Mad Hedge Biotech & Healthcare Letter
June 11, 2020
Fiat Lux
Featured Trade:
(THE BIOTECH MERGER BOOM ACCELERATES)
(AZN), (GILD), (BMY), (ABBV), (AGN), (TAK), (CI), (SNY), (JNJ), (UNH), (RHHBY), (LLY)
Posts
Nothing can ever be absolutely shocking in the biotechnology and healthcare world.
I’ll admit though that the reports on AstraZeneca’s (AZN) interest in acquiring Gilead Sciences (GILD) surprised me.
The two companies touched base last month on a potential acquisition deal.
If this rumor turns into a reality, then we’re looking at what could be the biggest healthcare deal to date.
That’s saying something considering the massive mergers we’ve seen in the past years.
So far, the biggest biotechnology and healthcare deal is the $87.6 billion acquisition of Celgene (CELG) by Bristol-Myers Squibb (BMY) in 2019.
In the same year, AbbVie (ABBV) acquired Allergan (AGN) for a whopping $83.8 billion, making it the third biggest deal in the healthcare sector to date.
The year 2018 paved the way for two more massive deals in the form of Takeda’s (TAK) $81 billion acquisition of Shire, which ranks fourth overall, and Cigna’s (CI) $68.4 billion deal with Express Scripts (ESRX) in seventh place.
Fifth on the list is by Sanofi’s (SNY) $73.5 billion deal with Aventis in 2004.
Although it has been two decades since it happened, the $72.5 billion merger of Glaxo and SmithKline Beecham in 2000 still counts as one of the biggest deals in the industry. This agreement gave birth to GlaxoSmithKline (GSK).
Prior to Bristol-Myers Squibb and Celgene deal, it was Pfizer’s (PFE) $87.3 billion acquisition of Warner-Lambert in 1999 that topped the list.
AstraZeneca’s current market capitalization is roughly $140 billion. Meanwhile, Gilead Science’s market cap stands at approximately $96 billion.
With all these in mind, the AstraZeneca-Gilead Sciences merger is estimated to reach roughly $250 billion on top of the significant synergies expected throughout the years.
If these two health industry heavyweights merge, then their newly formed company would become the third biggest healthcare company in the world behind Johnson & Johnson (JNJ), which has a market cap of $384.55 billion, and UnitedHealth Group (UNH) with $293.85 billion.
Looking at this potential merger in the context of the coronavirus race, it’s safe to say that the combined efforts of AstraZeneca and Gilead would create a COVID-19 titan.
AstraZeneca’s partnership with the University of Oxford resulted in a COVID-19 vaccine candidate that was recently selected as one of the top five candidates worthy of US government support through Trump’s Operation Warp Speed program.
Meanwhile, Gilead’s antiviral medication Remdesivir has been constantly hailed as the standard of care for COVID-19 treatment since the pandemic broke.
The drug which was previously marketed as an HIV medication is now expected to generate $2 billion in sales as a COVID-19 treatment in 2020 alone.
In 2022, Remdesivir is estimated to rake in roughly $7.7 billion in sales. After that, the antiviral drug is projected to generate annual sales somewhere between $6 billion and $7 billion.
Although everything is hypothetical, let’s take a quick look at where each company stands at the moment outside their COVID-19 efforts.
AstraZeneca has been a consistent strong stock market performer throughout the years.
In the first quarter of 2020, sales improved in practically all of AstraZeneca’s territories. Although it has a diversified portfolio of drugs and a robust pipeline, the company’s hottest segment is its oncology business.
A good example of this is non-small cell lung cancer treatment Tagrisso, which is starting to live up to expectations as the next mega-blockbuster for AstraZeneca.
The cancer drug’s first quarter sales reached an impressive $982 million, showing off a 56% jump year over year.
This is promising considering that its competitors include Roche’s (RHHBY) Tarceva and Eli Lilly’s (LLY) Cyramza.
As for its 2020 revenue forecast, AstraZeneca is reported to rake in $25 billion, from which it will generate approximately $7.5 billion in operating profit.
On the other hand, Gilead also has an impressive portfolio that it can bring to the table.
In the first quarter of 2020, the company earned $5.47 billion in revenue compared to the $5.20 billion it generated in the same period last year.
