Mad Hedge Biotech and Healthcare Letter
February 25, 2025
Fiat Lux
Featured Trade:
(WALL STREET'S MYOPIA IS YOUR OPPORTUNITY)
(REGN), (RHHBY), (AMGN), (AZN), (ABBV), (LLY)
Posts
While preparing my presentation for this week's Online Traders Conference, I came across a pattern that made me stop cold. You see, I've been gathering examples of how institutional investors quietly accumulate positions while retail traders are looking the other way.
And there it was, right in front of me - Regeneron Pharmaceuticals (REGN), displaying exactly the kind of setup I'll be warning traders about starting February 24.
You see, while everyone's been obsessing over the latest AI darlings, Regeneron has been quietly crushing it. Their Q4 revenue hit $3.79 billion, up 10.5% year-on-year.
But here's where it gets interesting - they beat consensus estimates by $43 million, and that's with their flagship eye drug Eylea taking a hit.
Speaking of Eylea, let's address the elephant in the room. Its sales dropped 11% to $1.19 billion, thanks to Roche's (RHHBY) Vabysmo muscling into their territory and Amgen's (AMGN) biosimilar crashing the party.
Four more biosimilars are waiting in the wings, held back only by patent disputes. Normally, this would send investors running for the hills.
But here's what the panic-sellers are missing.
Despite Eylea's challenges, Regeneron's non-GAAP EPS still climbed to $12.07, beating analyst expectations by 88 cents.
In fact, they've been playing jump rope with analyst estimates, leaping over them in 10 of the last 12 quarters. Yet their stock price has been doing its best impression of a sleeping cat - just lying there, barely moving.
As someone who's spent decades watching market cycles, I recognize this pattern.
We're in what technical analysts call an “accumulation phase.” While retail investors yawn and look elsewhere, institutional money is quietly building positions.
It's like watching a spring being compressed - boring until it isn't.
But here's what really got my attention: Regeneron just joined the dividend club. Starting March 20, they're paying $0.88 per quarter. Sure, the yield won't make income investors swoon, but that's not the point.
It reminds me of how AstraZeneca (AZN) played it - first, dominate growing markets, then gradually turn on the dividend spigot to attract the steady-money crowd.
They're also backing up the dividend with a $3 billion share buyback program.
With $9 billion in cash and short-term investments, they've got more dry powder than a Revolutionary War armory.
In Q4 alone, Regeneron spent $1.23 billion buying back shares - up 64.1% from last year.
And here's where it gets even more interesting. Their oncology franchise, led by Libtayo, is looking like a dark horse winner. Libtayo sales jumped 50.4% year-over-year to $367 million.
While that might not sound earth-shattering compared to cancer drug heavyweights like Merck's (MRK) Keytruda, Libtayo just pulled off something remarkable.
In their Phase 3 C-POST trial for high-risk skin cancer patients, Libtayo reduced death and disease recurrence risk by 68% compared to placebo.
Even better? Merck's competing trial for Keytruda in the same indication fell flat on its face. In this business, that's like watching your main competitor trip at the Olympic finals.
Looking ahead to 2029, I'm seeing revenue hitting $20.4 billion - think high single-digit growth each year. That would bring their price-to-sales ratio down from 5.12x to 3.53x.
Their non-GAAP EPS should hit $76.5, implying double-digit growth most years. With the stock currently trading at just 14.76x earnings - below most peers like AbbVie (19.06x) and Eli Lilly (64.96x).
On top of these, 2025 is packed with potential catalysts - clinical trial results and FDA decisions that could light a fire under the stock.
Analysts' average target is $929.37, suggesting about 38% upside. But in my experience, when you combine strong fundamentals, multiple growth drivers, and a market that's sleeping on the story, those targets often end up looking conservative.
Remember, the market loves nothing more than a comeback story.
With Regeneron, we might just be watching one unfold in slow motion. The question is: will you be holding shares when the spring finally releases?
