Mad Hedge Biotech and Healthcare Letter
January 25, 2024
Fiat Lux
Featured Trade:
(FROM BIG TO BIGGER)
(UNH), (CI), (ELV), (CVS)
Posts
Today, let's talk about where the smart money's at in our whirlwind economy – healthcare and insurance.
And who's the king of the hill in this game? None other than UnitedHealth Group (UNH).
It's not just any old company; it's a health insurance juggernaut that's been on a growth tear, doubling its value in just five years. That's definitely something to write home about.
With a market cap closing in at $500 billion and revenues of $372 billion in 2023, it's a force to be reckoned with. If it doubles again, we're looking at a $1 trillion giant. That's uncharted territory for healthcare stocks.
Before anything else, let's hop in our time machine for a sec.
Around 10 years back, UnitedHealth was a mere $75 billion baby. Fast forward to today, and it's ballooned to around half a trillion. We're talking about top-dog status in the healthcare world.
Now, let's get down to brass tacks. UnitedHealth's bottom line might not be the stuff of legends – a 6% profit margin over the past year.
But hold your horses – with over $300 billion in annual revenue, that 6% turns into a cool $18 billion-plus in profit.
And guess what? They've been raking in even more lately – $21.7 billion over four quarters.
"But will it double in value in a year or two?" you ask. Maybe not that fast, but hey, it's done it in five years before.
So, could UnitedHealth hit that mind-boggling $1 trillion mark by 2030? I wouldn't bet against it.
After all, UnitedHealth isn't just playing in the health insurance sandbox. It's the biggest kid in the playground – the largest health insurer in the United States and the biggest healthcare company globally.
For context, its closest peers are Cigna (CI) with $90.44 billion in market cap, Elevance (ELV) with $111.87 billion, and CVS (CVS) with $95.08 billion. You get the picture.
But here's the juicy part – UnitedHealth loves to shop. It's like the Pac-Man of healthcare, gobbling up companies left and right.
Just last year, it bagged Amedisys for a cool $3.3 billion, hot on the heels of its $5.4 billion acquisition of LHC Group. Talk about making moves.
Now, for my fellow investors, here's the sweetener: UnitedHealth also pays dividends, with a 1.4% yield. It might not sound like much, but this company's got a knack for growing dividends. It's like owning a golden goose that keeps laying more golden eggs.
So, what's the secret sauce for UnitedHealth potentially hitting that $1 trillion valuation? Simple – growth, growth, and more growth. It's not just selling insurance; it's into analytics and isn't shy about snapping up companies to beef up its portfolio.
Let's talk numbers. Management is eyeing an annual earnings growth somewhere between 13% and 16%. If UnitedHealth keeps hitting these home runs, its stock value climbing higher isn't just a possibility – it's a likelihood.
"But is it a good buy?" I hear you ask. Well, trading at around 23 times its earnings, it's a bargain compared to the average healthcare stock at 28 times earnings.
Simply put, this baby's got room to grow, and investors might just be willing to pay a premium for this gem.
So, when will it hit $1 trillion? If UnitedHealth sticks to the S&P 500 index's average 10% annual growth, we're looking at 2030 for that milestone.
But knowing UnitedHealth, which often outperforms the market, it could be sooner if it keeps up its projected annual growth rate.
In a nutshell, UnitedHealth Group isn't just a safe bet – it's a potential goldmine. With its continued growth, strategic acquisitions, and reasonable price tag, it's a shining star in any investment portfolio.
Mark my words – this is one stock that could make its investors very, very happy by 2030.
Mad Hedge Biotech and Healthcare Letter
December 5, 2023
Fiat Lux
Featured Trade:
(A UNION IN THE MAKING?)
(HUM), (CI), (CVS), (AET), (UNH)
The healthcare market was recently abuzz with the news of a potential mega-merger that sent shares of Humana (HUM) and The Cigna Group (CI) into a nosedive - 5.5% and 8.1% respectively. This news, centered around a transaction combining stocks and cash, could significantly reshape the healthcare landscape.
But let's not get ahead of ourselves. After all, in the world of healthcare mergers, certainty is as elusive as a mirage.
Still, if you’re feeling a sense of déjà vu, it’s because this isn’t the first time Humana and Cigna have danced around the idea of a merger.
Recall 2015 when Humana flirted with the idea of a merger with Cigna but ended up cozying up to Aetna (AET) – a union that never saw the light of day, thanks to the US courts.
A similar fate befell an attempted merger in 2017, when Elevance Health (ELV), then known as Anthem, tried to acquire Cigna for $48 billion, only to be blocked by the courts.
Since these previous attempts, both Humana and Cigna have significantly grown.
Prior to this market shake-up, Humana boasted a market capitalization of $62.87 billion, with Cigna commanding a higher ground at $83.77 billion.
But as history shows, regulatory skepticism often casts a long shadow over such ambitious plans, with fears of increased costs for the American public. This skepticism has extended to smaller deals, such as UnitedHealth Group's (UNH), which faced hurdles in their acquisition attempts.
Yet, the potential merger between these healthcare giants teases the possibility of substantial cost savings.
