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Tipping the Scales

The pharmaceutical world is buzzing, and it’s all thanks to the groundbreaking obesity drugs from Novo Nordisk (NVO) and Eli Lilly (LLY). In my previous newsletter, I delved into the massive potential of these new treatments, and it sparked a flurry of discussions. So, this time, I want to peel back the layers and explore how these advancements affect other companies within the same market.

After all, their emergence creates a paradoxical narrative, a dance of shadows and lumens. These drugs, renowned as the modern panacea for the obesity crisis, have catapulted the companies behind them into unprecedented valuations, making them luminaries in a market awash with investors hungry for the next big thing.

The enthusiasm surrounding these drugs is not unfounded; they are pivotal in treating type 2 diabetes and are seen as the desperately needed solution to the widespread obesity crisis. The groundbreaking medications introduced by Novo Nordisk and Lilly are enabling individuals to lose approximately 15% to 20% of their body weight, with Wall Street anticipating the combined annual sales of these revolutionary drugs to surpass $40 billion by the close of this decade.

However, the shadows of GLP-1s cast a contrasting pallor on companies that burgeoned in tandem with America’s expanding waistlines.

Firms like Insulet (PODD) and Tandem Diabetes Care (TNDM) are witnessing a decline of 40% and 50% in their values this year, respectively.

Similarly, DexCom (DXCM), the frontrunner in glucose monitoring, has experienced a 16% dip, and ResMed (RMD), the stalwart in CPAP machines treating sleep apnea, has seen its stock plummet by 30%. Inspire Medical Systems (INSP) and Madrigal Pharmaceuticals (MDGL) have also encountered significant drops in their shares.

These companies, once the darlings of the medical stock market due to their escalating sales growth, are now facing the brunt of a shifting investor focus. This is because the investment community is envisioning a future with a reduced prevalence of diabetes and sleep apnea and is consequently retracting their stakes in these stocks, leaving companies and investors navigating through a sea of uncertainties.

By early spring, the potential impact of widespread GLP-1 usage became the focal point of strategic discussions at numerous hedge funds. That led to a shift as some started withdrawing from stocks like DexCom and Madrigal, subsequently opting to short-sell these shares. The broader market tuned in this summer.

A case in point is Intuitive Surgical (ISRG), a leader in surgical robotics, which noted during its earnings call that a preference for trying GLP-1s was leading to a deferment in weight-loss surgeries. Although these procedures constitute a minor segment of robotic surgeries, they have been instrumental in driving Intuitive’s growth.

GLP-1s have also affected the demand for insulin injections. Recently, endocrinologists have suggested that GLP-1s could potentially delay the transition to insulin for a significant portion of Type 2 patients. This revelation triggered a recalibration of sales forecasts and stock price targets, with Insulet experiencing a downgrade in both target price and rating.

Meanwhile, the growth prospects of glucose monitor manufacturer DexCom in the Type 2 market remain positive. The integration of glucose monitors with GLP-1s is anticipated to become a prevalent trend among diabetic patients. Despite a temporary rally in DexCom stock, the lingering question remains whether the expanding use of GLP-1s will eventually reduce the demand for glucose monitoring.

Vendors of sleep apnea devices, such as ResMed and Inspire Medical, are also conveying to investors the minimal impact of GLP-1s on their markets. However, the debate continues on the intrinsic link between obesity and sleep apnea and the potential repercussions of GLP-1s on the entire sleep apnea spectrum. As market dynamics continue to shift and the ripple effects of GLP-1s become the focal point of discussions, more and more questions about the future landscape of obesity-associated medtechs arise.

The positive developments in GLP-1s have also cast a shadow over another sector: liver medications.

In June, revelations about Lilly's investigational drug, retatrutide, sent ripples through the sector. The drug not only facilitated a 24% weight reduction in subjects but also significantly diminished fat levels in their livers. This development impacted the stock values of companies like Madrigal Pharmaceuticals, Akero Therapeutics (AKRO), and 89bio (ETNB), pioneers in crafting remedies for the fatty liver condition known as NASH. While it remains to be seen how much these stocks will fall, it’s evident that their decline has already started.

The market is a tumultuous sea of uncertainties, with companies and investors meticulously navigating the evolving dynamics. For the astute investor, the key is to learn how to strike a balance between the old and the new.