For those who want to learn more about spotting these kinds of opportunities, I'll be diving deeper into institutional accumulation patterns at the Online Traders Conference running February 24 through March 1.
But don't wait for my presentation to take a serious look at Regeneron - the smart money isn't.
Mad Hedge Biotech and Healthcare Letter
January 23, 2025
Fiat Lux
Featured Trade:
(THE HARD TRUTH ABOUT THIS BIOTECH'S PIPELINE THAT WALL STREET DOESN'T GET)
(MRK), (AMGN), (AAPL)
Earlier this month, while reviewing my biotech holdings during a layover at Chicago O'Hare, I got an interesting call from a long-time reader.
He was panicking about Merck (MRK) after seeing it trading near its 52-week lows, convinced the pharmaceutical giant was headed for trouble.
"Have you seen what Medicare negotiations did to Januvia?" he asked, referencing the 79% price reduction. "And Keytruda's patent expires in 2028!"
Here's the hard truth about this biotech's pipeline that Wall Street doesn't get: while everyone's fixated on Keytruda's patent cliff, Merck has quietly tripled their late-stage pipeline in just over three years.
We're talking more than 20 unique assets in late-stage development, plus another 50 in early stages.
The last time I saw this kind of pipeline expansion was during the early days of Amgen (AMGN), which turned out pretty well for investors who saw past the obvious.
Actually, Merck's current "crisis" also reminds me of the time I bought Apple (AAPL) right after Steve Jobs announced the iPhone. Everyone worried about the risk, while I saw the opportunity.
Merck just posted Q3 2024 numbers that would make most CEOs envious: revenue up 7% year-over-year to $16.7 billion.
Keytruda, their cancer blockbuster, grew 21% to $7.4 billion. Even their Animal Health division jumped 11%. These aren't the numbers of a company in trouble.
Speaking of investors, they've enjoyed a 126% total return over the past decade with Merck, despite more ups and downs than my last flight through turbulence.
The company's 5-year average Return on Equity sits at 25% (recently climbing to 28%), with Return on Invested Capital steady at 20%.
With a Weighted Average Cost of Capital around 8%, there's plenty of room for growth.
Yesterday, I was discussing these numbers with a former FDA commissioner (who shall remain nameless) over coffee.
He pointed out something fascinating: Merck's R&D spending is increasing alongside revenue growth. That's like a tech company doubling down on product development – exactly what you want to see in pharma.
For dividend hunters (and I know many of you are), Merck offers a 3.3% yield with a 7% five-year dividend growth rate.
The payout looks sustainable too, consuming 68% of earnings and 55% of free cash flow. It's not going to make you quit your day job, but it's better than the 1.4% you'll get from the S&P 500.
Looking at valuation, Merck trades at a P/E of 20.5, below its historical average of 22.3.
My own growth projections suggest a 13% annual rate going forward. Optimistic? Perhaps. But with their robust pipeline and near-term analyst projections, I've seen crazier things work out.
The company just announced a $15 billion share repurchase program, including plans to spend $7.5 billion over the next 12 months. When management puts that kind of money where their mouth is, I tend to pay attention.
Yes, Keytruda's patent cliff in 2028 is real. But so is Merck's late-stage pipeline of antibody-drug conjugates (ADCs) – think smart missiles in the war against cancer.
And unlike some biotechs, Merck has the financial muscle to weather any storm, with decreasing net debt and a solid cash position.
Remember what I always say about buying straw hats in winter? Merck right now is like finding a premium pharma stock in the discount bin.
Just like my friend who panicked and sold everything after the November 8 election (and missed the subsequent rally), sometimes the best opportunities come disguised as problems.
As for me, I'm looking at Merck as a potential long-term hold. The company's fundamentals remind me of other great turnaround stories I've traded successfully over the years.
With the healthcare sector currently out of favor and Merck trading near its 52-week lows, this might be one of those moments we look back on and wish we'd bought more.
And speaking of patents, maybe I should patent my strategy: “Buy great companies when everyone else is afraid.” Though I suspect Warren Buffett already beat me to that one.