Despite the decline in its hepatitis products from $790 million in the first quarter of 2019 to $729 in the same period of 2020, Gilead’s HIV line made up for the loss by bringing in over $4 billion in sales compared to the $3.6 billion it earned last year.
Not only that, some of Gilead’s other candidates are exciting.
For example, rheumatoid arthritis drug Filgotinib is expected to become another blockbuster and generate $5 billion in revenue annually.
Meanwhile, the anti-tumor treatment Magrolimab is estimated to rake in $3 billion in peak sales.
With the company’s older drugs still capable of generating strong revenue and its new candidates showing their potential for revenue expansion, Gilead can be assured of a continued cash flow well into the 2030s.
Regardless of whether this rumored mega-merger pushes through, both Gilead and AstraZeneca are attractive stocks worthy of their premium valuations.
Global Market Comments
March 5, 2020
Fiat Lux
SPECIAL MARKET BOTTOM ISSUE
Featured Trade:
(FRIDAY, APRIL 17 SAN FRANCISCO STRATEGY LUNCHEON),
(A LEAP PORTFOLIO TO BUY AT THE BOTTOM),
(TEN LONG-TERM BIOTECH & HEALTHCARE LEAPS TO BUY AT THE BOTTOM)
(UNH), (HUM), (AMGN), (BIIB), (JNJ), (PFE), (BMY)
Mad Hedge Biotech & Healthcare Letter
March 5, 2020
Fiat Lux
SPECIAL MARKET BOTTOM ISSUE
Featured Trade:
(TEN LONG TERM BIOTECH & HEALTH CARE LEAPS TO BUY AT THE BOTTOM)
(UNH), (HUM), (AMGN), (BIIB), (JNJ), (PFE), (BMY)
Joe Biden’s romp over Bernie Sanders in the Tuesday Democratic primary takes the lid off on the entire biotech and healthcare sector. Sanders has promised to dismantle the entire sector by promising Medicare for all and banning private coverage.
Sanders was also about to take a cudgel to drug pricing. While Sanders was leading in the primary, the threats hung over the industry like an 800-pound gorilla.
Yesterday, Sanders went down in flames. You can see this clearly in the price action of Humana (HUM), which rose a ballistic 14.44% yesterday. Similarly, United Health Group (UNH) was up a monster 10.72%.
It is safe to say that the bottom is in for biotech and healthcare stocks.
I am often asked how professional hedge fund traders invest their personal money. They all do the exact same thing. They wait for a market crash like we are seeing now and buy the longest-term LEAPs possible for their favorite names.
The reasons are very simple. The risk of a LEAP is limited. You can’t lose any more than you put in. At the same time, they permit enormous amounts of leverage.
Two years out, the longest maturity available for most LEAPs, allow plenty of time for the world and the markets to get back on an even keel. Recessions, pandemics, hurricanes, oil shocks, interest rate spikes, and political instability all go away within two years and pave the way for dramatic stock market recoveries.
You just put them away and forget about them. Wake me up when it is 2022.
I put together this portfolio using the following parameters. I set the strike prices just short of the all-time highs set two weeks ago. I went for the maximum maturity. I used today’s prices. And of course, I picked the names that have the best long-term outlooks.
If you buy LEAPs at these prices and the stocks all go to new highs, then you should earn an average 229% profit from an average stock price increase of only 11.4%. That is a return 20 times greater than the underlying stock gain. And let’s face it. None of the companies below are going to zero, ever. Now you know why hedge fund traders only employ this strategy.
There is a smarter way to execute this portfolio. Put in throw-away crash bids at levels so low they will only get executed on the next 1,000 point down day in the Dow Average.
You can play around with the strike prices all you want. Going farther out of the money increase your returns, but raises your risk as well. Going closer to the money reduces risk and returns, but the gains are still a multiple of the underlying stock.
Buying when everyone else is throwing up on their shoes is always the best policy. That way your return will rise to ten times the move in the underlying stock.
Amgen (AMGN) - January 21 2022 $235-$240 bull call spread at $3.68 delivers a 172% gain with the stock at $245, up 14% from the current level
Biogen (BIIB) - January 21 2022 $365-$375 bull call spread at $3.89 delivers a 157% gain with the stock at $375, up 14% from the current level
Johnson & Johnson (JNJ) - January 21 2022 $150-$155 bull call spread at $1.63 delivers a 206% gain with the stock at $155, up 8.3% from the current level
Pfizer (PFE) - January 21 2022 $40-$45 bull call spread at $1.05 delivers a 376% gain with the stock at $40.60, up 11.5% from the current level
Bristol Meyers Squibb (BMY) - January 21 2022 $65-$70 bull call spread at $1.50 delivers a 233% gain with the stock at $68, up 11.40% from the current level
Is He Saying “BUY”?
