Mad Hedge Biotech and Healthcare Letter
April 19, 2022
Fiat Lux
Featured Trade:
(A BUDDING UNDERDOG TO DOMINATE THE ALZHEIMER’S BATTLE)
(SAVA), (BIIB), (LLY), (RHHBY), (ABBV), (AMGN)
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One of the most significant unmet medical needs worldwide is the treatment of Alzheimer’s Disease (AD).
With over 6 million people affected in the US alone and roughly 40 million globally, this number is projected to double by 2050 as the population ages and more individuals live longer lives.
That’s why it comes as no surprise that even though the Centers for Medicare & Medicaid Services decided to limit the coverage of Biogen’s (BIIB) AD drug, Aduhelm, more and more drugmakers continue to move forward with their own candidates.
Eli Lilly (LLY) continues to work on Donanemab, which could be available for review by mid-2023. Meanwhile, Roche (RHHBY) is anticipated to release data on Gantenerumab by the end of 2022.
Among the drugmakers pursuing this field, one name continues to rake in positive reports: Cassava Sciences (SAVA).
Cassava’s lead AD drug candidate is Simufilam, a small oral pill. Thus far, this has shown no safety issues and even released the best clinical AD data.
Notably, this is the only treatment that demonstrated tangible cognitive improvement for longer than 6 months in the clinical studies for AD.
The fact that Cassava’s candidate bested Donanemab and Gantenerumab, which both received breakthrough designations, and Aduhelm, which got an accelerated approval, indicates its candidate’s strong potential.
Between their promising results, convenient storage of the pill, easy dosing method, impressive safety data, and the vast unmet medical market, Simufilam could very well be hailed as the best-selling AD treatment the moment it gains approval.
Another indicator of Simufilam’s promise is the lack—or even absence—of insider trading within Cassava in the past years.
Typically, company insiders know more about the projects than anyone else. Strong insider selling is generally followed by a fall in a company’s stock price.
This has not been spotted anywhere in Cassava, with multiple insiders taking on very big stakes in the company.
However, the strongest indicator for Cassava’s impending win is Simufilam being in clinical progression. In fact, it’s already dosing in Phase 3 trials.
While other drugmakers working on an AD treatment may have promising options, the earlier a candidate is in the clinical trials, the higher the risk of failure and the longer it’ll take to be commercialized.
Each step forward in clinical trials is basically a way to “de-risk” the candidates, which leads to an increased value of the company.
Naturally, one of the questions raised when dealing with a biotech not as large as AbbVie (ABBV) or even Amgen (AMGN) concerns financial health.
Cassava’s recent financial filings showed that the company has roughly $240 million in cash and $0 debt.
Looking at their workflow, Cassava typically burns about $9 million every quarter.
As they ramp up their Simufilam trials, this is obviously expected to change.
After all, Phase 3 trials tend to cost more. So, the company anticipates a bump in spending to reach $12.5 million to $15 million per quarter this 2022.
While this is a substantial increase in capital expenditure, the jump remains within reasonable projections of the price of Phase 3 trials.
Taking into consideration the higher burn rate of roughly $15 million every quarter, Cassava would still have sufficient cash to operate for 16 quarters or 4 years without the need to resort to any additional financing rounds—at least for Simufilam.
If it fails, investors would already know whether Simufilam was a success.
That means if Cassava does pursue financing efforts, it would be for new projects and not for this particular AD treatment.
The market has not been kind to the biotechnology sector lately. It’s because the market tends to overreact to negative news.
Farsighted investors who recognize the enduring potential of a company—even at its vulnerable periods—can sometimes reap outsized returns if they turn out correct.
However, a successful strategy for some investors is to bet on companies that other investors are afraid to touch.
Nevertheless, it’s still prudent to keep in mind that investing in a roller coaster like Cassava means preparing yourself for an unexpected and possibly wild ride.
Mad Hedge Biotech and Healthcare Letter
April 14, 2022
Fiat Lux
Featured Trade:
(A BIOPHARMA STOCK BENT ON REDEMPTION)
(MRK), (BMY), (ABBV), (ORGN), (PFE), (VTRS), (MRNA), (BNTX), (CRSP), (VRTX), (BLUE), (BIIB)
It looks like we’re about to bear witness to a redemption journey.
