Mad Hedge Biotech and Healthcare Letter
December 28, 2021
Fiat Lux
Featured Trade:
(ANOTHER VICTIM OF OVERBLOWN FEARS)
(BMY), (PFE), (BNTX), (MRNA), (MRK)
Posts
Inflation is one of the primary concerns of investors these days, and rightly so.
Just last month, the consumer price index (CPI) climbed at an astonishing 6.8% year over year — the highest increase ever recorded in almost four decades.
In response, many investors have decided to focus their attention on stocks that protect their portfolios from inflationary pressures.
While some are looking at cryptocurrencies and, of course, gold as their preferred hedges against inflation, I don’t think it’s wise to ignore dividend stocks.
History dictates that stocks that offer above-average dividend yields have been known to surpass expectations during the difficult periods of high inflation.
An excellent example of this is Bristol Myers Squibb (BMY).
BMY is one of the biggest names in the healthcare sector, with a market capitalization of over $125 billion.
Unfortunately, BMY’s shares have experienced a 9% fall in 2021 to date.
The company has also been underperforming compared to the broad market, which went up by more than 20% during the same period.
While this is unfavorable for investors who bought BMY in 2020, the current situation offers an attractive entry point for those looking to inject new money here.
Looking at the reasons for BMY’s relatively weak performance, one key point to consider is that the company is a major player in an industry that is not particularly sought after at the moment.
This year, most investors poured money on stocks that would benefit firsthand from the reopening efforts of the economy.
Consequently, the dependable, non-cyclical healthcare and biotechnology sectors have been generally disregarded—barring the COVID-19 vaccine stocks like Pfizer (PFE), BioNTech (BNTX), and Moderna (MRNA).
Apart from that, some company-specific issues plagued BMY as it faces impending patent expirations on a few key products in the following years.
Oral cancer drug Revlimid, which generated $12.1 billion in 2020, is expected to face patent loss by 2025.
Meanwhile, blood clot treatment Eliquis, which raked in $9.2 billion last year, will be dealing with the same issue by 2027.
This will be followed by lung cancer medication Opdivo, which recorded $7 billion in sales, in 2028.
Taken together, these key drugs generate roughly $28 billion in annual revenue, which comprises more than half of the company’s $46 billion revenue per year.
While this can be a cause of concern, it doesn’t necessarily mean that these products will generate zero revenues for the company when their patents expire.
In fact, a previous study revealed that top-selling drugs typically lose about 50% of their sales in the 5 years after their patent expiration.
That means that BMY can still expect well above $10 billion each year from these three key drugs through the 2020s.
Moreover, worries over the patent expirations appear to be overblown, considering that these will happen several years from now. Considering that BMY has an extensive list of growth assets and a robust pipeline, I think this situation has been more than accounted for.
The fear of patent expirations is well-founded, though. If companies fail to navigate a patent cliff, it can have serious ramifications for a company
However, a company that’s well-diversified and wisely invests in lucrative growth assets in advance of these impending patent expirations—even the losses of exclusivity of top-selling drugs—can handle the situation easily.
So far, BMY has shown three clear ways in terms of handling patent losses. One is expanding the indications of their newer drugs. Another is launching new products to the market. The third is acquiring new assets through beneficial deals.
The first cluster of drugs that BMY has brought to market and is growing rapidly includes anemia medication Reblozyl, which recorded an impressive 67% increase in its revenue in the third quarter of 2021
This translated to $160 million, or over $600 million in annual sales.
Recently, the FDA has accepted BMY’s collaboration with Merck (MRK) to use Reblozyl as part of the treatment for beta-thalassemia. The approval for this work is anticipated to be released by the second quarter of 2022.
Following this growth rate, it wouldn’t be a surprise to discover in the future that Reblozyl has transformed into a blockbuster drug with yearly sales reaching over $1 billion.
Another potential blockbuster is multiple sclerosis treatment Zeposia, which has boosted its sales 20x since 2020.
While it started from a low base of $2 million, this drug has the ability to reach peak sales of $5 billion annually.
Aside from these, BMY has a deep pipeline filled with drugs holding blockbuster potential in the coming years.
Meanwhile, BMY just hiked its dividend by 10%, pushing its dividend yield to 3.5%—easily doubling what investors can receive from the broad market, with the S&P yielding 1.3%.
