Mad Hedge Biotech and Healthcare Letter
October 3, 2023
Fiat Lux
Featured Trade:
(REDEFINING RESILIENCE)
(VRTX), (ABBV), (AMGN), (JNJ)
Posts
It’s not surprising that a number of investors might be hesitant to purchase stocks this month. A few might remember that a number of the most significant stock market downturns in history took place in October. Numerous stocks continue to be high-priced despite the stock market shedding a considerable portion of its earlier momentum from this year.
However, October has often proven to be a favorable month for the stock market — if you know how to choose. Moreover, while a multitude of stocks carry a high price tag, there are those that do not.
Now, imagine a pharmaceutical giant, a singular entity reigning supreme in a market valued in the billions, poised to unveil three revolutionary products by 2025, each potentially generating sales eclipsing $1 billion. Picture this company at the forefront, pioneering a cure for type 1 diabetes (T1D).
The fascinating part? This isn’t a fragment of imagination—it’s the reality of Vertex Pharmaceuticals (VRTX).
With its towering presence in the biotech sector, Vertex has a market cap surpassing $90 billion, establishing itself as the largest entity among U.S.-headquartered firms. Unlike its contemporaries—AbbVie (ABBV), Amgen (AMGN), and Johnson & Johnson (JNJ)—Vertex doesn’t distribute dividends.
Still, it remains one of the most consistent companies thanks to its remarkable trajectory starting from its inception in 1989. Since the advent of the SPDR S&P Biotech ETF (XBI) in 2006, Vertex has soared, achieving over 900% return, overshadowing the ETF’s 380% return.
The journey of Vertex is not just a tale of numbers and percentages; it’s a narrative of resilience and innovation. The company distinguishes itself with its innovative approach to addressing serious diseases, particularly focusing on cystic fibrosis (CF), and its continuous expansion in the CF treatment market.
As expected, the question of whether Vertex is a one-dimensional entity, solely reliant on CF therapies arises. Far from it.
CF isn't anticipated to be the sole catalyst for Vertex's expansion for much longer. The firm, alongside its partner CRISPR Therapeutics (CRSP), is aspiring to secure approval from U.S. regulatory bodies for exa-cel to treat uncommon hematological conditions such as sickle cell anemia and transfusion-reliant beta-thalassemia in the upcoming months. Additionally, the company envisions an imminent market introduction for VX-548, a potent, non-opioid pain medication.
Looking ahead, the future seems even more promising for this major biotech entity. Vertex is conducting a crucial clinical trial on inaxaplin, focusing on APOL1-mediated renal disease, affecting a broader patient demographic compared to CF.
Meanwhile, the financial prowess of Vertex is another facet of its diverse identity. The company has been a consistent beacon of positive free cash flow since 2016, and its financial robustness was highlighted by a 14% revenue growth in the second quarter, driven by robust international sales.
The company’s strategic investments in R&D and commercial capabilities are pivotal to leveraging the multibillion-dollar market opportunities looming on the horizon. These investments are not mere allocations of resources; they are the building blocks of Vertex’s future, the seeds sown today to reap innovations tomorrow.
An excellent example of this is Vertex’s ambitious stride into the type 1 diabetes market, marked by its acquisition of ViaCyte in a $315 million deal. Ultimately, the goal is to deliver innovative stem cell-derived cell replacement therapies as a functional cure for type 1 diabetes.
While the diabetes products are still navigating through phase 2, the anticipation is palpable regarding their role in fueling Vertex’s future growth. The company’s resilience against elevated rates and its propensity to bounce back make it a fascinating stock to consider during market corrections. It’s not just about the numbers on a balance sheet or the ticks on a stock chart; it’s about the relentless pursuit of innovation, and the unwavering commitment to making a difference in the lives of patients around the globe.
So, do these make Vertex the unstoppable stock poised to rule the next two decades? The signs are pointing to a resounding yes.
Mad Hedge Biotech and Healthcare Letter
August 10, 2023
Fiat Lux
Featured Trade:
(INVESTING IN A KING)
(ABBV), (JNJ), (LLY)
The Dividend Aristocrats Club is a badge of honor for those S&P 500 stocks that have managed to increase their dividends for at least 25 consecutive years. But let's take a closer look because there's an even more exclusive club worth our attention.
