Mad Hedge Biotech and Healthcare Letter
November 9, 2023
Fiat Lux
Featured Trade:
(AN UNDERDOG’S LONG-TERM PLAY)
(MRK)
When sifting through the financial performances this earnings season, a pattern emerges among pharmaceutical giants – a sell-off that persists whether the news is good or bad.
However, amidst this tumultuous landscape, there’s one name that stands out as a beacon of strategic success: Merck Pharmaceuticals (MRK).
The company’s financial metrics are noteworthy. Trading at 14 times forward earnings aligns with industry standards, signaling a stable investment to Wall Street. This valuation reflects not just current profitability but anticipates future earnings, a critical measure for savvy investors.
Merck's robust market cap of $262 billion indicates more than just its size; it signifies its influence and foresight in the biotech field.
Its recent collaboration with Japan's Daiichi Sankyo reflects this, involving a substantial $4 billion upfront investment for a partnership that could be worth up to $22 billion.
These figures aren't just impressive; they underscore Merck's commitment to advancing cancer treatment through a series of antibody-drug conjugates aimed at solid tumors.
However, everyone knows that the healthcare industry is a long game.
Merck exemplifies this, banking on long-term outcomes, particularly with Keytruda, its leading cancer drug. Bringing in $16 billion in Q3 revenue, Keytruda is a testament to Merck's ability to not only develop but also commercialize high-impact therapies.
Even as Keytruda's patent protection approaches its 2028 expiration, Merck is already grooming its pipeline, ensuring a succession of treatments to maintain its market dominance.
In the immediate term, Keytruda is on a trajectory to become the top-selling drug globally, with projections pointing towards a staggering $30 billion in sales by 2028. This continued success is not a cause for complacency; instead, it's a launching pad for Merck as it orchestrates its future portfolio with strategic precision.
That’s why the Daiichi Sankyo collaboration is pivotal even if these programs are still in the clinical trial phase.
The probability of a phase 1 trial leading to a marketable drug is a mere 3.4%, yet Merck's investment suggests confidence in these potential therapies. This foresight is critical for anyone looking beyond immediate gains toward substantial future returns.
Turning back the pages to November 2021, we find another example of Merck’s long-term outlook. At the time, the company made headlines with its acquisition of Acceleron Pharma, a move costing $11.5 billion. This strategic play wasn't a mere chance but a calculated maneuver to secure a promising asset: Sotatercept.
This drug represents a breakthrough for those battling pulmonary arterial hypertension, a severe condition that constricts blood vessels in the lungs and makes breathing a laborious task.
With analysts predicting Sotatercept's sales could soar to $2.6 billion by 2028, this acquisition is a decisive stride toward future profitability.
Shifting focus to Merck's diversified portfolio, there's more to its story than these treatments.
Its HPV vaccines, like Gardasil, represent a significant foray into preventive health. Meanwhile, its animal health division boasts the resilience of a bull market. Moreover, its R&D efforts are primed to usher in a new era of blockbusters as Keytruda nears the end of its patent life.
Dividend growth is another proof of Merck's financial health and investor-focused approach.
Over the past decade, dividends have increased by 66%, outpacing the average yield of the S&P 500. The current cash payout ratio suggests there's potential for growth, offering an attractive proposition for income-focused investors.
In the broader context of investment strategies, Merck's maneuvers construct a compelling narrative for a bullish stance. Overall, the company’s proactive and diverse approach to biotechnology makes it a noteworthy contender for investors seeking long-term growth.
While the stock market is often swayed by the immediate ebb and flow of quarterly earnings, Merck's consistent investment in their pipeline, strategic partnerships, and dividend growth paints the picture of a company poised for sustained success. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
November 7, 2023
Fiat Lux
Featured Trade:
(OUTSMARTING OPIOIDS)
(VRTX), (LLY), (NVO), (BIIB)
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.