When giants unite, the promise of cost savings looms large. Redundancies in corporate functions like HR, investor relations, and executive positions offer low-hanging fruits for cost-cutting.
But the real cherry on top is the potential for operational synergies – cross-selling opportunities and leveraging infrastructure for efficient service delivery.
Humana's stronghold lies in its Insurance unit and CenterWell, with the latter, including pharmacy, provider services, and home solutions, contributing 16.3% of last year's revenue.
In contrast, Cigna wades into deeper waters, with its substantial revenue streams from pharmacy benefits and home delivery pharmacy businesses.
Now, let’s look at the companies in terms of revenue. A side-by-side of Humana and Cigna's revenues offers an intriguing picture.
Humana's Medicare Advantage revenues soared from $59.47 billion in 2020 to $72.89 billion in 2022.
Cigna, however, has only inched forward in this space. Humana's evident dominance in Medicare Advantage, with a market share of about 18%, contrasts sharply with Cigna's modest 2%.
Despite these differences, a merger isn't outside the realm of possibility.
For example, CVS (CVS) managed to successfully acquire Aetna for $69 billion back in 2018, with the two companies eventually turning into CVS Health.
While that merger proved that big deals could happen, the odds for Humana-Cigna are not exactly in Vegas betting territory.
Speculations about Cigna offloading its Medicare Advantage operations could make this merger more palatable to regulators, but it's far from a sure bet.
Another question to think about amidst these talks is why the market reacted like someone yelled “fire” in a crowded theater.
Well, it all boils down to the fear of overpayment.
Cigna, being larger, could potentially swallow Humana. But Humana, with its stronger financial health and market positioning, is seen as the more desirable entity.
The valuation metrics – price to earnings, price to adjusted operating cash flow, and EV to EBITDA – further complicate this perception, as Humana commands a premium.
With a potential merger announcement might be on the horizon, investors should approach this with a blend of skepticism and intrigue. The market is jittery, perceiving a possible merger as potentially detrimental to shareholder value.
However, should the merger succeed against the odds, the combined prowess of Humana and Cigna could spell a profitable future for investors. Knowing that the healthcare sector is never short of surprises, this potential merger, should it come to pass, could be one for the history books.
Mad Hedge Biotech and Healthcare Letter
November 21, 2023
Fiat Lux
Featured Trade:
(A PRESCRIPTION FOR CAUTION)
(VTRS), (PFE), (JNJ), (LLY), (BMY), (TEVA), (ABBV), (CVS)
In the rollercoaster world of pharmaceutical stocks, 2023 has been like riding the Cyclone at Coney Island – thrilling for some, nauseating for others.
Take Pfizer (PFE), for instance. It’s seen its stock take a nosedive by 43.4%. That’s the kind of drop that makes you check if your wallet’s still there. Then there’s Johnson & Johnson (JNJ), trailing behind with a 16.4% decline. Not as dramatic, but still enough to make your stomach lurch.
Meanwhile, there’s Eli Lilly (LLY), playing the hero as it rockets up by an extraordinary 66.8%, thanks to its new weight-loss drugs. At this point, investors are practically throwing ticker-tape parades.
However, even with Eli Lilly’s star performance, the S&P 500 Pharmaceuticals index still shows a downturn of 2.3%.
Now, as we've seen earnings reports trickle in, a trend has started to stick out: positive results aren’t shielding drugmakers from a sell-off. Look at Pfizer and Bristol Myers Squibb (BMY), both hovering near their 52-week lows.
Still, investors are giving the biotechnology and healthcare stocks the side-eye for several reasons.
The new Medicare drug-price negotiation program is like a strict parent setting a curfew – it’s potentially restricting pricing power for certain medications. Plus, as interest rates climb, the allure of high dividend yields is diminishing faster than my motivation to hit the gym.
In this skeptical market, however, there are some optimistic investors who are digging through the bargain bin, hoping to strike gold.
Enter Viatris (VTRS), trading at just 3.3 times earnings and boasting a 5.1% dividend yield. It sounds promising, but only a few brave souls are recommending a buy.
Basically, this situation with Viatris is pretty much like finding a designer shirt at a discount store – sure, it’s cheap, but will it fall apart after two washes? Let’s take a closer look.
Viatris’s backstory is a bit of a soap opera. Born from the merger of Mylan and Pfizer's Upjohn unit, it carries the baggage of Mylan's EpiPen pricing scandal.
Since rebranding, Viatris has been trying to find its footing. Despite a shiny new business plan, which involves selling off assets for a potential $9 billion, investor confidence remains shaky at best.
Notably, its decision to exit the biosimilars market, where heavy hitters like Teva Pharmaceutical Industries (TEVA) and AbbVie (ABBV) play ball, has been seen as a bold move. Considering the potential of that market, it felt like leaving a high-stakes poker game just when the chips were starting to stack up. And with CVS Health (CVS) eyeing this lucrative space, Viatris might find itself wishing it had stayed at the table.
