Mad Hedge Biotech and Healthcare Letter
August 3, 2023
Fiat Lux
Featured Trade:
(A FUTURE-PROOF INVESTMENT)
(UNH), (CI), (HUM), (CNC)
Posts
With a staggering market cap of $472 billion and a network reaching scores of policyholders, UnitedHealth Group (UNH) is an undisputed titan in the health insurance industry.
To put this into perspective, its competitors such as Cigna (CI), Humana (HUM), and Centene (CNC) have market caps of $86.42 billion, $56.64 billion, and $36.32 billion, respectively.
However, the past year witnessed a slight dip in UnitedHealth’s share price by 2%, which noticeably lags the broader market's return of 17%.
This raises a question: Is UnitedHealth’s investment appeal dwindling, or is it merely in a brief pause?
One can't discuss the health insurance sector without addressing the brewing storm of growth in its forecast. This sector is expected to welcome a turbocharged surge fuelled by an escalating burden of maladies and an expanding aging population worldwide.
The global landscape is witnessing a steep rise in various chronic afflictions - from cardiovascular and respiratory conditions to neurological disorders, cancer, musculoskeletal diseases, and diabetes. With the world population growing savvier about the financial cushioning health insurance provides, we're staring at a potential boom in this sector.
Take a gander at the numbers: The global health insurance industry was valued at a hefty USD 2.17 trillion in 2022.
Fast forward to 2032, and we're talking about a market swelling to an eye-watering USD 4.37 trillion. And with a projected CAGR of 7.3% from 2023 to 2032, we can safely say the health insurance express isn't slowing down anytime soon.
With this backdrop, let's dive into the compelling aspects of investing in UnitedHealth.
First, let's delve into the favorable aspects of investing in UnitedHealth. The core rationale is simple: healthcare is perennial. As long as human beings exist, healthcare will always be needed.
In the United States, individuals or their employers inevitably need to secure health insurance on a monthly basis. The constant evolution and improvement of healthcare services create a fertile ground for potentially substantial earnings in both the insurance and healthcare delivery sectors.
UnitedHealth, a veritable powerhouse, operates two key divisions - one specializing in health insurance and prescription coverage, and the other focused on healthcare provision. This dual-pronged approach has the potential to create sustained shareholder value.
Finding a flaw in this favorable proposition is challenging, particularly when examining the figures.
The company amassed an impressive $93 billion in revenue in the second quarter of 2023 alone, making it one of the world's largest corporations. It outperformed analysts' predictions of $91 billion, and the earnings per share of $6.14 surpassed Wall Street estimates of $5.99.
Although the company's medical care ratio did increase from 81.5% to 83.2% as expected, this was offset by a robust revenue growth that outpaced the rise in medical and operational costs.
UnitedHealth provides insurance to over 51 million individuals, with an addition of over a million new policyholders in 2023. UnitedHealth's scale allows it to keep costs low, forming a formidable entry barrier for new market contenders.
Moreover, its quarterly revenue experienced a notable 63% increase over the past five years, hinting at significant growth potential. This suggests that UnitedHealth's future growth prospects remain robust.
Straight from the company itself, UnitedHealth anticipates growing its earnings per share (EPS) between 13% and 16% annually. Moreover, the company has shown consistent dividend growth, with an annual increase of 10% since 2010.
This indicates a company that excels in operating its business model over time, suggesting potential stability and growth in both share price and dividends.
One key strategy of UnitedHealth is its diverse portfolio, developed over the years through strategic acquisitions like home health company LHC Group and analytics firm Change Healthcare. This diversity has allowed the company to maintain a growth rate exceeding 10% over the last five years.
UnitedHealth's most significant growth driver remains its premiums, but the company also saw an additional $2 billion in revenue from services and $1.2 billion from product sales last quarter.
Although it faces potential increases in medical costs, the company's diversified portfolio helps it maintain strong profit growth, with adjusted earnings per share rising 10% to $6.14 year-on-year.
Despite the overall positive outlook, it's worth noting that UnitedHealth's shares have decreased by about 4% this year. While the stock is trading at 23 times trailing earnings, slightly below the healthcare industry average of 25, the company's consistent growth could justify a higher valuation.
Overall, UnitedHealth remains a promising investment in the long run despite some short-term volatility, as it offers a blend of stability and growth. It may well be a stock worth considering for those looking for a long-term hold in the healthcare sector. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
December 8, 2022
Fiat Lux
Featured Trade:
(THE MASTODON OF HEALTHCARE)
(UNH), (HUM), (CI), (ELV), (CVS)
Most earnings reports across all industries recently include the terms “inflationary pressures,” “short-term macroeconomic conditions,” “labor shortages,” and, of course, “supply chain issues” to justify why revenues are down or flat. The S&P 50 index has declined by over 20% to date, with signs of sliding further.