The allure of GLP-1s might lead to a reevaluation of the medtech sector’s prospects, but companies like Insulet, ResMed, and Inspire still hold resilience in a GLP-1-dominated landscape.

Ultimately, it’s about understanding the intricate push and pull of shadows and light. The wise investor doesn’t just follow the light; they also understand the shadows, learning to see the opportunities lurking within.

So, delve deep, recalibrate your strategies, and remember, the paradox is not a roadblock; it’s a guidepost to new horizons in pharmaceutical innovation.

September 26, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
September 26, 2023
Fiat Lux

Featured Trade:

(THE WEIGHT OF INNOVATION)
(NVO), (LLY), (CI), (CVS)

The Weight of Innovation

Biotech Letter

In a world teetering on the brink of healthcare overload, the emergence of Novo Nordisk (NVO) and Eli Lilly's (LLY) revolutionary obesity drugs, Ozempic and Wegovy, is akin to sailing in uncharted waters. These drugs are heralded as the harbinger of unprecedented advancements in biotechnology and healthcare, but they also cast shadows of potential financial turmoil on the horizon.

The air is thick with anticipation as Wall Street analysts predict a financial windfall for the drugmakers, with the drugs promising up to 20% body weight reductions and a significant decrease in the risk of heart attack or stroke.

The demand is skyrocketing, and the projections are staggering. The obesity market is poised to grow substantially, with a forecasted compound annual growth rate (CAGR) of 31.3%. However, lurking in the shadows is a looming healthcare crisis, a silent specter waiting to engulf insurers, employers, and government programs in a financial maelstrom.

GLP-1 receptor agonists are more than just another pharmaceutical innovation; they are a beacon of hope for the 40% of U.S. adults grappling with obesity. But, the beacon comes with a hefty price tag, with Novo’s Wegovy listed at over $16,000 a year.

By 2030, the spending on GLP-1 obesity treatments is anticipated to reach an astounding $50 billion, suggesting a financial storm likely to peak between 2025 and 2027.

This turns the Medicare landscape into a battlefield, with debates raging over the ban on paying for weight-loss drugs and the potential ramifications of their inclusion. It’s a complex dance, where the potential benefits of combating obesity are entwined with immediate financial challenges, creating a paradox that could reshape the foundations of healthcare economics.

Meanwhile, Medicaid, the safety net for approximately 87 million Americans, is caught in the eye of the storm as well, with the surge in spending on GLP-1 drugs from $547 million in 2021 to $1.1 billion in 2022 painting a vivid picture of the impending financial turbulence.

The complex interplay between state eligibility prerequisites and legal challenges underscores the intricate process of assimilating novel pharmaceutical breakthroughs into prevailing systems.

The employer-based insurance market is walking a tightrope, balancing competitive benefits and premium affordability. The introduction of the new obesity medicines is a catalyst, intensifying the existing tensions and raising questions about the sustainability of covering new medications without robust clinical evidence.

The industry is in a conundrum, with the need for expansive coverage clashing with the realities of cost management.

This narrative is not just a tale of numbers; it’s a human story, interweaving the lives of patients, taxpayers, and the evolving pharmaceutical terrain. It’s about the omnipresent advertising campaigns and the cultural phenomena surrounding these drugs, reflecting societal shifts in perceptions and expectations regarding healthcare solutions.

Novo Nordisk and Eli Lilly are at the forefront of this transformation, advocating for expanded coverage and emphasizing the long-term savings associated with addressing obesity. The discourse is filled with contrasting perspectives, with companies like Cigna Group (CI) and CVS Caremark (CVS) exploring the balance between clinical validity and financial viability.

The journey is fraught with uncertainties and challenges, with the potential rise in premiums and the quest for pricing solutions being critical elements in the unfolding saga. The healthcare system is at a crossroads, with the long-term benefits of obesity drugs poised against the immediate financial ramifications.

The emergence of Ozempic and Wegovy is a mirror reflecting the complexities and intricacies of the biotechnology and healthcare sector. The balance between innovation and sustainability is a delicate one, and the path ahead is interwoven with threads of hope, anticipation, financial prudence, and societal well-being.