These past months, investors have been capturing this drama through a meme – comparing 'adjusted Ebitda' to 'free cash flow' with images of Jennifer Aniston and Iggy Pop. It’s a cheeky way of saying that Viatris’s financial projections might be wearing rose-colored glasses.
Looking ahead, Viatris is aiming for $2.3 billion in free cash flow next year, buoyed by recent sales. But the big question is: can it turn these assets into growth, or will it continue its high-wire act?
Reviewing its recent moves and their effects on the market, the Viatris saga has turned into a cautionary tale for investors in the pharma world – it’s a reminder that sometimes the threat of a nosedive is as real as the thrill of a skyrocket.
So, what’s the takeaway for those of us with skin in the game?
It seems wise to keep our eyes peeled and not jump on any bandwagons too hastily. Viatris, amidst its strategic transformations and market challenges, is worth watching with a careful eye. While its cash flow looks steady through 2027, thanks to planned asset sales, the long-term picture is as clear as mud.
As we navigate the unpredictable waves of the pharmaceutical market this year, let’s remember – it’s not just about holding on for the ride. It’s about knowing when to get on, when to get off, and maybe, just maybe, when to enjoy the view from the sidelines with some popcorn in hand. I say hold off from buying Viatris shares at the moment.
Mad Hedge Biotech and Healthcare Letter
September 26, 2023
Fiat Lux
Featured Trade:
(THE WEIGHT OF INNOVATION)
(NVO), (LLY), (CI), (CVS)
In a world teetering on the brink of healthcare overload, the emergence of Novo Nordisk (NVO) and Eli Lilly's (LLY) revolutionary obesity drugs, Ozempic and Wegovy, is akin to sailing in uncharted waters. These drugs are heralded as the harbinger of unprecedented advancements in biotechnology and healthcare, but they also cast shadows of potential financial turmoil on the horizon.
The air is thick with anticipation as Wall Street analysts predict a financial windfall for the drugmakers, with the drugs promising up to 20% body weight reductions and a significant decrease in the risk of heart attack or stroke.
The demand is skyrocketing, and the projections are staggering. The obesity market is poised to grow substantially, with a forecasted compound annual growth rate (CAGR) of 31.3%. However, lurking in the shadows is a looming healthcare crisis, a silent specter waiting to engulf insurers, employers, and government programs in a financial maelstrom.
GLP-1 receptor agonists are more than just another pharmaceutical innovation; they are a beacon of hope for the 40% of U.S. adults grappling with obesity. But, the beacon comes with a hefty price tag, with Novo’s Wegovy listed at over $16,000 a year.
By 2030, the spending on GLP-1 obesity treatments is anticipated to reach an astounding $50 billion, suggesting a financial storm likely to peak between 2025 and 2027.
This turns the Medicare landscape into a battlefield, with debates raging over the ban on paying for weight-loss drugs and the potential ramifications of their inclusion. It’s a complex dance, where the potential benefits of combating obesity are entwined with immediate financial challenges, creating a paradox that could reshape the foundations of healthcare economics.
Meanwhile, Medicaid, the safety net for approximately 87 million Americans, is caught in the eye of the storm as well, with the surge in spending on GLP-1 drugs from $547 million in 2021 to $1.1 billion in 2022 painting a vivid picture of the impending financial turbulence.
The complex interplay between state eligibility prerequisites and legal challenges underscores the intricate process of assimilating novel pharmaceutical breakthroughs into prevailing systems.
The employer-based insurance market is walking a tightrope, balancing competitive benefits and premium affordability. The introduction of the new obesity medicines is a catalyst, intensifying the existing tensions and raising questions about the sustainability of covering new medications without robust clinical evidence.
The industry is in a conundrum, with the need for expansive coverage clashing with the realities of cost management.
This narrative is not just a tale of numbers; it’s a human story, interweaving the lives of patients, taxpayers, and the evolving pharmaceutical terrain. It’s about the omnipresent advertising campaigns and the cultural phenomena surrounding these drugs, reflecting societal shifts in perceptions and expectations regarding healthcare solutions.
Novo Nordisk and Eli Lilly are at the forefront of this transformation, advocating for expanded coverage and emphasizing the long-term savings associated with addressing obesity. The discourse is filled with contrasting perspectives, with companies like Cigna Group (CI) and CVS Caremark (CVS) exploring the balance between clinical validity and financial viability.
The journey is fraught with uncertainties and challenges, with the potential rise in premiums and the quest for pricing solutions being critical elements in the unfolding saga. The healthcare system is at a crossroads, with the long-term benefits of obesity drugs poised against the immediate financial ramifications.
The emergence of Ozempic and Wegovy is a mirror reflecting the complexities and intricacies of the biotechnology and healthcare sector. The balance between innovation and sustainability is a delicate one, and the path ahead is interwoven with threads of hope, anticipation, financial prudence, and societal well-being.
Overall, the burgeoning obesity market presents a compelling case for investment in Novo Nordisk and Eli Lilly. The transformative potential of their weight loss drugs is substantial, promising to reshape the contours of obesity treatment. While the road is interspersed with uncertainties and challenges, the prospective growth and escalating demand for these innovative treatments underscore a lucrative opportunity. 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.