In terms of its acquisitions, BMY has been on a buying spree lately. The most massive deal following its $75 billion acquisition of Cologne is its $13 billion deal with MyoKardia.
Simply put, BMY is cheap. At current prices, this healthcare company is trading at only 7.5x this year’s earnings, while the estimates for 2022 look to be even lower.
However, BMY is an impressive company with a remarkable portfolio of assets.
Moreover, the impending patent losses of its top-performing drugs have already been dealt with thanks to the company's solid revenue replacement strategy.
Hence, this issue should no longer sound any alarm bells.
Overall, BMY is an attractive option for the long-term and buy-and-hold type of investors, particularly those aiming for a sizable and steadily growing dividend stream.
Mad Hedge Biotech and Healthcare Letter
December 14, 2021
Fiat Lux
Featured Trade:
(FROM AN UNKNOWN mRNA PIONEER TO BIG PHARMA PLAYER)
(BNTX), (PFE), (MRNA), (AZN), (JNJ), (SNY), (CVAC), (REGN), (MRK), (BMY)
Almost everything that could go right has gone right for BioNTech so far.
Its COVID-19 vaccine with Pfizer (PFE), Comirnaty, has been breaking records left and right, and more and more approvals in other countries are piling up.
Needless to say, BioNTech has transformed into one of the most profitable biotechnology companies with a rapidly growing cash stockpile.
Now, the company is up for another challenge: the Omicron variant.
Although BioNTech and even Moderna (MRNA) insist that they offer more than COVID vaccines, the reality is that their pipelines still have not reached the stage where they can generate as much revenue.
Hence, it is no surprise that their share prices have climbed since discovering the Omicron strain.
The emergence of this new mutation sparked another competition among COVID-19 vaccine developers, specifically in the mRNA segment dominated by BioNTech and Moderna.
Since news broke about the Omicron variant, these companies have been racing to come up with the most effective vaccine against it.
BioNTech holds a competitive advantage between the two since the company reportedly has been working with Pfizer on a vaccine candidate for this type of situation months before the discovery.
In comparison, Moderna has yet to determine where their candidate stands in terms of fighting off the new variant.
The same can be said about other vaccine developers like AstraZeneca (AZN) and Johnson & Johnson (JNJ).
What happens to their efforts if the Omicron variant turns out to be less dangerous and possibly closer to the common flu?
In this case, the vaccine developers would most likely boost the prices of their products 10-fold because then they’d end up with fewer orders to private customers instead of sealing agreements with governments.
The flu vaccine market is worth roughly $8 billion annually, while the COVID vaccination market is projected to bring in approximately $25 billion each year in the post-pandemic period.
Either way, this situation could offer speculative investors a solid stream of price catalysts.
The uncertainty will result in a higher valuation for BioNTech in the short term because the company has already proven its ability to deliver an effective vaccine within a short period.
Prior to its COVID work, BioNTech was actually known as one of the “Big 3” and a pioneer in the mRNA world. At that time, it shared this title with Moderna and CureVac (CVAC).
Since then, the segment has grown, and new challengers have joined the mRNA industry.
Some of the promising ones include China’s Abogen Biosciences, which managed to raise over $700 million in funding for its own mRNA COVID vaccine, and of course, Sanofi (SNY), which splurged in a $3.2 billion acquisition of Translate Bio to access the latter’s mRNA pipeline for cystic fibrosis and several genetic conditions.
Meanwhile, BioNTech has retained its focus on cancer, with 16 of the 18 programs targeting oncology in its Phase 1 pipeline.
If BioNTech successfully develops an mRNA treatment for cancer, they’ll be breaking into a massive and lucrative market.
By 2024, the market for cancer treatments is projected to grow and reach over $200 billion.
Apart from its work on oncology therapies, BioNTech is also known for its infectious disease pipeline, including vaccines for HIV, malaria, and tuberculosis. It’s also collaborating with Pfizer on 2 influenza vaccines.
By the end of 2021, BioNTech is anticipated to release 5 updates on its vaccine trials involving solid tumors that target head and neck cancer, melanoma, and colorectal cancer.
Other than Pfizer, the company has been working with Regeneron (REGN), Genentech, Merck (MRK), Bristol Myers Squibb (BMY), and Sanofi.