Introducing the Dividend Kings, the unsung heroes of the dividend world. No need to be part of the S&P 500; these select few must achieve at least 50 consecutive years of dividend growth. That's a feat as impressive as running an investment marathon and crossing the finish line with energy to spare!
Among them? AbbVie (ABBV), is a name synonymous with financial resilience. Let's explore why this Dividend King is attracting the attention of savvy income investors.
AbbVie, with 51 years of dividend growth, has a strong financial footprint. It is the fifth-largest pharmaceutical company worldwide, with a market capitalization of $260 billion. It ranks just behind industry giants such as Johnson & Johnson (JNJ) and Eli Lilly (LLY). Its pharmaceutical line-up serves over 62 million patients annually, combating conditions like cancer and migraines.
Now, let's not overlook some recent financial trends. AbbVie recorded $13.9 billion in net revenue during the second quarter, a 4.9% drop from last year, but the net revenue only fell by 4.2% when considering currency fluctuations. A stumble? Perhaps. A fall? Not quite. This Dividend King may have more to reveal.
However, it is essential to remain grounded in reality. After all, even giants face their day of reckoning.
AbbVie's Humira, a drug that generated $200 billion over the last 10 years, lost its exclusive patent in January 2023. Biosimilar competition led Humira's total revenue to shrink by 25.2% in the second quarter.
The company’s non-GAAP diluted earnings per share (EPS) dipped by 13.6% year over year to $2.91 for the second quarter. The company's non-GAAP net margin contracted by nearly 390 basis points year over year.
Clearly, the era of Humira's dominance as the top-selling medication in history is slowly coming to an end, paving the way for a future where its sales will be reduced. A tough pill to swallow, no doubt, but it's not all gloom at AbbVie's camp.
In 2022, Humira's global sales peaked at $21.2 billion. The emergence of biosimilar versions like Amjevita from Amgen has seen global Humira sales slide to $16 billion in the second quarter. However, AbbVie is managing the decline with rapidly increasing sales from newly launched drugs.
Promising medicines such as Skyrizi, Rinvoq, Botox Therapeutic, Vraylar, and Venclexta continue to offset the withering Humira sales, with solid growth prospects in other areas and a pipeline full of potential.
These new drugs appear ready to replace the shrinking Humira revenue. With other growth drivers like Epkinly and Vraylar, AbbVie looks well-positioned for the long term.
Additionally, with a strong $23.5 billion free cash flow over the past 12 months and needing just 43% of that amount to meet its dividend commitments, the company's 4% yield remains appealing to income investors.
The decline of Humira's sales is significant but hardly a death knell for AbbVie. The company has shown resilience and adaptability, balancing both growth and income potential.
While the potential risk of a recession could disrupt these trends, AbbVie's 50-plus-year record of increased dividends suggests historical resilience.
With moderate annual dividend growth likely, and a strong foundation for future development, AbbVie represents a compelling buy for investors. The figures and financials paint a picture of opportunity; now it's time to consider whether AbbVie fits into your investment portfolio.
Remember, the crown of a Dividend King is not easily earned, and AbbVie's financial performance showcases a royal opportunity worth exploring.
Mad Hedge Biotech and Healthcare Letter
June 13, 2023
Fiat Lux
Featured Trade:
(BUCKING THE TREND)
(VRTX), (ABBV), (CRSP)
The notion of "Sell in May and go away" hasn't exactly proven true this year in 2023. Surprisingly, the stock market has been experiencing an impressive upward trend, especially in June, and there may still be further potential for growth.
Allow me to share one of my favorite examples that embody both profitability and consistent expansion, all while enjoying a significant competitive edge.
In the biotechnology and healthcare sector, Vertex Pharmaceuticals (VRTX 1.94%) fits the description perfectly.
This company stands out as the undisputed leader in the market for cystic fibrosis treatments, offering a unique portfolio of drugs that specifically target the underlying cause of this genetic condition.
These groundbreaking medications, known as CFTR modulators, have successfully been introduced to the market, with Vertex Pharmaceuticals spearheading the way by bringing forth four of them.
Vertex has been continuously making remarkable progress in the field of cystic fibrosis (CF) treatment.