Once upon a time, Merck (MRK) was a major player in the cardiovascular sector. Over the years, it has gradually diminished to a minor league name.
However, Merck has plans to reverse this fortune and reclaim its dominance in the cardio market. To date, it has eight new drug approvals and a slew of expanded labels queued in the next couple of years.
This decision is evident in Merck’s move to outbid Bristol Myers Squibb (BMY) in the auction for Acceleron Pharma, shelling out a whopping $11.5 billion to boost its cardio pipeline considerably.
While the deal may seem like a massive risk, Merck is confident that this deal holds the potential to open up the path to single-product peak sales reaching $10 billion by the mid-2030s.
In fact, there’s no need to wait for long to see some solid proof of Merck’s multibillion-dollar bet, as Acceleron already has a candidate set to be put on display by the end of 2022 or early 2023.
This Acceleron acquisition forms part of the “New Merck” touted when the company welcomed a new CEO and came on the heels of the success of the leadership that brought the mega-blockbuster cancer drug Keytruda.
It also signifies Merck’s conscious efforts to ease their heavily criticized over-dependence on Keytruda.
While the drug will lose patent protection after 2028, Keytruda still holds a significant portion of Merck’s sales. The treatment accounted for roughly 35% of the company’s total revenues last year.
The patent loss of a significant moneymaker is a typical problem for virtually every Big Pharma company, with AbbVie (ABBV) and Bristol Myers Squibb coming to mind as the most recent examples.
The go-to solution to this is pursuing mega-money mergers: AbbVie acquired Allergan for $63 billion while Bristol splurged on Celgene at $74 billion.
This quickly bolsters the existing pipelines and portfolios of the companies and assuages the fear of investors over impending revenue losses.
Instead of following this pattern, Merck did the opposite in 2021.
The company decided to downsize and established a spinoff segment: Organon (ORGN). The idea is to offload its biosimilars and other legacy products to focus on its core strengths.
This is reminiscent of Pfizer’s (PFE) move to spin out its Upjohn unit and merge it with Mylan to form Viatris (VTRS).
This move looks to have worked well for Merck and Organon as it allowed the parent company to focus on its blockbuster brands.
For instance, Bridion recorded a 28% year-over-year rise in 2021 to reach $1.53 billion in sales, while ProQuad reported a 14% increase to hit $2.14 billion.
Meanwhile, Gardasil rose to an impressive 44% to contribute $5.7 billion.
Even Merck’s Animal Health sector grew by 18% to record $5.6 billion.
There’s also Keytruda, which is projected to become the highest-selling drug at $24.3 billion by 2026.
These are only some of the blockbuster products in Merck’s portfolio expected to continue increasing revenues this 2022.
In addition, the company expects at least $5 billion from its COVID-19 antiviral drug Molnupiravir.
Looking at the trajectory and growth of the pipeline and existing programs, Merck estimates an additional 17% increase in its year-on-year revenue in 2022 to reach $56.1 billion to $57.6 billion.
Despite the move to establish a spinoff unit, the Acceleron deal hints at the possibility that Merck might be shifting to an open checkbook strategy.
Considering how relentlessly it pursued the deal, there’s a chance that the company would be at the bargaining table for a while in search of ways to protect itself against the pending Keytruda patent loss.
Some contenders for a potentially splashy offer from Merck are Moderna (MRNA) and BioNTech (BNTX), which could bolster the bigger company’s mRNA pipeline.
It can also splurge on gene therapy experts by targeting CRISPR Therapeutics (CRSP) and even Vertex (VRTX).
However, given bluebird bio’s (BLUE) flailing performance as of late, this small biotech could very well be a contender for a bargain deal.
Speaking of discounted stocks, Biogen (BIIB) is also reportedly under consideration simply because of its deeply discounted price following its disastrous Alzheimer’s disease program.
Whatever move it makes, one thing is sure: Merck, with its $208 billion market capitalization, is in a healthy and stable place financially.
More importantly, it has an excellent product portfolio and an exciting pipeline.