Mad Hedge Biotech & Healthcare Letter
January 23, 2020
Fiat Lux
Featured Trade:
(BIOGEN’S BIG ALZHEIMER’S BET),
(BIIB), (BMY), (PFE), (IONS), (MYL)
Biotech giant Biogen (BIIB) failed to impress in 2019. Surprisingly, the company is sticking to its strategy this 2020.
Despite the majority of biotech companies posting market-beating gains last year, Biogen’s shares suffered a 1.4% loss to their value. Taking a look at its performance, there are three obvious reasons why Biogen stock lost ground in 2019.
For one, its revenue generation, particularly for the multiple sclerosis portfolio, flatlined last year. Another reason is the company’s move not to acquire another company the way Bristol-Myers Squibb (BMY) took over Celgene.
Biogen’s decision to not make any major acquisition in 2019 was deemed as an inability to achieve significant business development milestones, thereby failing to positively influence the company’s near-term outlook.
The third reason is Biogen’s decision to halt trials for its widely anticipated Alzheimer’s drug candidate, Aducanumab, in March 2019.
With so much invested in the development of this product, the investing community expected Biogen to completely drop the project altogether.
However, it seems that Biogen has found a way to resolve the issues it initially encountered in the Aducanumab study.
In October 2019, the company announced its plan to resurrect all its Aducanumab-related efforts. To show its commitment to the plan, Biogen kicked off 2020 with a massive purchase from Pfizer (PFE).
Since Biogen aims to apply for regulatory approval by early 2020, the company has been aggressively pursuing avenues to ensure that its Alzheimer’s drug candidate will get the green light as soon as possible.
One of its efforts is its $700 million deal to buy Pfizer’s castoff drug, PF-05251749.
The Pfizer drug was created to treat Irregular Sleep-Wake Rhythm Disorder suffered by Alzheimer’s and Parkinson’s disease patients. This condition, also known as Sundowning, affects 20% of those afflicted by these neurological diseases.
According to the terms of the deal, Biogen will shell out $75 million upfront to gain the rights to the Pfizer drug.
The company will also pay an additional $635 million in the form of milestone payments. Pfizer will receive tiered royalties as well.
On top of this $700 million deal with Pfizer, Biogen also added another $45 million to fund its Alzheimer’s research with Ionis Pharmaceuticals (IONS). Apart from these, the two companies have been working on ION859, which is a possible treatment for Parkinson’s disease.
As if all of these are not enough to show Biogen’s dedication to finding the cure for Alzheimer’s disease, the company has a similar drug in its pipeline: BAN2401. This new drug, which uses a similar approach to Aducanumab, is actually already in its late-stage testing phase.
However, Biogen’s deal with Pfizer is not the first of its kind.
Prior to this, the company paid a whopping $300 million upfront to Bristol-Myers Squibb to own the rights to neurological drug Gosuranemab. Unfortunately, that study failed to deliver the desired results.
Even though Biogen has yet to actually file for regulatory approval for Aducanumab, the company is already preparing for the treatment’s launch this year. This is a rather confident move especially in light of the niggling doubts on the drug’s approval.
Apart from working on Aducanumab, Biogen has been testing for a higher dosage for spinal muscular atrophy medication Spinranza. This is done as a precautionary measure against Novartis’ (NVS) blockbuster gene therapy Zolgensma.
Its exclusive rights on Tecfidera, which has been challenged by Mylan (MYL), is also anticipated to hold until 2028. This means Biogen can still expect to reign supreme in this niche, hanging on to its blockbuster drug that raked in $4.3 billion in 2018 alone and $2.15 billion in the first half of 2019.
In addition to Alzheimer’s and Parkinson’s disease, Biogen is active in searching for treatments for Lou Gehrig’s disease along with stroke and choroideremia as well.
Biogen has also set in motion its plan to venture into rare eye diseases via its $800 million acquisition of Nighstar Therapeutics back in June 2019.
Notably, though, Biogen has been steering away from any major acquisition in 2020.