Mad Hedge Biotech and Healthcare Letter
January 21, 2025
Fiat Lux
Featured Trade:
(THE ONLY TIME FIGHTING YOURSELF MAKES MONEY)
(ABBV), (AMGN), (SDZNY), (CHRS), (PFE), (JNJ), (ALVO), (TEVA), (SNY), (BMY)
If I had a dollar for every time someone told me the biotech sector was overvalued, I'd have enough to fund my own drug development program.
Yet here we are, watching the global immunology market rocket from $55 billion to $166 billion in just a decade, with the sector projected to hit $192 billion by 2028.
If you're wondering why big pharma keeps pouring billions into autoimmune research - and believe me, this question came up in every meeting last week - the answer is simple: we've barely scratched the surface.
Despite thousands of PhDs burning midnight oil in labs from Boston to Basel, we still don't have effective treatments for systemic lupus erythematosus, scleroderma, or even something as visible as vitiligo.
Want to see where the smart money is going? Look no further than the biosimilar stampede into AbbVie's (ABBV) Humira territory.
Like bargain hunters at a Black Friday sale, everyone's getting in line: Amgen (AMGN) with Amjevita, Sandoz (SDZNY) with Hyrimoz, Coherus (CHRS) with Yusimry, and Pfizer (PFE) with Abrilada.
And just when you thought the party was over, here comes Amgen's Wezlana challenging Johnson & Johnson's (JNJ) Stelara, followed by Alvotech (ALVO) and Teva's (TEVA) Selarsdi.
But here's where it gets interesting. I've identified four companies that are trading at valuations that would make Benjamin Graham smile.
First up is AbbVie, trading at 15.96x earnings (11.9% below sector median), with projected EPS growth to $15.21 by 2027.
Their dynamic duo of Rinvoq and Skyrizi is performing like a biotech version of Batman and Robin.
Rinvoq sales hit $1.61 billion in Q3 2024, up 45.4% year-over-year, while Skyrizi broke $3 billion, thanks to its mid-2024 FDA approval for ulcerative colitis.
As for Sanofi (SNY)? Now we're talking value. At 11.7x earnings - 35.39% below sector median and 1.3% below its 5-year average - it's like finding a Ferrari priced like a Fiat.
Their star player Dupixent raked in 3.48 billion euros in Q3 2024, up 22.1% year-over-year and 5.2% quarter-over-quarter.
Then, there’s Teva Pharmaceuticals. Trading at a P/E ratio of 7.88x - that's 56.5% below the sector median - while projecting non-GAAP EPS growth to $3.6 by 2028.
But here's the kicker: their clinical trial data reads like a biotech investor's dream. Their new drug duvakitug achieved 47.8% clinical remission in ulcerative colitis patients versus 20.45% for placebo (p=0.003).
In Crohn's disease? Even better - 47.8% endoscopic response compared to 13% for placebo (p<0.001).
Finally, there's Bristol-Myers Squibb (BMY). Yes, it's trading at 47.5x earnings (162.1% above sector median), but here's where patience pays off - their P/E ratio is expected to drop to 8.82x by 2027.
Meanwhile, Zeposia sales jumped 19.5% year-over-year to $147 million in Q3 2024, while Sotyktu showed consecutive quarterly growth.
The cherry on top? These companies are paying you to wait. We're talking dividend yields from 3.8% to 4.41% - try getting that from your savings account.
Looking at these numbers reminds me of the tech sector in the late 1990s, but with one crucial difference - these companies are actually making money, lots of it.
They generate significant cash flow and have strong balance sheets, unlike many of the high-flying tech companies of the dot-com era that were burning through cash with no clear path to profitability.
While others are chasing the next meme stock or crypto moonshot, smart investors are quietly positioning themselves in companies that are literally changing the face of medicine.
Remember, buying umbrellas in the summer heat has always been my style.
Right now, the immunology sector is experiencing its own kind of summer, and these four stocks are your umbrellas.