Overall, the burgeoning obesity market presents a compelling case for investment in Novo Nordisk and Eli Lilly. The transformative potential of their weight loss drugs is substantial, promising to reshape the contours of obesity treatment. While the road is interspersed with uncertainties and challenges, the prospective growth and escalating demand for these innovative treatments underscore a lucrative opportunity. I suggest you buy the dip.

September 7, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter

September 7, 2023

Fiat Lux

Featured Trade:

(SUGAR, SPICE, AND EVERYTHING NICE)

(NVO), (LLY), (MRK), (JNJ), (AZN), (LVMH)

Sugar, Spice, and Everything Nice

Biotech Letter

If the weight-loss drug market is a tide, Novo Nordisk (NVO) stands at its crest. As investors, when we seek promising ventures, we look for history, market presence, and future potential–and this Danish pharmaceutical powerhouse seems to tick all these boxes.

Dive into the annals of Novo Nordisk's story, and you'll find a century-old legacy predominantly immersed in diabetes treatment. This enterprise, with Eli Lilly (LLY) and Sanofi (SNY), once commanded an impressive 90% insulin market share.

But things changed when Sanofi made its exit in 2019, setting the stage for Novo Nordisk's next significant act. Though others such as Merck (MRK), Johnson & Johnson (JNJ), and AstraZeneca (AZN) are present in the diabetes space, they operate in unique niches, focusing primarily on small molecules.

So, what is Novo Nordisk's contemporary claim to fame? It’s none other than the weight-loss drug, Wegovy.

As of its recent U.K. debut, Wegovy is now associated with the National Health Service. This was a strategic move that saw the company's value soar, comfortably eclipsing the luxury behemoth Louis Vuitton (LVMH).

The numbers speak for themselves: Novo Nordisk's stock surged 40% this year, pushing its market cap to an enviable $428 billion.

If they were based stateside, this positions them as the 14th most valuable entity in the S&P 500.

What's truly jaw-dropping is the scale of Novo Nordisk's success. It achieved European market leadership with Wegovy's debut in just five significant markets: Denmark, Norway, Germany, the U.S., and the U.K. The demand seems to be exploding every time the drug lands in a new market.

Meanwhile, their main competitor, Eli Lilly, isn't actually that far behind. Bolstered by their Mounjaro drug, they've seen a stock uptick of 52% this year.

Novo Nordisk's current revenue is approximately $26 billion, predominantly from its diabetes drugs lineup. However, by 2030, forecasts predict the obesity market could range from $30 billion to even $100 billion.

And only a few major players are in line to capitalize on this. Notably, Novo Nordisk and Eli Lilly are poised to dominate this space, with a combined projected market share of 82%.

Furthermore, whispers in the pharmaceutical sector suggest that Novo's golden molecule, semaglutide, has broader applications. Beyond diabetes and obesity, it might target three substantial markets in the coming decade.

Firstly, the cardiovascular space, valued at $162 billion in 2022, presents significant potential. Early indications reveal that semaglutide might offer protective benefits against cardiovascular threats. If Novo gains the necessary approvals, its market share could rise substantially.

Secondly, non-alcoholic steatohepatitis (NASH) affects nearly 30 million Americans. Market evaluations for this condition vary, with some projections reaching $62 billion by 2031.

Novo Nordisk is already deep into phase 3 clinical trials, and if semaglutide proves effective here, it would be another feather in the company's cap.

Lastly, the treatment of addiction disorders could be an untapped market for semaglutide. Preliminary research shows promise, but real-world human trials are still in their infancy. If validated, this could open another revenue stream for Novo Nordisk in the years to come.

Overall, Novo Nordisk is more than just a pharmaceutical company; it's a saga of consistent growth, innovation, and potential.

If you had invested in its shares between 2017 and 2019, today's valuation would offer substantial returns.

Admittedly, the current valuation is on the higher side. Still, context matters.

In light of the above, my advice is two-fold. For those eyeing short-term gains, a 'Hold' might be the best strategy for Novo Nordisk. But if you're in it for the long haul, with a decade or more in view, this is a definitive 'Buy.'

August 29, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
August 29, 2023
Fiat Lux

Featured Trade:

(WEIGHTY RETURNS)
(NVO), (LLY), (SNY), (AMGN), (PFE), (AZN)

Weighty Returns

Biotech Letter

These days, the narrative around transformative weight-loss drugs just got a little juicier. Here's the lowdown: Heart-failure patients are now giving a nod to Novo Nordisk’s (NVO) Wegovy. But, why?