Clearly, the economy cannot be described as recession-proof. It typically follows a relatively predictable, albeit irregular, path commonly called the economic cycle. Needless to say, recessionary periods can be heartbreaking and brutal for the market and its investors.
However, some sectors are somewhat immune to the ups and downs of the economy. These industries provide investors with recession-proof stocks that can be held onto during these challenging periods. One of them is the healthcare industry.
Healthcare stocks, particularly high-quality businesses, tend to be viewed as recession-proof. Despite the economic turbulence, companies in this sector still enjoy relatively solid and steady demand. That’s not entirely shocking since people can’t exactly just cancel their healthcare needs.
No matter what’s happening in the world, when you’re unwell, you have no other option but to see a doctor and get medicine.
Within the healthcare sector, not all businesses are created equal. Some still felt the recession's nasty consequences, while others managed to thrive.
One name that continues to impress amid the economic turmoil is UnitedHealth Group (UNH).
Basically, UNH operates 2 main segments.
One is UnitedHealthcare, which offers a complete range of healthcare insurance. The other is Optum Health, which provides data-driven healthcare gathered from partner surgery centers. It also obtains information from OptumRx, UNH’s pharmacy management arm.
Both UnitedHealthcare and Optus Health delivered excellent results to date, boosting the company’s full-year guidance from $20.85 to $2105 in terms of EPS. In comparison, UNH recorded an annual EPS of $18.08 back in 2021.
In the first 9 months of 2022, UNH raked in $192.5 billion in revenue. This shows a 14% increase year over year. Meanwhile, its earnings per share climbed to $16.15 compared to the $13.82 it reported during the same period in 2021.
One of the key drivers for these results is the boost in the number of subscribers to UNH’s services, which rose by 850,000 in 2022. Apart from these, the company has an attractive dividend that keeps investors satisfied. For the 13th consecutive year, UNH has raised its dividend, announcing a quarterly boost of 14% to reach $1.65.
Keep in mind that the health insurance industry climbs higher each year, and COVID-19 has forced everyone to reconsider and review their perspectives towards healthcare.
On top of these, UNH’s long-term growth is supported by the inevitable: the continuous and increasingly expensive demands of an aging population. That is, the company has a massive addressable market that keeps on expanding year after year.
Looking at the trajectory of this industry, it is estimated that 73.5 million individuals will be enrolled in Medicare by 2027. This represents a 28.5% boost from the 57.2 million reported in 2017.
Due to the increasing demands in healthcare in the coming years, particularly among the aging population, spending in this segment is also anticipated to rise rapidly. In fact, healthcare spending is projected to hit $6 trillion annually by 2028.
Thus far, UNH is hailed as the leading company in healthcare. The company’s hegemony looks and feels incomparable, and none of its competitors appear to be strong enough to dethrone it. For context, the leading rivals of UNH in the US include Humana (HUM), Cigna (CI), Elevance (ELV), and CVS Health (CVS).
For these competitors to stand a chance at beating or at least competing with its on equal grounds, they would need to merge—a move they’ve all attempted in the past but were blocked by regulators.
Overall, UNH remains a solid choice, especially during these trying times. This company is a widely respected mastodon in the insurance market worldwide, showing off substantial growth in revenue and profit practically every year. Buy the dip.
Mad Hedge Biotech and Healthcare Letter
January 18, 2022
Fiat Lux
Featured Trade:
(THE PERFECT COUNTERBALANCE FOR A VOLATILE TECH)
(CI), (ANTM), (CVS)
Investing in quality stocks is a surefire way to slowly build a healthy portfolio over the years.
As long as you buy and hold stocks that have the potential to expand and offer stable financials continuously, then you’ll be securing your long-term success.
Obviously, this strategy is less risky compared to jumping on every new bandwagon and believing hyped ideas.
Then, there are breakthrough ideas that look too good to pass up. A good example is the cryptocurrencies such as Bitcoin and Ethereum.
Both operate on blockchain technology, which holds the potential to revolutionize practically all industries by decentralizing them and utilizing data in more efficient ways.
While investing in this kind of technology can definitely be exciting and thrilling, it’s undeniably scary for some who are still unfamiliar with it.
But, what if there’s a safer and more traditional way to get your foot in this groundbreaking technology?
Here’s where Cigna (CI) comes in.
Cigna is one of the handful of companies that are looking into integrating blockchain into their business, such as accepting cryptocurrencies as an additional form of payment.
Needless to say, investing in Cigna would offer you exposure to this new and emerging blockchain technology sans the risk that comes with every new technology.
This is a unique move considering that health insurance stocks are not exactly widely known as proponents of cutting-edge technology.
Aside from Cigna, other providers have been looking into leveraging blockchain to improve their operations. Some names associated with this project include Anthem (ANTM), CVS (CVS), and Cleveland Clinic.