A notable achievement is the expanded approval of their drug, Kalydeco, by the U.S. Food and Drug Administration. It can now be used to treat CF patients as young as one-month-old, marking a groundbreaking milestone as the first CFTR modulator ever approved for this age group.
Kalydeco has also been a significant revenue generator for Vertex, ranking as their second highest-earning drug with an impressive $553 million generated over 12 months.
But there's more to Vertex's success.
Their flagship medication, Trikafta, takes the lead as their best-selling drug, raking in a staggering $7.7 billion in revenue in 2022 alone.
Recently, Trikafta received approval to treat children as young as two years old with specific mutations, providing relief to nearly 1,000 more individuals in the cystic fibrosis patient community.
The long-lasting patent protection of Trikafta, with approximately 14 years remaining before expiration, holds great significance for Vertex Pharmaceuticals. With a relatively modest patient population of 88,000, the company has ample opportunities for further growth.
The robust revenue and profits of Vertex's CF franchise speak to their success in this area. Additionally, AbbVie's (ABBV) decision to discontinue its CF program further solidifies Vertex's monopoly in the cystic fibrosis field, strengthening its position for continued success.
While capitalizing on the expanding market for cystic fibrosis treatments, Vertex Pharmaceuticals also targets underserved areas to drive long-term growth.
One promising drug candidate in their pipeline is VX-548, a non-opioid medication designed to address acute pain conditions, which is nearing commercialization.
Moreover, Vertex has a highly promising candidate in its pipeline that goes beyond cystic fibrosis.
Collaborating with CRISPR Therapeutics (CRSP), the company eagerly awaits regulatory approvals for exa-cel, an innovative treatment for sickle cell disease and transfusion-dependent beta-thalassemia, in both the United States and Europe.
Exa-cel represents just the tip of the iceberg when it comes to Vertex's upcoming arsenal of new drugs.
The company holds great optimism for VX-548, a cutting-edge non-opioid therapy targeting acute pain, as well as its triple-drug combination for cystic fibrosis, which features vanzacaftor.
Both treatments are undergoing Phase III trials, with expectations for completion in late 2023 or early 2024.
Additionally, Vertex is conducting a pivotal trial for inaxaplin, a potential treatment for APOL1-mediated kidney disease that impacts a larger patient population than cystic fibrosis.
Needless to say, Vertex has been experiencing an exceptional streak, consistently outperforming the market over the past year. The best part is that its potential to generate significant returns extends well into the next decade.
While Vertex possesses a variety of potential approvals for treating cystic fibrosis, some of which may materialize before 2028, its CF-related revenue is expected to grow substantially even without factoring in those additional approvals.
Analysts anticipate a solid annual increase of 8.2% in the company's overall revenue over the next five years. Although this growth rate is commendable for a biotech industry heavyweight, it falls short of Vertex's impressive 38% annual growth achieved in the previous five years.
From my perspective, the projected 8.2% growth appears rather conservative.
This sentiment is particularly amplified when considering the imminent potential approval of exa-cel, an innovative gene-editing therapy targeting sickle cell disease (SCD) and beta-thalassemia (TDT).
After all, the initial market value of exa-cel could soar to a staggering $64 billion, and given the life-altering impact it offers, a price tag of approximately $2 million per treatment is justifiable.
Honestly, I'm hard-pressed to find anything negative to say about Vertex. This prominent biotech company is constantly delivering positive news and making significant strides on all fronts. I recommend you buy the dip.
Mad Hedge Biotech and Healthcare Letter
May 30, 2023
Fiat Lux
Featured Trade:
(A MONSTER STOCK ON THE RISE)
(VRTX), (MRNA), (ABBV), (CRSP)
Biotech companies possess an extraordinary power: the ability to soar to great heights with just a handful of successful drugs.
An excellent example of this phenomenon is the remarkable ascent of Moderna (MRNA), a visionary biotech firm that catapulted from a $4 billion valuation to an astounding $52 billion.
The secret behind its meteoric rise? The resounding triumph of its coronavirus vaccine not only sparked hope in the hearts of millions but also propelled its stock price to a staggering 100% surge over the past three years.
But it's not just about a momentary triumph. Some biotech geniuses focus on concocting life-altering remedies for tricky-to-tackle diseases, which demand regular treatment for the long haul.
This is where Vertex Pharmaceuticals (VRTX) truly shines.