In terms of performance so far, BioNTech has raked in $15.2 billion in revenues for the first three quarters of 2021, with full-year earnings expected to reach $18.1 to $19.2 billion.
Overall, I view BioNTech as a long-term investment.
While many still see it as a pure COVID play, this German company is increasingly starting to act more and more like the Big Pharma organizations.
It’s realistically expecting that its profit-generating asset, Comirnaty, may not have a very long shelf life. Therefore, it understands the necessity to come up with new products to sustain its current valuation over the longer term.
Mad Hedge Bitcoin Letter
October 7, 2021
Fiat Lux
Featured Trade:
(A RARE BLUE-CHIP STOCK IN DEEP VALUE TERRITORY)
(MRK), (NVAX), (MRNA), (BMY), (XLRN)
Merck (MRK) is facing a huge problem. In roughly seven years, its top-selling megablockbuster cancer treatment Keytruda is set to lose its patent exclusivity.
This is a major concern for the company, considering that Keytruda comprised over a third of the their revenue in 2020.
This impending “doom” appears to have scared off investors, as Merck stock has been trading at at least 12 times the earnings expected within the next 12 months.
However, it looks like Merck is slowly gearing up to reveal the solutions it came up with to address this major problem.
The first sign of a turnaround is Merck’s recent news about releasing an oral antiviral pill for COVID-19.
Immediately after the release of the positive data, the biopharmaceutical giant’s $206 billion market capitalization climbed by $16 billion, showing off an 8.4% in its share price.
In comparison, other COVID-19 vaccine stocks experienced significant selloffs. Novavax (NVAX) fell by 12%, while Moderna (MRNA) slipped by 11%.
Merck’s COVID-19 pill, called Molnupiravir, is expected to be a cheaper, safer, and more effective alternative to the current antiviral treatment available today, which is Remdesivir from Gilead Sciences (GILD).
Molnupiravir has been so promising that the US government already sealed a $1.2 billion contract with Merck to get 1.7 million doses of the drug months before the announcement.
While there’s still no final word on the pricing, the US government’s deal places the drug at $700 per dose.
Given its manufacturing capacity, Merck disclosed that it could easily produce six times that order, with the company targeting roughly 10 million courses by the end of 2021.
Using these numbers, it’s easy to see how Merck can generate $7 billion in sales of Molnupiravir alone this fourth quarter.
Although Molnupiravir’s sales won’t be a game-changer for Merck in the same way Moderna’s COVID-19 vaccine candidate changed its landscape, the $7 billion revenue would still offer a significant boost.
Another 10 million doses of Molnupiravir are slated for release by 2022, indicating higher sales for Merck in the coming months.
Aside from working as an antiviral pill, Molnupiravir is also believed to be effective against other known viruses like influenza.
Considering the surging demand for travel these days, there’s a huge possibility that Merck’s oral drug will be handed out like candy canes as a potential preventive measure.
After all, the efficacy of the COVID-19 vaccines, especially for those who got jabbed earlier than most, would start to wane at this point.
Taking into account the demand for this pill worldwide, it’s realistic to assume that Molnupiravir can generate $35 billion to $70 billion in revenue for Merck.
Even before the news about Molnupiravir broke, Merck already raised its revenue guidance for 2021 to somewhere between $46.4 billion to $47.4 billion, signaling 12% to 14% growth.
Aside from its COVID-19 drug, Merck has been busy expanding its portfolio that already covers oncology, hepatitis, and HPV.
One of its latest moves to achieve this goal is its $10.8 billion acquisition of Acceleron Pharma (XLRN)—a deal Merck snagged right under the nose of the strongest contender in the race, Bristol-Myers Squibb (BMY).
Merck’s acquisition of Acceleron will boost the cardiovascular pipeline of the company, including treatments for life-threatening blood vessel conditions.
These are on top of its growing vaccine business, which still has four queued for Phase 2 clinical trials and another for regulatory review.
These candidates effectively make Merck a critical player in the rapidly expanding vaccine market—a segment that’s projected to rise from $42 billion in 2020 to $74 billion by 2028.
Overall, Merck is one of the unparalleled blue-chip stocks trading in deep-value territory these days.
It’s hitting all cylinders, showing off a stable expansion of its key franchises and an impressive balance sheet to fund its R&D plans.