Although blockchain remains in the early innings in terms of its existence in the healthcare industry, investors seeking some exposure would benefit from this reasonably safe option.
After all, Cigna is nothing but a safe stock.
Everyone has practically heard of the company.
Cigna provides Medicare and Medicaid products and insurance coverages not only within the United States but also in some international markets.
Known as a “global health service company,” it has approximately $64.5 billion in marketing capitalization and is considered the fifth-biggest healthcare organization in terms of revenue.
In 2021, it reported over $160 billion in revenue and has managed to rake in profits consistently.
With a net margin of roughly less than 6% of its sales, Cigna has been an investor darling by being consecutively in the black in the last 5 years.
For its 2022 plans, Cigna aims to grow its addressable market to add 3 new states and 93 new countries to reach 1.5 million new customers eventually.
The company also recently secured a new 7-year deal with the US Department of Defense, which would hand over the handling of the healthcare services of roughly 9.6 million active-duty service members to Cigna.
Moreover, Cigna has been working on targeting high-margin sectors like specialty pharmacies.
One of these businesses is Accredo, which manages individuals suffering from complex and hard-to-treat chronic ailments. These conditions include HIV, hepatitis C, and even cancer.
These types of illnesses demand a lifetime’s worth of medications with astronomical price tags. Clearly, being able to get a foothold in this segment would open up a lucrative revenue stream for Cigna.
Basically, Cigna is not your typical flashy stock that gains much attention from the market or the news. Nonetheless, it’s a solid pick that never fails to get the job done.
If anything, investing in Cigna would mean buying and forgetting about it while you collect a stable dividend yield of roughly 2% from this healthcare provider—a solid yield that’s better compared to the 1.3% average of the S&P 500.
So, for cryptocurrency fans, buying Cigna shares would simply be a way to diversify into a sector where you won’t really anticipate that much bullishness on blockchain.
Mad Hedge Biotech & Healthcare Letter
June 8, 2021
Fiat Lux
FEATURED TRADE:
(THE BIGGEST NEWS IN BIOTECH TODAY)
(BIIB), (ESALY), (LLY), (RHHBY), (DNLI), (SRPT), (IONS), (ICPT), (SAVA), (ANVS), (CI), (CVS)
It’s not typical for stock market news to alter the lives of millions of people across the globe, but this is what Biogen (BIIB) managed to accomplish this week.
The company received accelerated approval from the US Food and Drug Administration (FDA) for its controversial Alzheimer’s disease treatment, Aducanumab.
The drug, which is now marketed as Aduhelm, marks a potential breakthrough medication for over 6 million Americans suffering from the debilitating illness and to possibly billions all worldwide.
Basically, Aduhelm targets what Biogen calls “a defining pathology of the disease” by decreasing the amyloid beta plaque levels in the brains of patients suffering from Alzheimer’s disease.
Biogen shares spiked by roughly 60% following the Aduhelm news, with the pop in the biotechnology stock even more impressive than what was initially predicted.
This latest FDA approval also brings a ray of hope for the biotechnology industry.
Biotech shares have been in a slump this year, with the SPDR S&P Biotech ETF (XBI) falling by 9.2% thus far.
Potential second-order effects of the Biogen win can easily be seen in other developers of Alzheimer’s disease treatments.
Although the moves may not be as dramatic as Biogen’s, several biotech companies benefited from the good news.
Directly benefiting from it is Japanese drugmaker Eisai (ESALY), which has been working with Biogen on Alzheimer’s disease treatment. This company’s American depository receipts climbed by 48.2% after the news broke.
Eli Lilly (LLY), which is also working on its own Alzheimer’s therapy, saw its shares go up 9.3%.
Even Roche (RHHBY), which is still in the early stages of its development of a similar treatment, enjoyed a 1.6% increase, while an under-the-radar biotech company, Denali Therapeutics (DNLI), experienced a 7.8% increase.
Other smaller companies that benefited from Biogen’s news include Sarepta Therapeutics (SRPT), Ionis Pharmaceuticals (IONS), Intercept Pharmaceuticals (ICPT), Cassava Sciences (SAVA), and Annovis Bio (ANVS).
In terms of pricing, Aduhelm is estimated to cost $56,000 per year.
Although there is still no definite number in terms of how much Aduhelm could generate in sales for the company, there have been early estimates prior to this news.
Before this accelerated approval, Aduhelm was projected to add at least $16 billion in market capitalization to Biogen.
If successful, the drug can contribute a minimum of $10 billion in sales annually—a performance that would make Aduhelm one of the best-selling drugs of all time.
At this price point as well, the drug could peak at $5.7 billion by 2027.
Understanding that the cost is too high for some, Biogen has been working on establishing partnerships with healthcare and insurance companies to help patients cover the expenses.
