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)
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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.
Mad Hedge Biotech & Healthcare Letter
March 24, 2020
Fiat Lux
Featured Trade:
(THE BIG CORONA PLAY WITH TELEDOC HEALTH),
(TDOC) (HUM), (AET), (CI)
The coronavirus disease (COVID-19) outbreak continues to inspire terror across the globe.
To date, there are roughly 398,107 confirmed cases and over 17,454 documented deaths, pushing communities to take proactive measures to stem the tide of this global pandemic.
In its wake, an increasing number of government officials and health professionals like the US Centers for Disease Control (CDC) have advised patients to take advantage of telemedicine and virtual health systems as much as possible. This is particularly helpful for those with respiratory symptoms since using these platforms could minimize contact with others along with the spread of the virus.
One of the no-brainer beneficiaries of this advice is virtual healthcare services provider Teladoc Health (TDOC).
Basically, companies like Teladoc offer personalized care without the need for patients to leave their houses. Although the kinks have yet to be worked out, the telemedicine sector should be expected to skyrocket in the weeks and even months ahead.
In fact, Teladoc shares gained 9% since February 19 -- a good sign for the company especially since the broader market went down by roughly 20% over the same period.
Earlier this month, Teladoc disclosed that the number of patient visits registered in its system showed a 50% increase week over week.
Ever since COVID-19 hit the country, the company has been fielding at least 15,000 visits on a daily basis, reaching over 100,000 weekly. Teladoc shared that it has been experiencing "visit demand consistent with peak flu volumes."
The convenience that companies like Teladoc provide can ease the burden on the broader healthcare system, which has been overworked with COVID-19 cases.
Another factor that could have contributed to Teladoc’s increasing patient load is the decision of some major health insurers to waive the patient costs for telemedicine visits.
So far, Humana (HUM), Aetna (AET), and Cigna (CI) confirmed that this policy will be relaxed throughout the national health emergency.
Needless to say, this announcement was highly appreciated by their clients, with Teladoc reporting that over half its patient visits in the past weeks are from first-time users.
However, this isn’t exactly Teladoc’s first big break.
Even prior to the pandemic and the recommendations from health experts, Teladoc has been quite impressive on its own.
Throughout the years, Teladoc has been consistent in reporting strong growth metrics. Since it went public in 2015, the stock has skyrocketed to 330% compared to the 30% gain for the S&P 500.
Reviewing its fourth-quarter earnings report for 2019, it’s clear that this is a stock for long-term investors. Based on the management’s commentary and how the story is playing out in the past months, there’s a good possibility that investors will be richly rewarded as well.
In 2019 alone, Teladoc added a total of 14 million new members to record an impressive growth rate of 61%. The company closed the year with 36.7 million patients registered in its system.
In terms of revenue, Teladoc delivered $156.5 million, showing off a 27% jump year over year.
This is particularly impressive as it eclipsed the high end of its guidance, which fell somewhere between $149 million and $153 million. It also beat the consensus estimates of analysts at $152.95 million.
This increase in revenue was bolstered by strong growths both in the US and the international markets. Its subscription-access fees reached $127 million, which was a 24% increase year over year.
Fees collected from visits showed quicker growth to contribute $29.5 million, demonstrating a 47% jump compared to the same period in 2018.
Total office visits increased by 44%, climbing to 1.24 million and surpassing the company’s guidance range of 1 million and 1.2 million as more and more patients opt for the subscription-based plans.
Meanwhile, its paid memberships in the US climbed 61% year over year to reach 36.7 million while its fee-only access soared by 104% to jump to 19.3 million members.
While 2019 was definitely a good year for the company, it’s difficult to downplay the reality that its impressive adoption curve recently could make 2020 an even better year for Teladoc.
Looking at how the company has been thriving, two things could happen for Teladoc.
One possibility is for it to develop into one of the most disruptive companies in the industry. The second possibility is that it will get acquired by a bigger player.
No matter what happens, the outcome will be a win-win for its investors.
Global Market Comments
December 19, 2019
Fiat Lux
Featured Trade:
(WHY THE REAL ESTATE BOOM HAS A DECADE TO RUN),
(DHI), (LEN), (PHM), (ITB)
(PLAY IT SAFE WITH ANTHEM), (ANTM), (CI)
One of the notable lessons in value investing is this: boring is oftentimes a good thing. Tangible proof of this principle is to be found in Anthem Inc (ANTM), which is a virtually inconspicuous stock but is performing satisfactorily for its investors.
Here’s a brief background on this relatively obscure stock.
Anthem is offering various healthcare plans to corporations and individuals. The holding company also provides its services to Medicare and Medicaid markets, which are comprised of approximately 40 million Americans.
Aimed at becoming a one-stop-shop for its clients’ insurance needs, the company’s offerings include dental and vision services and life insurance. To date, Anthem is ranked among the top five healthcare and insurance providers in the United States while it placed No. 29 among Fortune 500 companies. Clearly, this “unknown” stock is one of the industry leaders today.
Where does Anthem currently stand?
While the healthcare industry seems to be struggling with countless changes courtesy of the Trump administration, Anthem appears to be well prepared to handle whatever comes its way.
Here’s a case in point.
Anthem had to retrench on their Obamacare services last year. Despite that, the company still impressed its investors with a 3.8% improvement in its operating revenue year over year. That's not bad for an insurance company.
How did the company manage to recoup its losses? The lost revenues from Obamacare were counterbalanced by a boost in new insurance premiums along with an increase in the number of Medicare enrollments.