The intel shows that the overweight community, grappling with heart woes, noticed a stamina uptick and weight drop when on Wegovy. The buzz was so compelling that it got its spotlight moment at the European Society of Cardiology Congress in Amsterdam. Plus, the New England Journal of Medicine gave it some ink.

Dive into the numbers, and you'll find that out of about 530 individuals with hearts not really pulling their weight (pun intended), the Wegovy brigade shed 13% of their body weight. That’s in stark contrast to the 3% that the placebo group managed.

More walking, less heart huffing-puffing - Wegovy users clocked in 17 times more steps on the treadmill and showcased fewer heart hiccups. Oh, and fewer side effects? Check.

Rewinding the tape, GLP-1 drugs initially stepped into the arena as the remedy for Type-2 diabetes. But then, surprise! Novo’s Ozempic and Eli Lilly’s (LLY) Mounjaro became the talk of the town. Not just because they were treating diabetes, but because those popping them shed an eye-catching 15% to 20% of their body weight. That's blockbuster material right there.

Eventually, Novo bagged the FDA's green light first for weight loss with Wegovy, and its demand skyrocketed so much so that medical maestros started prescribing Ozempic and Mounjaro to folks with weight woes. Now, all eyes are on the FDA's next move concerning Lilly’s weight-loss contender.

Now, here’s the kicker. This isn’t Wegovy’s first rodeo in the spotlight. Earlier this month, eyebrows were raised when it was revealed that these new kids on the block, known as GLP-1 agonists, might be the next superhero squad against a gamut of diseases.

Yet, GLP-1 might not just stop at obesity and heart diseases. It can also combat a spectrum of illnesses, including Alzheimer's. As expected, Novo and Lilly are doubling down on this potential, exploring these drugs' impact on liver and kidney diseases. As the benefits of GLP-1s unfold, insurers will probably be queuing up to offer coverage.

Let’s paint a clearer picture in terms of market potential.

Nearly 42% of U.S. adults grapple with obesity. The World Obesity Atlas dropped a bombshell—by 2035, over 4 billion global citizens might be tipping the scales, adding an astronomical $4 trillion in health costs.

The repercussions? Beyond the obvious heart diseases, strokes, and type 2 diabetes, they are also prone to mental health challenges, like depression and anxiety.

The economic ripples? Staggering. A drug that can be the silver bullet for such a widespread health epidemic could be the next Wall Street darling.

The next 10 years will likely see the GLP-1 agonists market touching an annual $86 billion. Yet, these figures might be leaning heavily on diabetes and off-label prescriptions.

With the World Health Organization cautioning about a billion obese and 2 billion overweight individuals by 2030, it's clear—this market is about to get a whole lot bigger.

With promises like these, it's no shocker that investors are tossing their coins into the ring. Both Novo and Lilly have seen their valuations triple, and Lilly's net worth now towers over its peers at a staggering $500 billion, crowning it the globe's pharmaceutical kingpin.

However, it’s wise to remember that it's one thing to climb the mountain and another to stay on the summit. Even in this early stage, competitors have started to emerge, including Amgen (AMGN), Sanofi (SNY), AstraZeneca (AZN), and Pfizer (PFE).

By 2025, the biopharma giants could potentially unveil their very own GLP-1-based wonder drugs for obesity, chipping away a quarter of Novo and Lilly's market dominance by 2032.

In the ever-evolving theater of biopharma, GLP-1 agonists, led by stalwarts like Wegovy, are emerging as the new front-runners. While the rewards seem tantalizingly vast, savvy investors know the pharmaceutical landscape is punctuated with highs and inevitable lows.

And here's a golden nugget: in the dynamic world of stock trading, every dip is an opportunity disguised as a setback. So, if you're seeking a stock market mantra for this burgeoning sector, remember to buy on the ebb, not the crest. It's in these valleys that fortunes are made, setting the stage for robust returns. Dive in wisely.