So far, Biogen has been negotiating with Cigna (CI) to come up with terms to make Aduhelm available to Alzheimer’s patients via a value-based contract.
That is, the pricing will be assessed based on how responsive the patient will be to the treatment.
Biogen has also been working on collaborating with CVS Health (CVS) to develop more efficient ways to implement cognitive screenings in urban markets.
The two companies have been looking into boosting testing within underserved communities to improve early diagnosis, with the project commencing by September.
Some cities included in this initiative are Washington, D.C., Los Angeles, Dallas, Chicago, South Carolina, Atlanta, New York, Detroit, and Philadelphia.
Biogen has finally regained its momentum thanks to this accelerated and unprecedented approval.
That means we can expect Biogen to leverage this massive revenue stream to round out the rest of its programs and boost its R&D, as well as possibly compensating its shareholders with share buybacks and even dividends in the second half of this decade.
Mad Hedge Biotech & Healthcare Letter
April 20, 2021
Fiat Lux
FEATURED TRADE:
(A DEPENDABLE BUT UNDERVALUED HEALTHCARE STOCK)
(UNH), (ANTM), (CI), (HUM), (CNC), (CHNG)
The ongoing seesaw fights in the stock market are causing too much drama that cunning investors can—and definitely should—steer clear from.
Instead of fretting over speculative and risky investments, it’s better off staying with tested and proven big-name companies that will remain solid buys for the years to come and continue to deliver positive results despite periods of uncertainty.
Among the huge names in the healthcare industry, United Health (UNH) is a strong contender that meets the criteria.
After almost a decade of delivering high returns, which shows off fast-rising earnings expectations, it’s interesting to see that the market has recently backed away from this blue-chip stock.
Nonetheless, the market’s skittishness offers an opening for investors looking to buy in the dip a company that pays dividends and promises to steadily boost your savings in the years to come.
Founded way back in 1974, UNH has become a top name in the healthcare industry, landing in seventh place on the Fortune 500 list.
To date, UNH has four main divisions handling its over 50 million members both in the US and across the globe: its private health insurance business UnitedHealthcare, its pharmacy benefits segment OptumRx, its healthcare services provider branch OptumHealth, and its analytics platform OptumInsight.
UNH has a market capitalization of $354 billion.
In comparison, the closest competitor is Anthem (ANTM), with $87.93 billion. In terms of market cap, the two are followed by Cigna (CI) with $85 billion, Humana (HUM) with $53.81 billion, and Centene (CNC) with $36.19 billion.
Amid the financial crisis brought about by the pandemic, UNH still reported a 6.2% jump in its revenue in 2020 to reach $257.1 billion.
The company’s most prominent growth driver is its Optum line, and UNH is making sure that this division continues to grow.
One of the most indicative moves towards that direction is UNH’s $7.8 billion acquisition announcement of technology and data analytics company Change Healthcare (CHNG), which should be completed by the second quarter of 2021.
In the agreement, UNH is offering Change Healthcare $25.75 for its shares, representing a premium of roughly 41% above the latter’s stock price.
UNH plans to merge Change Healthcare’s operation into OptumInsight, which currently handles hospital systems health plans, life sciences companies, and even governments.
In the first nine months of 2020 alone, OptumInsight generated over $1.9 billion, contributing to roughly 11% of UNH’s total bottom line.
The combination of these two will all but guarantee that UNH’s possession of the biggest and most powerful platform in the entire healthcare industry, with the acquisition projected to add approximately $470 million to the company’s adjusted earnings in 2022.
The decision to acquire Change Healthcare is part of the string of M&A deals executed by UNH to stay ahead of the game.
In 2019, it bought two companies to expand its operations: the DaVita Medical Group for $4.3 billion and Equian for $3.2 billion. Prior to these, UNH splurged on a $12.8 billion acquisition of Catamaran in 2015.
For 2021, UNH projects its earnings to increase, estimating its per-share profits to be somewhere between $16.90 and $17.40—and that estimate already took into consideration the headwinds involving COVID-19 that could still weigh on the company’s bottom line.
While this may appear optimistic, the truth is, generating strong results isn’t a novel accomplishment for UNH.
In the past three years, the company reported a net income of $10 billion or higher, with net margins recorded at 5% above its revenue.
Over the course of the last 12 months, UNH stock has climbed 24%, beating the S&P 500, which rose 18% during the same period. It also offers a decent dividend of 1.5%, which is admittedly slightly lower than the S&P 500 average at 1.6%.
Overall, UNH is a safe stock that you will not have to anxiously watch over and can hold in your portfolio for years.
More importantly, this company remains undervalued and still shows a lot of room for growth.
So if you’re a value investor looking with an interest in the insurance and healthcare services industry, then this market leader is a sustainable addition to your portfolio.