It has shown remarkable growth in the past years and impressive efforts to secure a great future, making it a solid stock to buy and hold for a long time.
Mad Hedge Biotech and Healthcare Letter
April 5, 2022
Fiat Lux
Featured Trade:
(A BRIGHT SPOT IN A GLOOMY SECTOR)
(VRTX), (MRNA), (ABBV), (CRSP)
In an economy continuously plagued with a rising interest rate, it’s not unheard of for risk-averse investors to steer clear of businesses with high debt loads.
After all, those kinds of companies could be the most affected as climbing interest rates inevitably lead to lower profits.
The silver lining is that there’s no need to sacrifice putting money in growth stocks altogether.
You can simply load up on ultra-conservative businesses to ensure that you don’t come off the losing end in the battle of an ever-increasing interest rate.
In the biotechnology and healthcare sector, there are a handful of promising fast-growing businesses that are not saddled with tons of debt. One of them is Vertex Pharmaceuticals (VRTX).
A continuously growing business, Vertex recorded $7.5 billion in sales in 2021, showing off a 22% increase from 2020.
Its cystic fibrosis (CF) program is a major player in its growth, particularly Trikafta/Kaftrio. On its own, this blockbuster treatment contributed $5.7 billion to Vertex’s top line in 2021.
As it expands and goes after more growth opportunities, Vertex consistently ensures that it is backed by a solid balance sheet. In total, its short- and long-term liabilities amount to roughly $3.3 billion.
With a cash balance of $6.8 billion, the company has more than enough to clear that off.
In the past 12 months, Vertex has generated roughly $2.6 billion in cash from its daily operating activities.
This biotechnology company has been in such excellent shape that it managed to buy back shares with $1.4 billion last year. That’s practically three times the $539 million it allocated to repurchasing efforts in 2020.
Meanwhile, investors who feel they missed the boat on Moderna (MRNA) now have a second shot at investing in another high-growth biotechnology company.
Plus, it still has a Moderna connection and already has a strong track record of dominating a lucrative market.
Vertex and Moderna, which saw their stock price catapult to a record-breaking 800% in the past two years, are working on an mRNA-based therapy for CF patients.
Now, you might be wondering why Vertex is pursuing this program, considering its dominance in the CF market.
In fact, the closest rival would be AbbVie (ABBV). However, Phase 2 trial results for this candidate are due in two to three years. That means Vertex will likely remain the top name in the CF space for a while. Nevertheless, Vertex appears determined to keep its lead.
So, why bother with a new program instead of bolstering the existing Trikafta pipeline?
Well, right now, Vertex has virtually covered 90% of the CF market—and this is where Moderna comes in.
What the two are trying to do is to completely cover the market and target the remaining 10% not qualified to take the existing Vertex CF treatment.
As of the last update, the remaining demographic is at 25,000 patients. This would translate to another $4 billion in commercial sales.
If they succeed, the two would have created the biggest competitor to Trikafta. That means Vertex’s most formidable rival would be Vertex as well.
Needless to say, Vertex’s continuous dominance in the CF space guarantees blockbuster levels of profits in the years to come.
Vertex has been busy expanding into additional therapeutics segments despite its resounding success in the CF space.
Another potential blockbuster is CTX001, a one-time gene-editing treatment targeting blood disorders beta-thalassemia and sickle disease, developed in collaboration with CRISPR Therapeutics (CRSP). This is by far the most exciting venture of the company, with the partners expected to file for regulatory approval by the end of 2022.
Aside from these, Vertex’s pipeline is filled with promising candidates. One is VX-147, which is a groundbreaking therapy for severe genetic kidney diseases. There’s also autoimmune treatment VX-880.
VX-548 is another exciting candidate. While this drug is aimed to be an acute pain treatment, a key characteristic is the absence of drug addictiveness.
This is a breakthrough effort because it might just be the answer to the ongoing opioid crisis.
Given the unique mechanism of VX-548, this alternative aims to deliver treatment with low addictive effects.
There are roughly 75,000 deaths reported annually caused by overdose on opioid drugs in the United States alone. This could translate to $4 billion in the addressable market.
