesn’t grab the headlines like some of its pharmaceutical peers. However, with a robust 22% stock gain this year alone, investors might want to sharpen their focus on this quiet achiever.

Now, you might mistake McKesson for a pharmacy benefit manager like Cigna Group's (CI) Express Scripts or UnitedHealth Group’s (UNH) OptumRx. But it doesn't stand shoulder-to-shoulder with pharmaceutical giants such as Pfizer (PFE) or Merck (MRK). Instead, its pivotal role ensures that prescription medications, consumed by a large fraction of Americans, reach their intended destinations.

Their operational model cuts through the noise: acquire medications from manufacturers and deliver them seamlessly to pharmacies. This spans local establishments and major national chains, including stalwarts like Walmart (WMT) and CVS Health (CVS).

Distributing medications is intricate. Not any logistics company can step up to the plate. These drugs, strictly governed by regulations, demand precision in handling and transit. Specific conditions are mandatory to retain their efficacy and, ultimately, their trust with consumers.

Newcomers in the pharmaceutical space, such as Ely Lilly’s (LLY) Mounjaro and Novo Nordisk’s (NVO) Ozempic, are set to further accelerate McKesson's growth trajectory. McKesson's operations, in tandem with Cardinal Health (CAH) and Cencora (COR)—the former AmerisourceBergen—underscore the dominance of this trio in the industry.

Given their consistent performance and notable market share, there's no mistaking their leadership. From an investor's lens, their well-established distribution networks translate to attractive returns.

The narrative enveloping McKesson has matured, particularly in the wake of the pandemic. Pre-COVID-19, the air was thick with concerns – potential drug price regulations, whispers about executive remuneration, and the ever-looming shadow of opioid liabilities.

In recent history, McKesson navigated tumultuous waters. They confronted their role in the opioid saga, culminating in a staggering $7.4 billion settlement spanning two decades. Such a settlement, rooted in claims of McKesson's hand in opioid distribution, marked a challenging chapter in the company's journey. But, like all resilient entities, they emerged with lessons and a sharper focus.

Refocusing on its core competency in drug distribution, the future projections for McKesson radiate optimism. Sales are on track for a 10% rise by fiscal 2024, aiming for the $304 billion mark. On the earnings front, a hike of 4.8% is forecasted, reaching $27.20 a share, followed by a notable ascent to 13.4% in fiscal 2025 – a jump to $30.84 a share.

While profit margins have hovered around the 4.8% range over half a decade, the company's cash flow paints a promising picture. With a robust $5 billion cash flow from the previous fiscal year, the announcement of a $6 billion share repurchase plan indicates a stronger, more liquid financial position.

McKesson’s journey, past and present, casts it as a promising investment, both for its operational prowess and its strategic repurchase blueprint. Examining its financial statements reveals a commendable reduction in net debt over the past triennium.

When McKesson is pitted against the likes of Cardinal and Cencora, optimism for its prospects feels natural. Projections indicate a growth rate between 12-14% in the years on the horizon, potentially crowning it as an industry vanguard. Valued at 15.6 times forward earnings, even if it inches above its five-year mean, the stock's appeal remains intact. Given its robust growth metrics, the stock seems a potential bargain, especially when juxtaposed with fellow S&P 500 members.

And there's more in the mix. With McKesson poised to ride the wave of prescription surges, particularly from premium medications like Ozempic, Wegovy, and Mounjaro, revenue streams seem destined for an upward course. A sentiment echoed by industry comrades, Cardinal and Cencora.

To encapsulate, in the expansive tableau of the pharmaceutical sector, where innovation meets timely delivery, McKesson etches its mark. As the healthcare matrix continues its evolution, especially in a world reshaped by a pandemic, the resilience and growth story of McKesson becomes hard to sidestep for the discerning investor. It's high time investors pivot their gaze towards this under-the-radar giant, poised for more milestones.

September 28, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
September 28, 2023
Fiat Lux

Featured Trade:

(TIPPING THE SCALES)
(NVO), (LLY), (PODD), (TNDM), (DXCM), (RMD), (INSP), (MDGL), (ISRG), (AKRO), (ETNB)

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