Mad Hedge Biotech and Healthcare Letter
November 2, 2023
Fiat Lux
Featured Trade:
(SLICING THROUGH DOUBT)
(CRSP), (VRTX), (BLUE), (BEAM), (AMGN), (REGN)
In the intricate world of medical breakthroughs, September 14, 1990, stands out like a sore thumb—or perhaps, a healing one.
On this day, the baseball world was left agog as Ken Griffey Jr. and Sr. knocked out back-to-back home runs, a feat as rare as hen’s teeth.
Meanwhile, in a quieter corner of the planet, a medical marvel was unfolding. Ashanti DeSilva, a 4-year-old with a genetic disorder ravaging her immune system, was about to become the poster child for gene therapy, receiving a groundbreaking treatment that involved a cocktail of modified white blood cells. The aim? To supercharge her immune system and give her a fighting chance at a normal life.
But let’s not sugarcoat it—the road from there to here was anything but a walk in the park. Gene therapy, the promising prodigy of the biotechnology and healthcare sector, had its fair share of teenage rebellion, grappling with safety concerns and delivery vehicle dilemmas. It wasn’t until the early 2010s when gene correction technologies got their act together and safer delivery systems stepped onto the scene, that gene therapy started living up to its potential.
Enter Sickle Cell Disease (SCD), the blood disorder that’s been playing hard to get, affecting around 70,000 Americans and causing everything from anemia to organ damage.
The cure seemed as elusive as a winning lottery ticket until exa-cel, the brainchild of CRISPR Therapeutics (CRSP) and Vertex Pharmaceuticals (VRTX), entered the scene.
This therapy, wielding the mighty CRISPR/Cas9 like a genetic scalpel, takes a patient's stem cells on a rollercoaster ride—harvesting, modifying, and infusing them back into the patient, with the end goal of producing healthy red blood cells.
Looking ahead, CRISPR Therapeutics and Vertex are gearing up for a potential launch of exa-cel in 2024, assuming all the stars align. This innovative gene therapy is poised to be a significant growth catalyst for both companies in the coming decade. Initially, the focus will be approximately 32,000 patients suffering from SCD and TDT.
However, investors need to brace themselves for the price tag, as gene editing therapies don't come cheap. The cost for exa-cel is anticipated to be well north of $1 million, reflecting the complexity and value of this cutting-edge treatment.
At this point, it's crucial to acknowledge that exa-cel is not the only player in this high-stakes game.
A variety of other gene therapies are also vying for the spotlight, with contenders like Bluebird Bio's (BLUE) lovo-cel, Beam Therapeutics' (BEAM) innovative base-edited candidates, and Editas Medicine's (EDIT) competitive CRISPR/Cas9 therapy all in the running.
Now, let’s talk turkey. The financial forecast for exa-cel is looking bright, with CRISPR Therapeutics poised to tap into a $48 billion market opportunity.
Although the treatment has yet to gain FDA approval, the company already has its ducks in a row. It set up 50 treatment centers in the US and 25 in Europe, as well as schmoozed with commercial payers to ensure exa-cel is as accessible as a cold beer on a hot day.
Still, let’s not put on our rose-colored glasses just yet. The biotech sector is as fickle as a cat on a hot tin roof, with CRISPR Therapeutics’ market cap doing the cha-cha in response to industry volatility. With a slew of gene therapies for SCD waiting in the wings, it’s a stark reminder that in biotech, it’s not enough to keep up—you’ve got to lead the pack.
Meanwhile, CRISPR Therapeutics is flexing its muscles with six other clinical trial programs targeting a spectrum of conditions from various cancers to type 1 diabetes, where it is ambitiously seeking a functional cure. With a robust $1.8 billion in cash, equivalents, and marketable securities as of the second quarter and a market capitalization of $3.2 billion, the company is in a strong financial position.
For the astute investors, the real gold is in playing the long game. Rather than getting caught up in the short-term ebbs and flows of the biotech market, the savvy should be pondering how to leverage the current market conditions to their advantage.
