Mad Hedge Biotech and Healthcare Letter
July 18, 2023
Fiat Lux
Featured Trade:
(BIG PHARMA, BIGGER OPPORTUNITIES)
(AMGN), (HZNP), (BMY), (GILD), (PFE)
Posts
The irresistible charm of pharma companies often boils down to their potential pot of gold at the end of the rainbow: the groundbreaking drugs they're tirelessly laboring to introduce. But let's not be reckless.
As appetizing as these stocks may be, they carry a hefty price tag. Moreover, the road to drug development is fraught with unexpected potholes that can leave a nasty dent in the stock's value.
Alternatively, you could pivot to buying a cluster of the more affordable ones.
After all, embracing the tried-and-true philosophy of "a penny saved is a penny earned" can be a winning strategy across diverse sectors, and pharma stocks are no exception.
Here are some options you can explore.
Hovering at $222, Amgen (AMGN) carries a price-to-earnings ratio slightly shy of 12. The firm is grappling with the challenge of a potential few-billion-dollar-a-year dip in sales for some of its drugs while making ambitious strides to enhance its annual revenue of $27 billion.
So far, the most notable beacon of hope for Amgen is its experimental obesity treatments, AMG133 and AMG786, positioned in a market that has the potential to skyrocket beyond a whopping $30 billion annually.
Meanwhile, in a bold move, Amgen has proposed a $27 billion acquisition of Horizon Therapeutics (HZNP).
This strategic takeover could directly bolster Amgen's earnings per share (EPS) by more than $5, significantly enhancing the firm's current annual EPS of $18.
Amgen remains resilient despite facing hurdles from the Federal Trade Commission, which has launched legal proceedings to halt the transaction. The company is not just fixated on Horizon; it has the bandwidth to explore other potential acquisitions or augment its stock buyback program.
Another stock to consider is Bristol Myers Squibb (BMY). Priced at a humble $63, it’s trading at a modest valuation, barely touching eight times its earnings.
The market trembles at the potential stagnation—or worse, reduction—of its annual EPS, currently soaring just above $8. This anxiety is fuelled by the projected multi-billion dollar decline in sales for several drugs as the sands of time run out on their patents. These drugs, after all, form a substantial portion of this year's anticipated revenue of $46.6 billion.
However, it's not all gloom and doom. Bristol Myers Squibb has not one, not two, but a whopping eight new drugs jostling their way through clinical trials. One to keep an eye on is milvexian, a stroke prevention formula that shows immense promise.
These innovative concoctions could eventually inject a stunning $30 billion into the company's annual revenue stream, with the stock potentially reaching an ambitious price target of $85, projecting a handsome upside of 32%.
Gilead Sciences (GILD) is one more stock to take into consideration. Trading at an enticing 11 times earnings, it’s a steal at $76.
Yes, some of its products are on the downhill, but here's the game-changer: Trodelvy, an innovative cancer treatment.
Anticipated to triple revenues, this treatment’s sales is projected to surge from a humble $1 billion this year to a staggering $2.7 billion by 2028.
This suggests an upward trajectory for Gilead's sales, hurtling from just shy of $27 billion this year to well over $30 billion by 2028. The earnings per share (EPS) is poised to see an annual gain of about 6%, potentially reaching nearly $9 by then.
There’s also Pfizer (PFE), priced at a modest $36 and trading just shy of 11 times earnings.
As the dark cloud of Covid-19 gradually disperses, the pharmaceutical titan projects a significant contraction in its annual vaccine sales - halving it down to nearly $14 billion this year, contributing to the overall $67.8 billion income.
But don't be too hasty to dismiss Pfizer's prospects. Its innovation pipeline is teeming with promising solutions like its groundbreaking meningitis therapy. Moreover, it's poised to breathe fresh life into its vaccine division by fusing a flu and Covid vaccine.
Come 2026, the company anticipates its vaccines will arm over 130 million Americans, a notable surge from this year's 79 million recipients of the Covid vaccine alone.
You may find a less treacherous path by adopting a strategic approach of integrating more economically priced pharma stocks into your portfolio.
These stocks may grapple with dwindling sales from established drugs and the relentless onslaught of generic brands.