Although these candidates are not as advanced as Vertex’s CF program, they demonstrate that the company can go beyond its well-established niche and bolsters investor confidence.
With the rising inflation and economic turbulence, it’s advisable to prioritize companies with steady cash flow and promising growth prospects
Despite the rough couple of years for the broader market, Vertex easily meets these expectations and appears to be one of the positive stories in the healthcare and biotechnology sector.
Mad Hedge Biotech and Healthcare Letter
March 31, 2022
Fiat Lux
Featured Trade:
(A SUPERCHARGED BUY-AND-HOLD GEM FIRING ON ALL CYLINDERS)
(ABT), (PFE), (VTRS), (MRK), (OGN), (ABBV)
Sell-offs can be stomach-churning, but they also offer excellent opportunities to load up on shares of companies that are typically too expensive to purchase otherwise.
You can never go wrong when you opt for dividend stocks that are impressively stable and possess a solid track record that stood the test of time.
One name that fits this description in the biotechnology and healthcare sector is Abbott Laboratories (ABT).
Over the past years, Abbott has had its hand in diverse ventures ranging from BinaxNOW antigen tests and continuous glucose monitors to Pedialyte. That’s why it comes as no surprise that the company’s over $43.1 billion revenue in 2021 was generated from extensive sources.
While the rest of the world struggled financially during the pandemic, Abbott was able to leverage the strength of its business model.
Thanks to its diverse coverage of the healthcare market, Abbott was able to readily seize the high growth potential of diagnostic tests in the early stages of the COVID-19 pandemic.
This hold of the market expanded as more tests were needed due to the emergence of multiple variants. Since Abbott already had the technology at the ready, it was able to position itself as a first mover and leader in this segment.
In addition, its diverse portfolio and strategic partnerships translated to an increase in its quarterly revenue to more than 81% in the past five years. It has also boosted Abbott’s growth at twice the S&P 500’s pace and even flagship biotech and healthcare ETFs in the past five years.
Moreover, Abbott’s dividend has consecutively increased in the past 50 years, giving the company the title “Dividend King.”
Abbott’s dividend has increased by an impressive 77% in the last five years thanks to its significant participation in the COVID-19 testing kit market.
More importantly, a market sell-off won’t necessarily affect Abbott’s business. Given its track record, it’s safe to say that its dividend will keep rising in the years to come, thereby rewarding patient long-term investors.
Among the diverse divisions within Abbott, the most exciting is its Medical Devices segment. For years, the company’s innovations in this sector have gained praise from healthcare providers for their ability to combine technology and health under one umbrella.
This segment has greatly benefited from key acquisitions, with the $5.8 billion acquisition of Alere boosting its care diagnostics sector and $25 billion merger with St. Jude’s Medical dramatically expanding its medical device department.
So far, the company has created products for stroke prevention, electrophysiology, and cardiac monitoring—all of which have targeted high-growth segments.
In this particular area, Abbott’s key growth driver is a product called Libre Freestyle. This is an integrated continuous glucose monitoring device.
Basically, it is an implanted device that helps patients with diabetes to monitor their glucose levels. It communicates with an app and, depending on the patient’s condition, is connected to an automated insulin pump.
This effectively eliminates the need for the painful finger-sticking method or self-injecting insulin.
Abbott only has two serious competitors in this breakthrough diabetes-centered technology: Medtronic (MDT) and Dexcom (DXCM).
Despite their presence, Abbott holds the lead due to its more affordable price point, with Freestyle Libre sales increasing by $1 billion in 2021 to record a total of $3.7 billion.
Another interesting department for Abbott is its Established Pharmaceuticals sector. This segment covers established drugs like cystic fibrosis drug Creon, IBS treatment Duspatal, and influenza vaccine Influvac.
While this isn’t a fast growth segment, it has become an essential contributor to the company, with most of its sales coming from wholesale agreements overseas.
Suppose the movement from other Big Pharma companies is any indication. In that case, this segment may very well be on its way to becoming another spinoff organization like Pfizer’s (PFE) move to create Viatris (VTRS) and Merck’s (MRK) decision to develop Organon (OGN).