After all, CRISPR Therapeutics, with its pioneering gene-editing technology, has the potential to follow in the footsteps of biotech titans like Amgen (AMGN) and Regeneron Pharmaceuticals (REGN), both of which have turned early investments into veritable treasure troves.
Moreover, its financial stability, bolstered by its partnership with Vertex, ensures that funding woes common among smaller biotechs are less of a concern. While it may not be the largest or most prominent player in the biotech arena, the next decade could very well see CRISPR Therapeutics delivering returns that outpace the market. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
October 31, 2023
Fiat Lux
Featured Trade:
(A SEA OF POSSIBILITIES)
(PFE), (MRNA), (NVAX)
In the cutthroat world of pharmaceuticals, Pfizer (PFE) seems to be having a bit of a moment. And not the kind you'd want to experience yourself. With shares flirting dangerously close to their 52-week low, investors are left scratching their heads. Is this a rare stock market sale, or is Pfizer showing us warning signs?
Pfizer, a leader in the biotechnology and healthcare world, is currently wrestling with the whims of COVID-19 product sales, resulting in a not-so-insignificant 40.7% shrinkage in share value year to date. The Big Apple-based giant is feeling the heat, with revenues taking a hit and the company's crystal ball now showing a less rosy sales and profit forecast for 2023.
But let's not get lost in the sea of stock market blues. After all, Pfizer is no one-trick pony.
The company has actually been busy beefing up its portfolio with some promising assets. I’m talking Oxbryta for sickle cell disease and Nurtec ODT for those pesky migraine headaches. And let's not forget the potential show-stoppers in their pipeline: the respiratory syncytial virus vaccine Abrysvo and the mid-stage weight loss/diabetes drug Danuglipron. These could very well be the next big things in pharma.
Still, the numbers don't lie. Pfizer's second quarter showed a 54% year-over-year drop in revenue to $12.7 billion, and earnings per share took a 77% hit, plummeting to $0.41. And yes, there's the looming patent cliff, threatening to push 11 of its drugs, including heavy hitters like Eliquis, Ibrance, and Xeljanz, off the financial ledge by 2030.
But before you jump ship, consider this: Pfizer's not just sitting around waiting for the other shoe to drop. Aside from its potential blockbusters, it has a pipeline bursting at the seams with 90 programs, 23 of which are in the final stage of trials. And it’s planning to launch a whopping 19 new products in the next year and a half. Not too shabby, right?
Now, let's talk about FDA approvals. Pfizer's been collecting them like a kid collects baseball cards. Just recently, it added Velsipity for ulcerative colitis and a combination therapy for non-small-cell lung cancer to their collection. It's clear Pfizer is not just resting on its laurels.
In the vaccine arena, Pfizer, in collaboration with BioNTech (BNTX), is making waves with their combination vaccine trials. And they're not just dipping their toes in the water; they're diving in headfirst, ready to take on competitors like Moderna (MRNA) and Novavax (NVAX). It's another vaccine race, and Pfizer is in it to win it — again.
Then there's the $43 billion cherry on top: the acquisition of Seagen (SGEN). This move will inject some serious oncology magic into Pfizer's portfolio and contribute a hefty chunk of change to their revenue stream in the coming years.
Then, there’s the company’s dividend. Pfizer's not stingy when it comes to sharing the wealth. It has upped its quarterly dividend to $0.41 per share, marking 14 years of consecutive increases.
So, what's the verdict? Is Pfizer a sinking ship or a stock market treasure waiting to be discovered? The short-term might be a bit rocky, but Pfizer's long-term game looks strong. With a diversified portfolio, a robust pipeline, and a commitment to innovation, Pfizer is poised to ride out the storm and come out on top.
While the waters might be turbulent now, Pfizer's got the goods to navigate through and come out stronger on the other side. For the savvy investor with an eye on the future and a stomach for a bit of volatility, this pharma leader just might be the hidden gem you've been searching for. So, grab your financial compass and set your sights on Pfizer. It's time to dive in and discover the treasure that awaits.