Nevertheless, they also harbor promising new entrants that, if successful, could spark a significant rally.
All things considered, the companies mentioned above are not mere “cheap” stocks but intriguing opportunities laced with robust potential. I suggest you take advantage of the dip.
Mad Hedge Biotech and Healthcare Letter
June 27, 2023
Fiat Lux
Featured Trade:
(THE INCONSPICUOUS STAR)
(BMY)
Do you remember the 1999 cinematic sensation "The Matrix?" Neo, the protagonist, had a choice: swallow the red pill to wake up to reality or the blue one to slumber in illusion. Perhaps our market could do with a similar reality check—swallow the red pill and recognize the true value of companies with hefty margins and cash rivers.
After all, not so long ago, the markets were all singing praises for pharmaceutical stocks, idolizing them for their deep cash coffers and ironclad resilience against inflation.
But in the theater of investment, the curtain has suddenly dropped on them, as the market's affection has pirouetted towards the exuberant dance of AI stocks, evoking memories of the late '90s tech bubble.
Yet, for the savvy value investors in the audience, this shift is less of a tragedy and more of a golden intermission.
They now have a chance to secure prime seats at discounted prices, notably at the performance of the pharmaceutical powerhouse, Bristol Myers Squibb (BMY).
As the market narrative unfolded this year, BMY's plotline took a 9% twist, veering away from the 12% uptick of the S&P 500 (SPY). I've earlier peeked behind BMY's curtains, shedding light on its promising pipeline.
So why does BMY steal the spotlight?
Bristol Myers Squibb is not merely an actor but a maestro orchestrating symphonies in cardiovascular, oncology, and immunology sectors. The jewel in its crown is its leading role in the lucrative and burgeoning realm of immuno-oncology.
Behemoths like BMY have a magic wand—they can either acquire promising new drugs or cultivate them in their own labs, thanks to their deep wells of expertise.
BMY has been striking high notes with its margin, powered by star-performing drugs like the cancer-fighting Opdivo and cardiovascular medicine Eliquis, both of which enjoy patent protection until 2028.
In the last act (over three years), BMY has introduced nine new characters to its play, which are predicted to rake in a whopping $4 billion in this year's box office sales.
These factors ensure BMY's marquee stays lit. Notably, it has earned an A+ profitability grade, with sector-leading EBITDA margin and return on equity of 43% and 23%, respectively.
Even though the first quarter's revenue seemed to tread water YoY (with a 1% dip after adjusting for currency effects), BMY's newest cast members have outshone the rest. This is demonstrated by new product revenue that soared from $350 million YoY to a hefty $723 million in Q1.
Peering into the future, BMY's management anticipates that the revenue from these nine new stars will breathe new life into their portfolio, contributing between $10 billion and $13 billion in annual sales by 2025.
This troupe includes the cardiovascular prodigy, Camzyos, which has been stealing the limelight with promising efficacy data. Given its record thus far, we can expect a considerable upside to its fair value of $66.
Despite the looming specter of generic pressures, Bristol Myers Squibb is in the throes of a grand product launch.
Aside from Camyzos, the newly launched stars anticipated to push BMY to greater heights include cancer combatant Opdualag (an extension of the Opdivo franchise), hematologic treatments Reblozyl, Abecma, and Breyanzi, and immunological medications Sotyktu and Zeposia.
Bristol's multi-pronged attempts to capture significant market opportunities should help navigate the stormy seas of the long-term patent cliff.
As a finale, BMY flaunts a sturdy BBB-rated balance sheet, featuring a safe net debt to TTM EBITDA ratio of 1.5x. It offers a respectable 3.5% yield, and the dividend is comfortably protected by a 29% payout ratio, with a 5-year CAGR of 7%.
BMY also has a trick up its sleeve to return capital to shareholders tax-savvy via share buybacks, currently having $7 billion in remaining buyback authorization. At a forward PE of just 8.2, BMY essentially gets a 12% earnings yield on share buybacks.
Lastly, I find BMY to be priced just right at $65.66 with the aforementioned PE of just 8.2. This valuation seems unfairly low for a company with a strong line-up of newer drugs.
While only a modest 4% EPS growth is predicted for the company this year and low single-digit EPS growth over the next couple of years, BMY management could stir up the plot and boost the bottom line with share buybacks at the current discounted price.