Vertex, the biopharmaceutical juggernaut born in 1989, has orchestrated a stunning 636% surge in annual revenue over the past decade. While maintaining such an astronomical growth trajectory might prove challenging, the company’s formidable pipeline harbors the potential to fuel its rise for yet another decade.
The shining star of Vertex’s portfolio these days is none other than Trikafta, a groundbreaking medicine combatting the relentless foe known as cystic fibrosis (CF).
This blockbuster drug singlehandedly generated $7.6 billion in revenue in 2022, constituting the lion's share of the company's overall product revenue, amounting to $8.9 billion.
In fact, in the first quarter of 2023, Trikafta contributed an astounding $2.1 billion to Vertex's $2.3 billion total product revenue.
At present, Vertex's revenue stream flows exclusively from CF medications, with the company projected to rake in $9.5 billion to $9.7 billion for the entire year from these products alone.
Here's another fun fact that further cement Vertex’s dominance in the CF world: other contenders in the cystic fibrosis domain have stumbled and faltered, leaving the landscape desolate with scarce rivals.
AbbVie (ABBV) has thrown in the towel, abandoning its CF program altogether. It's no wonder Vertex's triumphant creation is now in higher demand, hailed as a proven champion in the ring of battle.
However, Vertex is no stranger to the importance of diversifying its revenue streams.
While the company has a standout product, it recognizes the risks of relying solely on its success. That's why Vertex is boldly venturing into various other programs.
Teaming up with CRISPR Therapeutics (CRISP), it recently wrapped up the regulatory submissions for exa-cel, an innovative gene therapy designed to combat both beta-thalassemia and sickle cell disease.
The potential approval of exa-cel could catapult Vertex into a whole new realm of breakthrough treatments.
But that's not all.
Vertex's pipeline boasts a promising therapy called inaxaplin, currently in pivotal studies, which targets APOL1-mediated kidney disease—a condition affecting more patients globally than CF. Furthermore, the company's early-stage clinical testing program holds the potential to cure type 1 diabetes. Vertex also has its sights set on tackling type 1 diabetes, harnessing the power of CRISPR's cutting-edge gene-editing technology known as CRISPR-Cas9.
Evidently, Vertex has aggressively invested in new ways to expand its portfolio. Its first-quarter report showed that the company allocated a staggering $742 million in research and development.
This substantial investment underscores Vertex’s determination to continue launching groundbreaking therapies worldwide.
Vertex also has significant milestones on the horizon, including the completion of a late-stage study for its vanzacaftor triple-drug therapy targeting cystic fibrosis (CF) by the end of 2023.
Additionally, late-stage testing for VX-548, a potential acute pain treatment, is expected to conclude later this year or early 2024.
Although it may take time for these therapies to reach the market, even with positive results, it’s reasonable to believe that their future regulatory approvals seem to be slam-dunks.
Moreover, both therapies hold tremendous revenue potential for Vertex. The vanzacaftor triple-drug therapy has the potential to become the company's most profitable CF treatment, while VX-548 could serve as a blockbuster non-opioid painkiller.
To add to its strengths, Vertex enjoys a strong balance sheet with a substantial cash stockpile of $11.5 billion as of last March. I fully expect Vertex to leverage this financial strength for strategic business development deals and stock buybacks.
With a strong balance sheet, ongoing drug development efforts, and the potential to become a frontrunner in the biotech industry, I believe that Vertex has the potential to become a monster stock over the next decade.
Mad Hedge Biotech and Healthcare Letter
April 11, 2023
Fiat Lux
Featured Trade:
(NOT NOW, BUT SOON)
(JNJ), (NVO), (LLY), (AMGN), (GILD), (ABBV), (BMY)
During times of market turbulence, many investors may find themselves hesitant to participate due to the uncertainty and risks involved. However, one potential strategy to weather the storm could be to seek out dividend stocks.
By investing in these types of equities, individuals can find a sense of stability and security, as they often offer a reliable source of income regardless of market fluctuations. In short, dividend stocks can serve as a safe harbor amid a choppy investment climate.
If you're looking for a healthcare stock with some serious street cred, check out Johnson & Johnson (JNJ).