Merck has become the poster child of a remarkable stock valued at a reasonable price.
Mad Hedge Biotech & Healthcare Letter
September 28, 2021
Fiat Lux
FEATURED TRADE:
(A RINSE-WASH-REPEAT PLAY FOR OPPORTUNISTIC INVESTORS)
(EXEL), (BMY), (RHHBY), (VRTX), (TDOC)
No matter the short-term consequences of events in the past months, what remains constant is the stock market’s ability to create wealth over the long term.
Each crash or correction that occurred in history was eventually offset by a strong bull market rally.
That’s why it pays to be prepared for when things start to turn around.
Today, I’d like to take a look at another name in the oncology sector that’s poised to skyrocket in the coming years: Exelixis (EXEL).
Here’s a quick overview of Exelixis.
Exelixis is a California-based biotech that’s focused on developing treatments for hard-to-treat types of cancer. To date, the company has three FDA-approved treatments in the market.
The stock has been trading within the $20 and $22 range and sports a market capitalization of roughly $7 billion.
For most of its existence, Exelixis’ growth story centers around its blockbuster therapy, called Cabometyx.
In the second quarter earnings report, Cabometyx’s sales went up 59% compared to its 2020 performance to contribute $275.6 million.
This comprised the bulk of Exelixis’ total revenue worth $385.2 million, which climbed an impressive 48.4% year over year.
Cabometyx is the leading treatment for first- and second-line treatment for advanced renal cell carcinoma (RCC) and advanced hepatocellular carcinoma.
Together, both indications could generate over $1 in annual sales for Cabometyx in 2021 and 2022.
To put things in perspective, the entire Cabometyx franchise was only worth about $742 million in 2020.
What makes Cabometyx an exciting revenue stream is its label-expansion capacity.
Apart from the two approved indications, Exelixis is also conducting six more clinical trials for this drug either as a monotherapy or a combination treatment.
So far, Cabometyx has proven to be effective as a combination therapy with Bristol-Myers Squibb’s (BMY) Opdivo. This additional approval has allowed Exelixis to seize an even bigger share of the RCC market today.
Considering the label-expansion opportunities for Cabometyx, this treatment is projected to become a multi-billion-dollar drug soon.
Given the solid performance of its products and successful collaborations, Exelixis has also become a cash cow.
The company estimates that it would conclude 2021 with roughly $1.6 billion to $1.7 billion in cash and investments—an amount that comprises over 20% of its market capitalization.
With this money, the company can comfortably pursue acquisitions and even strengthen its internal R&D engine.
However, not everything has been smooth sailing for Exelixis in the past months.
One of the major factors that pulled the stock down by a whopping 20% is the unimpressive results from its liver cancer clinical trial with Roche (RHHBY) last June.
However, I think the market overreacted to this piece of negative news.
If anything, Exelixis has already turned the situation around.
Unfazed by its unexpected flop with Roche, Exelixis is again pursuing a difficult-to-treat condition: prostate cancer.
The difference this time is that the company appears to have more confidence in the efficacy of its famed Cabometyx as a treatment for the condition—so much so that they intend to apply for FDA feedback in the high-risk group and possibly even an accelerated approval.
It also celebrated a recent win with the approval of Cabometyx’s label expansion to cover 12 years and older—an approval granted way ahead of their December 4 schedule.
Now, Cabometyx can also be prescribed to treat DTC, which is the most common kind of thyroid cancer in the United States.
More than that, Exelixis is the first to provide a standard treatment option to these patients, making the company a first mover in this segment.
Looking at the history of first movers, such as Vertex (VRTX) in the cystic fibrosis sector and Teladoc (TDOC) in the telehealth space, Exelixis could very well be on its way into becoming a functioning monopoly.
In terms of its pipeline, Exelixis has more than 100 studies going through different stages. These cover diverse indications including gastrointestinal cancers, neuroendocrine tumors, and lung cancer.
While Exelixis has a balance sheet akin to Fort Knox and a remarkable revenue growth, its shares remain range-bound in the past couple of years.
Nonetheless, it has continued to be an impressive “rinse-wash-repeat” covered call play during the same period and is considered a dividend stock with double-digit yields.
Moreover, Exelixis has been consistently ramping up revenue growth in the past years.