As a biotechnology and healthcare company, Abbott does not offer the typical buzz-worthy updates that investors in this space are on the lookout for.
Instead, the company has been actively developing products for diagnostics, medical nutrition, medical devices, and surgical tools. Moreover, it focuses on harnessing solid relationships with medical professionals and health insurers.
Unlike its spinoff company AbbVie (ABBV), Abbott is regarded as a financially traditionalistic business. It is a conservative Dividend King that’s steadily growing in its established business sectors, making it a buy-and-hold gem for patient long-term investors.
Mad Hedge Biotech and Healthcare Letter
March 29, 2022
Fiat Lux
Featured Trade:
(A DURABLE AND ENDURING STOCK IN THESE TROUBLING TIMES)
(AMGN), (JNJ), (AZN), (ABBV)
The latest market sell-off has motivated me to take a closer look at blue-chip businesses with solid track records of bringing value to shareholders regardless of the economic conditions.
After all, an insistence on putting money only in the highest quality stocks is key to long-term success in investing.
And when investing in the biotechnology and healthcare industry, it’s vital to choose stocks with robust drug portfolios and promising pipelines of candidates. This ensures continuous solid growth in the near and long run.
Amgen (AMGN) fits that description.
Over the years, Amgen has risen as one of, if not the most prominent biotechnology company. This company is one of the largest and possibly longest-running biotechnology businesses in the world.
It is a leader in various sectors, including oncology, blood disorders, cardiology, inflammation, and immunology. It has also expanded in other segments, with “King of Biologics” as the latest moniker for this biotech titan.
Amgen has been consistently profitable throughout its history, sustaining industry-leading margins that boost both its top and bottom-line growth.
Founded in 1980, it has steadily made a name for itself following the approval of its first drug —anemia treatment Epogen — in 1989.
Since then, this biotechnology stalwart has evolved into a significant player in the industry with a market capitalization of roughly $130 billion and an enterprise value of approximately $156 billion.
This translates to the company demonstrating a solid balance sheet on top of a robust repurchase program and an impressive track record of increasing its dividends.
Amid the sluggish economic climate in 2021, Amgen pulled $26 billion in total revenue to record a 6% climb year-over-year in adjusted EPS.
This improvement in its performance was fueled by its remarkable portfolio of branded drugs and biosimilars.
Naturally, the next question is whether the company can sustain this growth.
For 2022, Amgen announced a guided total revenue within the range of $25.4 billion and $26.5 billion.
In 2023, the company anticipates an accelerating growth primarily due to the US launch of the all-around immunology injection Amgevita, the expansion of psoriasis and psoriatic arthritis Otezla’s label, and additional momentum from future blockbusters severe asthma treatment Tezspire and non-small cell lung cancer oral therapy Lumakras.
Looking at the track record, the company estimates potential mid-single-digit growth in revenues from these products and over double-digit increase in EPS.
Moreover, the company has an impressive pipeline of roughly 40 innovative candidates. The programs include 10 cutting-edge molecules advancing through mid- and late-stage trials.
Among these are biosimilars for blockbuster products such as Johnson & Johnson’s (JNJ) Crohn’s disease treatment Stelara, and AstraZeneca’s (AZN) blood disorder drug Soliris.
If these get the green light, then each biosimilar could siphon hundreds of millions of dollars in yearly revenue from these competitors.
In particular, Amgen’s work on a biosimilar for AbbVie’s (ABBV) severe rheumatoid arthritis treatment Humira could generate substantial sales for the company.
Its burgeoning biosimilars programs and other pipeline candidates contribute to predictions that Amgen could record at least 7% in annual earnings growth over the next five years.
More importantly, Amgen offers a market-beating 3.3% dividend yield, making it an attractive investment with incredible growth potential.
As the market continues to make sense of the effects of inflation, the continuing conflict between Ukraine and Russia, and the constant threat of rate hikes, it has become essential to come up with a list of top quality companies that can offer steady growth and a healthy dividend.
Thus far, Amgen has been excellent at delivering on both counts.
It’s a great biotechnology company with a very solid history and, judging from its pipeline candidates, an even more solid future.