Since its fourth-quarter results in 2018 pleasantly surprised investors and analysts alike, it’s anticipated that Anthem will perform just as well or even better this year. So far, predictions for Anthem’s performance in 2019 remain bullish.
The stock market noticed. Since October, the stock has gone ballistic, rocketing an impressive 30%.
However, no company is perfect. One major red flag for Anthem is its ongoing lawsuit against another healthcare provider, Cigna (CI), over their botched merger plans. If the legal battle continues, then Anthem is poised to incur substantial long-term expenses.
Bottom Line
All in all, Anthem is a solid stock that offers an attractive combination of stability and continuous long-term growth in anyone’s portfolio. Thus far, the company has performed well and managed to provide acceptable financial results to its investors.
Although its business has not grown by leaps and bounds, its modest growth in the past years and the projected consistency in its stock performance in the years to come make Anthem a reasonable investment.
Buy Anthem on the next decent dip.
Mad Hedge Biotech & Health Care Letter
October 29, 2019
Fiat Lux
Featured Trade:
(THE BIG MEDICARE PLAN WITH HUMANA),
(ANTM), (CI), (HUM), (UNH)
Sometimes, markets are right, and sometimes, they are wrong. With regard to the healthcare industry these days, they have definitely got it wrong. For they are overweighting the political risk to this group presented by the 2020 presidential election.
Even if the most extreme leftist candidate, Elizabeth Warren, wins, she will still have to get the plans through congress. And after the experience of the last three years, you can bet the next congress will be a pretty moderate bunch.
Just as President Trump found it impassable to kill Obamacare, even with an all-Republican Congress, Warren will find it equally difficult to get the most expensive form of Medicare for all passed into law.
Take this view, and all of a sudden, the healthcare industry becomes wildly cheap. In fact, it is one of the lowest valued, highest earning sectors in the entire stock market.
Shares of managed care companies have certainly struggled this year. For instance, Anthem (ANTM) went down 5.1%, Cigna (CI) sunk 13.2%, UnitedHealth Group (UNH) declined by 2.2%, and Humana (HUM) fell 0.3%.
Due to the country’s turbulent political climate courtesy of the impending 2020 elections, investors are anxious over Medicare for All, which has the capacity to shut down the entire industry altogether.
As expected, these fears have weighed heavily on health insurance stocks and these companies are anticipated to experience a rollercoaster of emotions in the next year and a half. However, there could be convincing reasons for Humana to stand out from the rest.
Zeroing in on “population health management” along with “social determinant of health,” the company has been working on boosting its dominance on nonclinical services to deliver better health results. This is because approximately 80% of health outcomes are linked to nonclinical issues. Hence, this initiative could lead to improved products for customers and cost savings.
This is why Medicare Advantage, which allows private insurers to collaborate with Medicare for care coverage, turned into the “crown jewel” of Humana’s growth strategies. Basically, this plan appears and functions like a private health plan but is actually a government-sponsored program.
To date, Humana is the second biggest Medicare Advantage provider growing its membership by 15% during the second quarter of both 2018 and 2019.
As of 2018, the company holds a 17% share of the 20.4 million people enrolled in the Medicare Advantage program, with plans comprising roughly a quarter of the managed care’s medical membership. This accounts for almost three times the industry average, which indicates a positive growth for Humana as Medicare is projected as the fastest-growing sector of the insurance industry in terms of spending.
Actually, basic math could easily illustrate Humana’s upward trajectory as well. The number of Americans eligible for a Medicare plan is increasing by roughly 3% annually. Based on data from the Congressional Budget Office, the number of Medicare recipients opting for Medicare Advantage is estimated to climb from 34% of those eligible for Medicare in 2018 to 42% by 2028. Clearly, this increase offers a lot of room for growth, and Humana is smack dab in the center of it.
Although UnitedHealth actually has more members in the said program at the moment, no other managed care company is as intensive and focused as Humana. In fact, 73% of Humana’s consolidated revenue comes from its Medicare Advantage membership earnings alone. This makes the company a Medicare Advantage pure play.
Holding its position as one of the leaders in this private option available within the Medicare community, Humana has established a stronghold in this ever-evolving and constantly turbulent industry. So far, the stock’s price target is projected to hit $315. Long-term investors could also finally expect to shake off healthcare fear jitters and big rewards from 2021 onwards if the elections result in Democratic leadership.
Looking at Humana’s earnings history, it can be seen that it has grown from $7.75 per share in 2015 to $14.55 by 2018. For this year, the company’s projected earnings is expected to reach $17.50 a share. However, the possibility of a federal tax on health insurers could pose a threat to the company’s growth.
Humana is well-poised for advancement on the back of its strategic plans involving its Medicare business and promising initiatives. In the past years, Humana has been deploying excess capital and hiking its dividend. Just in February 2019, the company increased its dividend by 10% to reach 55 cents a share.
As part of its repurchase strategy, Humana allocated $3 billion for its buyback plans. These moves further indicate the financial capacity of the company and could hopefully reinvigorate investor confidence.
Global Market Comments
October 17, 2019
Fiat Lux
Featured Trade:
(UPDATING THE MAD HEDGE LONG TERM MODEL PORTFOLIO),
(USO), (XLV), (CI), (CELG), (BIIB), (AMGN), (CRSP), (IBM), (PYPL), (SQ), (JPM), (BAC), (EEM), (DXJ), (FCX), (GLD)
Mad Hedge Biotech & Healthcare Letter
October 15, 2019
Fiat Lux
Featured Trade:
(CASHING IN ON ECONOMIES OF SCALE WITH CIGNA)
(CI), (ESRX), (AET)