The forecast? Growth storms ahead.
Mad Hedge Biotech and Healthcare Letter
December 10, 2024
Fiat Lux
Featured Trade:
(THE INSURANCE COMPANY ALWAYS RINGS TWICE)
(UNH), (CI), (CVS), (HUM), (AMGN), (BIIB), (GILD)
Got an interesting call yesterday from an old college buddy - let's call him Bob. We go way back to our UCLA days, before I headed to Tokyo and he went into tech.
He was fuming because UnitedHealth (UNH) just denied his family's third claim this year, something about an "experimental treatment" for his daughter's rare condition.
Coming from a guy who just cashed out of his third startup, hearing him rant about insurance bureaucracy was pretty rich.
Still, his situation got me thinking. After hanging up, I dug into what's really happening with insurance stocks, and the picture isn't pretty.
UnitedHealth Group, our nation's biggest health insurer, just had its worst week in years - dropping 9.5% after one of their executives was tragically murdered, which sparked an unexpected spotlight on their claims practices.
Cigna (CI) and CVS Health (CVS) caught the same downdraft, falling 4.5% and 5% respectively.
But here's what really caught my attention: UnitedHealthcare's denial rate for Medicare Advantage claims has more than doubled since 2020, hitting 22.7% last year.
Interestingly, this spike happened right as they rolled out new automation processes. Funny how that works, isn't it?
Experian Health's latest report shows this isn't isolated - 73% of healthcare providers are reporting more denials than ever, with processing times stretching longer and longer.
The cost of this trend? The Council for Affordable Quality Healthcare estimates $31 billion annually in administrative expenses alone.
Meanwhile, biotech companies find themselves in an awkward position. They're developing treatments that cost more than a house in the Hamptons and then need these very same insurers to make them accessible.
Amgen's (AMGN) been crushing it with their human therapeutics portfolio, pulling in $28.2 billion in revenue last year.
Biogen's (BIIB) making serious moves in neurological treatments, though their path has been rockier - just ask anyone who followed the Aduhelm saga.
Gilead Sciences (GILD), our antiviral champions, have managed to stay above the fray, partly because their HIV and hepatitis treatments have become standard of care.
But even these giants must wonder:: as insurers tighten their prior authorization screws, what happens to patient access?
These biotechs spend billions developing breakthrough treatments - Amgen alone dropped $4.4 billion on R&D last year - only to face the insurance industry's equivalent of "computer says no."
The irony isn't lost on anyone: insurers need innovative treatments to justify their premiums, while biotech needs insurance coverage to justify their R&D spending.
It's a delicate dance that's worked reasonably well so far, but these rising denial rates have everyone on edge. Just last quarter, we saw several biotech earnings calls dominated by questions about insurance coverage rather than clinical trials.
So what should we do? Well, I say UnitedHealth and Cigna are "holds" right now - the current turbulence needs time to settle.
CVS Health is showing broader operational challenges that suggest it might be wise to consider selling. But Humana (HUM), with their strong Medicare Advantage presence, looks promising.
On the biotech side, Gilead looks like an excellent stock to buy on the dip. Its leadership in antivirals and solid pipeline make it compelling.
Amgen and Biogen? Keep them on your watch list while they try to find their footing in this situation.
Bob texted me again this morning - turns out he's filing an appeal with help from one of Silicon Valley's top healthcare attorneys. Typical Bob, bringing a cannon to a knife fight.
But maybe that's exactly what this sector needs right now - some heavy artillery to shake up the status quo.
For those willing to dodge the crossfire, there might just be some spoils of war worth picking up. After all, fortune favors the bold—and sometimes, the heavily armed.
Mad Hedge Biotech and Healthcare Letter
November 26, 2024
Fiat Lux
Featured Trade:
(NO MORE EATING AT YOU)
(PFE), (LLY), (NVO), (AMGN), (RYTM), (ALT)
Who knew the devil could lurk in an Excel spreadsheet? More specifically, in a hidden tab that, until recently, was minding its own business like a shy teenager at a school dance.