This strategy could be a stroke of genius if the company’s bet on Aducanumab pays off.
Mad Hedge Biotech & Healthcare Letter
December 26, 2019
Fiat Lux
Featured Trade:
(THE BOOM IN CANCER DRUGS),
(MRK), (CELG), (RHHBY), (BMY), (LLY), (NOVN)
Forecasting drug revenue can be a tricky business -- just ask the biotech leaders who overpromised but underdelivered.
These days, more and more variables are coming into play, with the US elections looming over us and the threat of generic meds overtaking market leaders becoming more tangible by the minute.
Another threat is the entry of biosimilars in the US, knocking down big-name drugs even in the most lucrative markets. Payers are also constantly seeking discounts, forcing tougher competition among crowded markets like diabetes and hepatitis.
However, the oncology sector remains a booming sector for the biotech industry.
Practically all major companies are either developing oncology treatments or already marketing these as blockbuster treatments, with 63 cancer drugs launched in just the past five years.
Unfortunately, not all cancer drugs are created equal. Looking at the spending on the treatments in recent years, it can clearly be seen that almost 80% of the money has been hogged by the industry leaders with the rest of the group lagging far behind.
To put things in perspective, bear in mind that the annual sales of the top 20 cancer drugs have reached over $50 billion, with $31 billion distributed among industry leaders Merck and Co (MRK), Celgene (CELG), and Roche Holdings (RHHBY).
These numbers hardly come as a surprise especially in light of over $133 billion recorded in spending for cancer treatments.
The top-selling oncology drug to date is multiple myeloma treatment Revlimid. Technically a Celgene product, the company’s $74 billion acquisition by Bristol-Myers Squibb (BMY) means the drug will be joining the other powerhouse offerings in the newly formed company’s lineup in the years to come.
With over a decade of dominance in the market and an impressive $9.7 billion in global sales annually, Revlimid has yet to hit its peak.
In fact, this mega-blockbuster is projected to exceed $15 billion in sales next year.
As if that wasn’t impressive enough, this oncology leader is estimated to bring more than double that amount come 2022.
Another dominant player in the oncology market is lung cancer drug Keytruda. Since its launch, this Merck immunotherapy leader has been able to usher in a boatload of cancer treatments using its core indications -- and it’s not yet done.
With an FDA approval eyed on June 29, 2020 for yet another indication for Keytruda, specifically for treating cutaneous squamous cell carcinoma (cSCC), its goal to dethrone Revlimid as the leader in this space now looks achievable.
Right now, Keytruda is used for various cancer types.
Aside from dominating the large addressable lung cancer market, it’s also used to treat head and neck cancer as well as melanoma. This makes Keytruda’s contributions indispensable to Merck’s overall top-line and continuous growth in sales in the past years.
Hence, it comes as no surprise that Merck’s recent third-quarter earnings had Keytruda is the starring role once again. Sales for this oncology drug jumped 62% year over year, reaching almost $3.1 billion.
One more dominant force in the oncology sector is Roche, with breast cancer drug Herceptin serving as the primary moneymaker of the company in the past 15 years.
With Herceptin raking in roughly $7 billion in annual sales in recent years, Roche has been proactive in securing its position in the oncology space by adding blockbusters ovarian cancer drug Avastin and leukemia medication Rituxan in the list.
For years, these three cancer drugs have formed the foundation of Roche’s continuous growth in the oncology sector. However, these treatments are now in danger of facing competition.
A particularly aggressive competitor is Pfizer (PFE), with its breast cancer drug Ibrance gaining traction as shown by its growing sales from $0.7 billion in 2015 to a promising $4.1 billion in 2018. Other competitors include Eli Lilly’s (LLY) Verzinio and Novartis’ (NOVN) Piqray.
To maintain its stronghold, Roche has been aggressive as well in developing new drugs.
Word has it that the company is expecting an addition $5 billion in sales for its new cancer treatments like breast cancer drugs Perjeta and Kadycla along with lung cancer medications Tecentriq and Alecensa.
Mad Hedge Biotech & Healthcare Letter
December 17, 2019
Fiat Lux
Featured Trade:
(WHY THE M&A BOOM WILL SPILL INTO 2020),
(BMY), (CELG), (NOVN), (LOXO), (ROG), (ONCE), (MRK), (SAN), (ARQL), (THOR), (AMRN), (GSK), (AMGN), (GILD)