BMY, currently being snubbed by investors, provides a fantastic opportunity for value and income investors to scoop up high-quality stocks at the perfect price.
Its robust balance sheet, high margins, and portfolio of new drugs all add up to make BMY a compelling long-term buy for investors.
With the stock priced at a discount and offering a well-covered, attractive yield, income and value, investors could see significant returns over the long term.
Mad Hedge Biotech and Healthcare Letter
April 25, 2023
Fiat Lux
Featured Trade:
(SMALL BIOTECHS, BIG OPPORTUNITIES)
(PFE), (SGEN), (MRK), (RXDX), (BMY), (BIIB), (ETNB), (KRTX), (MORF), (IDYA)
The biopharma sector has seen a flurry of merger and acquisition activity recently, and the trend seems to continue. This is good news for smaller biotech stocks looking to capitalize on the trend.
In the first quarter of 2023, the total healthcare and life sciences M&A in the United States reached roughly $71 billion, more than double the $28 billion seen in the same quarter in 2022. Notably, this figure includes Pfizer's (PFE) acquisition of Seagen (SGEN) for $43 billion.
Still, the situation isn't as dire as it may seem especially considering that in 2022, the total M&A spending in the U.S. dropped to about $300 million year over year from the $400 billion recorded in 2021.
The main culprit behind this trend appears to be higher interest rates, which have made financing a deal less appealing for buyers, particularly when there is the potential for a less optimistic profit outlook due to a slowing economy.
Even with these concerns, pharmaceutical deals have been far from stagnant since the end of the first quarter.
Merck (MRK), a biopharmaceutical company with a market capitalization of $288 billion, announced that it would purchase Prometheus Biosciences (RXDX) for roughly $11 billion, representing a premium of about 75% over the pre-announcement price. The announcement had a considerable impact on Prometheus stock, which saw a surge in value.
Shareholders of Prometheus enjoyed significant gains as Merck seeks to replace its revenue stream from cancer treatment Keytruda, which generates just over $20 billion annually.
Keytruda's patent is set to expire in 2028, leaving room for competitors to gain market share and making Merck's acquisition of Prometheus a critical move. For context, Prometheus's ulcerative colitis product alone has a total available market worth roughly $30 billion.
This deal could be just the beginning of a wave of new mergers and acquisitions in the biotechnology and healthcare industry. Experts note that we are entering a "smart optimism" period in the sector.
It makes sense for larger pharma companies to explore mergers and acquisitions in the current market for several reasons.
For one, many larger companies are seeking to revamp their drug pipelines. Take Bristol Myers Squibb (BMY), for example, which has a market capitalization of $146 billion. Sales of its myeloma treatment, Revlimid, likely peaked at just over $12 billion in 2021. As the patent for Revlimid expires, the company is expected to lose market share, causing sales to plummet to the low hundreds of millions.
While the company has several new drugs in development, it may still seek to acquire smaller firms to safeguard its future. However, given that Bristol has just over $9 billion in cash, any significant acquisitions it pursues could require taking on debt. Such a move would not be unprecedented, as Pfizer financed roughly 70% of its Seagen purchase with long-term debt.
Another big name that could be on the lookout for an attractive deal is Biogen (BIIB), a company with a market capitalization of $42 billion. Biogen is reportedly interested in the neuropsychiatric and inflammatory sectors and could strike a deal as early as the latter half of 2023.
Looking at things from a seller's point of view, many of these companies are now much less valuable than they once were on the public market and, therefore are easier targets for acquisition.
The SPDR S&P Biotech ETF (XBI) has taken a 50% hit from its all-time high set in February 2021. This is mainly due to higher interest rates, which have diminished the perceived value of future profits. Since many small biotechs are valued based on their projected earnings well into the future, this has significantly affected their stock prices.
Some biotech companies have been eyed as potential takeover targets due to their reduced market value.
One is 89bio (ETNB), with a market cap of $1.2 billion and a stock price falling by more than 50% from its all-time high, could be a potential target.
Similarly, Karuna Therapeutics (KRTX), which has a market cap of $7.4 billion and has seen a decline of almost 30% from its all-time high, is also considered an acquisition candidate.