That is, until some eagle-eyed analyst at Cantor Fitzgerald decided to right-click their way into a $12 billion nightmare for Amgen.
(If you're wondering how to find these hidden tabs yourself, just right-click on any visible tab in Excel. Though after this debacle, pharmaceutical companies might start password-protecting their spreadsheets like they're nuclear launch codes.)
The data in question concerns MariTide, Amgen's hopeful contestant in the "help-America-lose-weight" sweepstakes.
The hidden tabs revealed what the published paper in Nature Metabolism conspicuously didn't mention: bone density scans that would make an osteoporologist reach for their stress ball.
Patients receiving the 420-milligram dose saw their bone density drop by about 4% over 12 weeks - the kind of number that sends stock traders reaching for their sell buttons faster than you can say "osteoporosis."
Speaking of selling, this discovery sent Amgen's stock tumbling 7%, which in the biotech world is like watching $12 billion vanish faster than free cookies at a Weight Watchers meeting.
Amgen, doing what pharmaceutical companies do best when faced with uncomfortable data, assured everyone that their Phase 1 study doesn't suggest any bone safety concerns. (One imagines their PR team working overtime, possibly sustained by the same stress-eating habits their drug aims to curb.)
Now, let's talk about the increasingly crowded room of companies trying to help elephants become gazelles.
Novo Nordisk (NVO), the current crown prince of weight-loss drugs, is sitting pretty with Wegovy raking in 17.3 billion Danish kroner (about $2.5 billion) in just one quarter.
They're so confident they're throwing $11 billion at Catalent faster than you can say "production scale-up." That's enough kroner to buy every Danish pastry in Copenhagen, though that might defeat the purpose.
Not to be outdone, Eli Lilly's (LLY) Zepbound is showing off with weight loss results that would make Jenny Craig jealous - we're talking 21% body weight reduction.
Together with Novo Nordisk, they're expected to dominate 80% of the market, leaving other companies to fight over the crumbs like desperate dieters at a birthday party.
Still, the supporting cast is equally fascinating.
Pfizer's (PFE) danuglipron and Structure Therapeutics' (GPCR) GSBR-1290 are trying to turn these injectable drugs into pills, because apparently not everyone enjoys playing pin cushion.
Viking Therapeutics (VKTX) is getting creative with VK2735, a dual GLP-1 and glucagon receptor agonist, which is pharmaceutical speak for "two mechanisms of action are better than one."
Meanwhile, AstraZeneca's (AZN) AZD5004 is trying to join the party, though their early Phase I results are about as impressive as a rice cake at a dessert buffet.
Now, let’s take a look at the numbers. The global anti-obesity drugs market is expected to balloon from $6.15 billion in 2024 to an eye-watering $37.94 billion by 2032.
But, that seems to be just the conservative estimate. Some analysts are betting this market could hit $150 billion by the early 2030s.
So, what’s the smart move here?
For those watching this space (while probably patting their own midsections thoughtfully), the message is clear: This market is hotter than a freshman chemistry experiment gone wrong.
But as Amgen's Excel adventure shows, sometimes the devil really is in the details - or in this case, in Tab 9, hidden away like a chocolate bar in a dieter's sock drawer.
And like my old friend Deng Xiaoping used to say, sometimes you have to cross the river by feeling the stones.
Today, those stones are telling me this: hold off on buying Amgen - that bone density data isn't just a minor setback, it's a potential deal-breaker.
If you really want to take part in the action, opt for Novo Nordisk and Eli Lilly for their proven ability to execute and dominate.
And for those of you who, like me, enjoy a bit of calculated risk-taking, consider a speculative position in Structure Therapeutics and Viking Therapeutics.
Before you get too excited, though, I'd suggest limiting these speculative plays to no more than 5% of your portfolio each - promising early-stage biotechs can deliver spectacular returns, but they can also crash faster than a poorly maintained MIG-25.