Before delving into the company, knowing that JNJ’s stock price isn't exactly bargain-bin material is crucial. Still, it's not the most expensive pharmaceutical company out there, either. Novo Nordisk (NVO) and Eli Lilly (LLY) are commanding higher valuations, while JNJ’s peers like Amgen (AMGN), Gilead Sciences (GILD), AbbVie (ABBV), and Bristol-Myers Squibb (BMY) are trading at a lower price-to-free-cash-flow ratio.
Let's not forget that JNJ isn't just a one-trick pony in the pharmaceutical game.
With around 30% of its revenue from medical devices, we can't compare it apples-to-apples with other pharma companies. Peers in the medical devices sector typically trade at higher valuation multiples, so it's essential to keep that in mind when evaluating JNJ's price-to-free-cash-flow ratio.
Moreover, this mega-brand dominates both the pharmaceutical and consumer goods scenes. With fingers in many pies - pharma, med tech, and consumer goods - JNJ has made quite the name for itself.
Despite being a seasoned player, Johnson & Johnson (JNJ) still has some spring in its step; come year-end, the company will be shaking things up with a spin-off of its consumer segment into a new entity, Kenvue.
JNJ’s upcoming spin-off is about sharpening its focus on what matters - its pharma business. And for good reason - this is where the big bucks are made.
The healthcare giant’s immunology and cancer drugs are outperforming the rest of the pack, with two key players, Stelara and Tremfya, delivering some serious sales growth last year. Together, they raked in a cool $12.3 billion, proving that sometimes, less really is more.
JNJ’s pharma segment is crushing it. Darzalex, the multiple myeloma med, racked up an impressive $8 billion in sales, a 32% boost from the previous year. Meanwhile, prostate cancer drug Erleada wasn't far behind, with a 45.7% increase in sales to $1.9 billion.
All in all, JNJ's pharma segment hauled in a massive $52.5 billion in revenue in 2022. Not too shabby.
Looking deeper into its performance in fiscal 2022, JNJ reported a slight increase of 1.2% YoY in sales, reaching $94.9 billion, but currency effects had a negative impact. However, adjusted earnings per share increased by 3.6% YoY, with operational growth at 9.2%.
The "Consumer Health" segment reported a 0.5% decline in revenue, but adjusted operating growth was 3.6%.
The "Pharmaceuticals" segment, responsible for more than half of revenue, increased sales by 1.7% YoY to $52.6 billion, with operational growth at 6.7%.
The "MedTech" segment increased revenue by 1.4% YoY to $27.4 billion, with operational growth at 6.2%.
For fiscal 2023, Johnson & Johnson is expecting revenue growth of 4.5% to 5.5% and adjusted earnings per share growth of 3% to 5%.
Despite the positive reports, JNJ investors are still anxious about the future primarily because of the impending patent expirations of existing products. Unfortunately, the company is heading towards a patent cliff, as it faces the challenge of replacing revenue from products with expiring patents.
Stelara generated $9.7 billion in revenue in fiscal 2022 and will lose patent protection in 2023. Simponi, which generated $2.2 billion in revenue in fiscal 2022 and will lose patent protection in 2024, are two of the biggest concerns.
These two products account for 12.5% of the company's total revenue and 22.5% of the pharmaceutical segment revenue. Replacing these sales will not be an easy feat.
Additionally, in 2027, JNJ will lose patent protection for two other vital drugs - Xarelto and Imbruvica, which generated $2.5 billion and $3.8 billion in revenue in fiscal 2022.
To resolve these concerns, JNJ is putting its money where its mouth is regarding innovation. The company invested a whopping $14.6 billion in R&D in 2022 alone, and it looks like it's paying off. With plenty of promising drugs in the pipeline, JNJ is poised to continue its growth trajectory in the coming years.
When it comes to dividends, JNJ is royalty. With a 60-year track record of annual dividend increases, JNJ company has earned the coveted title of Dividend King.
JNJ boasts a healthy payout ratio of 41% and a juicy dividend yield of 2.8%, well above the S&P 500's average yield of 1.7%. The company's steady cash flow quickly covers these payouts, making it a solid choice for investors seeking reliable income.
While JNJ may be a top-notch investment option in the long run, the current market conditions make it a tad pricey. So, for now, just give it a spot on your watchlist and wait for the dip to go for a bargain. Remember, patience is not just a virtue but also a lucrative strategy in investing.