Morphic Holding (MORF), with a market cap of $1.8 billion and a drop of more than 35% from its all-time high, and Ideaya Biosciences (IDYA), which has a market cap of $706 million and has lost almost half its value from its all-time high, could also be targeted for acquisition.
Overall, this is a promising period for the sector. So, take a moment to consider some of the smaller biotech firms in the market. Suppose these companies have a hard time finding interested buyers. In that case, there is still hope for shareholders as there's a chance that a larger corporation may step in and make an acquisition, leading to a substantial payout.
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.
Mad Hedge Biotech and Healthcare Letter
February 2, 2023
Fiat Lux
Featured Trade:
(A STRONG CONTENDER AGAINST THE ENDLESS VOLATILITY)
(BMY)
Despite substantial advances, cancer remains the second-leading cause of death in the United States. In 2022 alone, it was estimated that over 1.9 million new instances of cancer would be diagnosed in the United States alone. More than 600,000 deaths from cancer are anticipated in 2023.
There’s also a massive financial expense that’s continuously growing. Last 2018, the country's top 15 kinds of cancer cost more than $156 billion. By 2030, the spending for cancer-related treatments is projected to soar to a whopping $246 billion.
However, every problem brings with it an opportunity. In the case of cancer treatments, there is a huge opportunity. While several small companies are working on cancer therapies, many investors feel uneasy with the high risk and volatility of these early-stage biotechnology stocks. This is where well-established players come in.
Among the biotechnology names associated with cancer, one of the standouts is Bristol Myers Squibb (BMY). The company currently markets five treatments, each generating sales of a minimum of $1 billion yearly.
BMY’s best-selling drug is blood cancer treatment Revlimid. Unfortunately, Revlimid sales are falling because of the emergence of generic competition.
Meanwhile, cancer immunotherapy Opdivo continues to be on track with its goal to surpass Revlimid in BMY’s lineup. By 2026, this product is projected to reach peak sales of $11.75 billion. This is roughly 50% more than its current sales record.
Aside from these blockbusters, BMY has several rising stars. One of them is Opdualag, an immunotherapy that’s a combination of Opdivo and a LAG-3 inhibitor called relatlimab. This new drug has the potential to hit peak sales of over $4 billion. The other blood cancer drugs, specifically Breyanzi and Abeam, also have the potential to reach blockbuster status in the following years.
BMY has placed itself in a prime position for success in early 2023 thanks to years of careful planning in anticipation of the patent expirations of its blockbusters.
With about $40 billion in operating cash flow, BMY has created the third most extensive Phase 2 trial base. These efforts ensure investors would be happy with short-term results as the company has released nine new treatments in the past three years. This trend is expected to continue until the end of the decade.
For the subsequent years, investors can expect more approvals, eventually becoming new revenue streams and cash flow generators. Looking at the candidates in its pipeline, BMY is estimated to generate $25 billion in additional revenues from these new treatments by 2030.
Then the candidates in earlier-stage trials would replace the newly approved treatments in the queue. This continuous cycle represents the power of a solid and robust pipeline.
Suppose you’re still uncertain about the dependability of BMY. In that case, it’s good to remember that even the Oracle of Omaha believes in this stock.
While healthcare names do not typically make up a considerable share of the portfolio of Berkshire, BMY has made the cut. Warren Buffett’s penchant for consistent and reliable stocks underscored BMY’s solid performance amid the pandemic.
Moreover, BMY raked in a lot of money, enjoying a free cash flow in the past 12 months that totaled more than $12.7 billion. This marks the company’s third consecutive year of delivering free cash flow of at least $10 billion.
Having substantial cash is a crucial, especially for a company that frequently gets involved in acquisitions. In 2022, BMY bought oncology firm Turning Point Therapeutics for $4.1 billion, which dwarfs in comparison to its $74 billion acquisition of Celgene in 2019.
In addition to all these, BMY pays a 3.1% dividend yield. For long-term shareholders, these factors make the stock an excellent investment.
Overall, BMY is a great addition to your healthcare portfolio. Apart from being a frontrunner in the highly lucrative cancer market, this stock has a proven track record that outshone the rest of its peers amid the volatility and uncertainties in the previous years.