The biotech’s big cash balance along with its proven profitability indicate a minimal possibility of dilution.
Considering its price-to-earnings-growth ratio of almost 1, this company is the picture of an ideal balance of double-digit sales growth complemented with great value.
Simply put, it’s a great opportunity for long-term investors.
More importantly, its recent stock-price meltdown makes it an ideal addition to the portfolio of opportunistic investors.
Mad Hedge Biotech & Healthcare Letter
September 7, 2021
Fiat Lux
FEATURED TRADE:
(A LONG-TERM STOCK FOR PATIENT INVESTORS)
(REGN), (RHHBY), (BAYN), (SNY), (MRK), (BMY), (NTLA)
While August ushered in the end of the “dog days of summer,” with temperatures generally at their highest throughout the US, some stocks might be just starting to get warmed up this September.
This is particularly true in the biotechnology industry.
Considering that the broad market indices are reaching historic highs, the biotechnology sector, caused by its relatively low valuation, is deemed one of the appealing targets for investors who truly understand the essence of the industry and can manage the potential risks associated with it.
While not all biotechnology companies are attractive opportunities, some are great long-term investments.
One of them is Regeneron (REGN).
In fact, Regeneron is the manufacturer of a treatment projected to become the top-selling drug globally by 2030.
Annual sales of the moneymaking drug, autoimmune diseases’ medication Dupixent, could hit $21 billion by the start of the next decade—an almost fourfold jump from its current sales estimate of $5.6 billion per annum.
The projection came following Regeneron’s announcement that Dupixent can also be used to treat atopic dermatitis among children aged 6 months to 5 years old.
This makes Dupixent the first-ever biologic treatment to release positive results for that population.
Evidently, the breadth of Dupixent’s indications, complemented by the long-established safety profile of the drug, contribute to its long-term success—an achievement that’s expected to multiply and be carried over to the next decade.
While the next decade is clearly exciting for Regeneron, the company is actually performing well these days.
So far, Regeneron shares are up by roughly 40% year to date—a record-breaking rise not only for the company but also in the biotech sector.
Regeneron’s revenue skyrocketed by 163% year-over-year in the second quarter, pushing its earnings per share to leap 260% higher.
Apart from Dupixent, another catalyst for Regeneron’s impressive gains is its COVID-19 cocktail: REGEN-COV.
This treatment, albeit controversial, is anticipated to make Regeneron and its partner, Roche (RHHBY), a lot of money in the following months, especially with the delta variant wreaking havoc in the world.
Moreover, sales for all six of Regeneron’s highest-selling products, such as its eye disease drug Eylea, which it developed with Bayer (BAYN), immunology drug Kevzara, which is a product of its collaboration with Sanofi (SNY), lung cancer treatment Libtayo, and cholesterol drug Praluent, have been consistently growing by double-digit percentages.
Apart from these current treatments displaying solid sales momentum, the company also has a loaded pipeline that can easily boost Regeneron’s revenue streams in the future.
In terms of the new products under development, Regeneron has partnered with Intellia Therapeutics (NTLA), one of the leaders in the CRISPR-Cas9 gene-editing sector, to come up with next-generation treatments.
Aside from developing new products, Regeneron is expanding the indications of its top-selling drugs. Just like its efforts with Dupixent, the company is also working on expanding Libtayo’s indications.
So far, Regeneron has been working to turn Libtayo into a go-to treatment for skin cancer.
This effort could open up new avenues for Regeneron, as at least 9,000 cases of skin cancer are recorded in the US annually.
Of these, approximately 3,200 fall under the category that the company is targeting for Libtayo’s expansion.
This is a strategic move if Regeneron has any hope to dethrone the most dominant players in this competitive immunology market: Merck’s (MRK) Keytruda and Bristol-Myers Squibb’s (BMY) Opdivo.
Looking at the average net price of Libtayo, which is at $130,000 per year, the expected sales for this drug could grow to $400 million by 2026 in the US alone and roughly $700 million worldwide—and these are only for the approved indications of the drug.
In addition to its current applications, Regeneron is also working to gain approval for Libtayo to be used for cervical cancer.
Overall, Regeneron is an excellent investment for patient buy-and-hold investors. Its current portfolio of products is performing well, while its pipeline programs and partnerships offer promising growth potential.