August 1, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
August 1, 2023
Fiat Lux

Featured Trade:

(CHASING THE TRILLION-DOLLAR DREAM)
(LLY), (NVO), (AMGN), (PFE)

Chasing the Trillion-Dollar Dream

Biotech Letter

Mark my words. The healthcare sector is on the cusp of a seismic shift. By 2033, I expect to see the dawn of a trillion-dollar enterprise. Now, you might think I've lost my marbles, but hear me out.

The prime contender for this prestigious title? Eli Lilly (LLY).

Now, Lilly is comfortably lounging at a market cap of $425 billion, a massive figure, yes, but still less than half of our $1 trillion target. Lilly's stock would need to scale up by a staggering 135% to breach the trillion-dollar threshold.

Daunting, right?

But if you break it down to an annual growth rate over a 10-year span, we're looking at a relatively modest compound rate of around 8.9%. With Lilly's recent track record and brimming product pipeline, this growth trajectory doesn't seem so far-fetched.

A closer look at Lilly's pharmaceutical lineup reveals a host of innovative treatments. Lilly's recent contributions to diabetes care - Mounjaro, Jardiance, and Trulicity - represent significant strides.

Adding to the fray are Taltz, a cutting-edge psoriasis solution, and Verzenio, a life-saving breast cancer drug. A peek into Lilly's late-stage pipeline reveals potential blockbusters in the making, like lebrikizumab for atopic dermatitis, mirikizumab for immunology, and donanemab for the relentless battle against Alzheimer's.

Then, there's the $1.9 billion acquisition of Versanis Bio, positioning Lilly at the precipice of the weight-loss market.

Lilly stands out with its robust line-up in the race for weight loss solutions. Mounjaro, initially a diabetes drug, has demonstrated potential as a weight-loss aid in clinical trials, with participants on the highest dosage shedding up to 22.5% of their body weight over 72 weeks.

Yet, the sector is intensely competitive, with giants such as Novo Nordisk (NVO), Amgen (AMGN), and Pfizer (PFE) on the battlefield. While Lilly's recent acquisitions present strong prospects, forecasting revenue growth over the next decade remains an intricate puzzle.

Notably, weight-loss solutions form a crucial part of Lilly's growth plan and could contribute more than 60% of the company's annual revenue by the mid-2030s.

Meanwhile, Lilly is developing potential breakthroughs in Alzheimer's treatment, with donanemab showing promise in clinical trials. This treatment has a mechanism that targets amyloid plaque, often found in the brains of Alzheimer's patients.

If approved, sales could reach a projected $3.9 billion by 2027.

Despite these promising avenues, caution is warranted. Lilly's stock is trading at 51.75 times its forward-looking earnings estimates. While the prospects for Alzheimer's and weight management treatments show promise, their success is far from guaranteed.

Historically successful drugs like Humalog and Alimta have seen their sales decline by 25% and 83%, respectively, as they lose exclusivity and face competition from lower-cost alternatives.

A company's value is often tied to its latest blockbuster in the pharmaceutical sector. Patent protection typically lasts 25 years from the date of discovery, with about half this time spent on testing. This leaves a limited window for profitability.

Investing in Lilly or any other pharma stock based on earnings expectations over 50 times isn’t always a guaranteed win. The firm’s upcoming offerings could indeed be significant earners, but they must offset foreseeable losses from other areas.

For instance, Trulicity, Lilly's top-selling treatment, generated nearly $2 billion in sales during the first quarter of 2023. However, Trulicity's revenue may be cannibalized by Lilly's own Mounjaro, with looming patent expirations set to intensify the pressure from 2027.

With robust profit margins exceeding 20%, the ascent of Eli Lilly to a trillion-dollar valuation is not only a bold prediction but also a captivating journey to monitor.

While this forecast appears to be grounded in solid reasoning and well-articulated facts, the reality of this industry is inherently marked by uncertainty and continuous change. Without the caveat of patent expiration, Lilly would be an unequivocal strong buy.

But given this reality, investors might be wiser to monitor Lilly first, rather than rush into a commitment. I suggest patiently waiting and buying the dip.

lilly

June 20, 2023

Biotech Letter

Mad Hedge Biotech and Healthcare Letter
June 20, 2023
Fiat Lux

Featured Trade:

(THE RISE OF THE TRILLION-DOLLAR PHARMA)
(LLY), (NVO), (AAPL), (MSFT)

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