Mad Hedge Biotech and Healthcare Letter
October 26, 2023
Fiat Lux
Featured Trade:
(A CENTURY-OLD CONTENDER)
(JNJ)
For 127 years, the Dow Jones Industrial Average has been a reliable indicator of Wall Street's health. As of late, with the Dow Jones pulling back from its 2023 high, it hints at some of its components being undervalued. To the discerning investor, this presents a compelling investment opportunity.
One company that stands out in this landscape is the healthcare behemoth, Johnson & Johnson (JNJ). Its P/E ratio, at a decade-low of 15, underscores its investment appeal. This becomes particularly significant given that, historically, this number hasn't dipped this low in the past ten years.
A primary concern for potential investors might be the litigation shadowing J&J regarding its now-discontinued talcum-based baby powder.
The company's stock has faced increased scrutiny, with close to 100,000 lawsuits alleging a link between the product and cancer. While J&J has attempted court settlements, bankruptcy judges have halted these efforts twice. This ongoing legal tussle has indeed infused a certain level of unpredictability into the stock's future trajectory.
However, regarding financial stability, J&J's financials are robust.
The company enjoys the highest credit rating (AAA) from Standard & Poor's, an S&P Global division. This accolade reflects immense trust in J&J’s ability to manage its debt efficiently.
One of the pillars of J&J's consistent performance over the last 35 years has been its gradual shift in revenue focus. The company has been directing an increasing share of its net sales towards pharmaceuticals.
These products not only have higher margins but also promise quicker growth than medical devices. But it's worth noting that as the global populace grows older and healthcare accessibility improves, J&J's medical devices still hold significant revenue potential.
The healthcare sector is witnessing a paradigm shift with the incorporation of artificial intelligence (AI). An area where this amalgamation is showing promise is drug discovery.
Johnson & Johnson subsidiary Janssen discovered that AI could make drug discovery 250 times more efficient. In the world of medical research, where vast data sets need meticulous scrutiny, AI's ability to predict potential high-performing compounds can revolutionize the drug approval process.
Traditionally, getting a drug approved can take years and drain resources, sometimes to the tune of nine figures. An optimized drug development process is not just an operational win but a significant cost-saving.
For J&J, this AI-driven efficiency aligns perfectly with its strategic direction. After the recent spin-off of its consumer health business, the company is doubling down on growth initiatives.
While J&J is grappling with the expiration of exclusivity rights for some of its flagship drugs, it has set ambitious targets. By 2025, the pharmaceutical giant aims to generate over $60 billion in sales, a considerable leap from the $52.6 billion revenue of 2022.
Leadership at J&J has also played a role in its long-standing market success. Since its founding in 1886, the company has seen only eight CEOs. This continuity ensures that long-term growth strategies are not only devised but also effectively executed.
Another critical aspect to consider is the inherent defensive nature of the healthcare sector.
Even during economic downturns or stock market volatility, the demand for medical devices, prescription drugs, and healthcare services remains consistent. Being essential services, their consumption isn't optional. This gives J&J an edge as it ensures a predictable cash flow.
While the market is teeming with dividend stocks, few match the reliability of Johnson & Johnson. The company’s consistent performance over 61 years, despite numerous challenges, including recessions, global pandemics, and drastic shifts in the healthcare landscape, stands as a testament to its resilience.
Johnson & Johnson has a rich history and a vast product portfolio spanning areas like oncology, immunology, and infectious diseases. However, past performance doesn't seal the future. What gives J&J its edge is its continuous innovation and its ability to meet the ever-evolving healthcare demands.
With global demographics skewing older and advancements in medicine increasing life expectancy, the demand for healthcare is only going to grow. Companies like J&J, with their extensive product range, are well-positioned to explore these growth avenues.
So, while J&J has its set of challenges, especially legal ones, they're unlikely to impede its long-term growth trajectory. For investors eyeing a blend of stability and growth in an otherwise unpredictable market, Johnson & Johnson stands out as a prime candidate.
