Mad Hedge Biotech and Healthcare Letter
July 13, 2023
Fiat Lux

Whispers of a recession in 2023 plague virtually every corner of the world. Nowadays, fund managers and Wall Street leaders are developing strategies to brace themselves for what’s to come next.

Inflation continues to be a cause of alarm, and a more unstable growth backdrop not only in the United States but also across the globe could drag down earnings in almost all industries. That means tactics to play defense are all the rage these days.

With the market meltdown this year, several names in the biotechnology and healthcare industry managed to buck the trend and even rise significantly. One of them is Eli Lilly (LLY).

Eli Lilly has surged by 33% in 2022 and continues to outperform the market amid the economic turmoils and financial crises; let’s check out what’s under its hood and see if it’s a good stock to add to a recession-proof portfolio.

Although it wasn’t the major player in the recent updates on Alzheimer’s disease treatments, Eli Lilly shares rose following the announcement from Eisai (ESALY) and Biogen (BIIB) earlier this week.

The full results of their Phase 3 trials showed promising data, which strengthened the underlying theory that Alzheimer’s symptoms are linked to the beta-amyloid plaques that build up in the patient’s brain.

While this theory has been floating around for roughly 30 years, Biogen’s study marks the first time it received any confirmation. The results convincingly illustrated the link between eliminating the amyloid and the slowdown in cognitive decline among Alzheimer’s patients.

Biogen and Eisai may be the first to prove this, but their work provided Eli Lilly’s Alzheimer’s program the much-needed boost since the latter’s candidates are also based on the same theory.

In terms of revenue, Eli Lilly and Biogen could compete for a market opportunity worth more than $20 billion.

Outside this Alzheimer’s program, Eli Lilly offers investors a top-notch and diverse portfolio.

Founded way back in 1876, the company has grown into the second-biggest pharmaceutical business across the globe. It has a market capitalization of $343 billion, which is next only to Johnson & Johnson, with $459 billion.

The leading candidate in Eli Lilly’s portfolio is its Type 2 diabetes drug, Trulicity, which rakes in over $5 billion in sales annually. On top of that, it has 6 more blockbusters contributing more than $1 billion in annual revenue. These include the cancer drug Verzenio, insulin treatments Humalog and Humulin, and heart failure medication Jardiance.

These products, along with 9 other drugs in Eli Lilly’s portfolio, all contributed to boosting its revenue by 2.5% year-over-year to reach $6.9 billion in the third quarter of 2022. It also helps that the company has an expansive presence worldwide, with its treatments and products available in 120 countries.

There are also approximately 70 more projects queued for clinical development, while others are awaiting regulatory review.

Meanwhile, the most significant catalyst for Eli Lilly this year has been its Type 2 diabetes drug Mounjaro, which was approved last May.

The recently concluded third quarter marked the first complete quarter since the drug was launched in the US. Raking in an impressive $97.3 million in revenue for this period alone, Mounjaro is definitely off to a promising start.

The figures are projected to climb as Eli Lilly receives regulatory approvals from Japan and the European Union.

Actually, Mounjaro is anticipated to become a mega-blockbuster drug for Eli Lilly. It’s estimated to reach annual peak sales of $25 billion. For context, this amount is almost as much as the total revenue of the company in 2022, which is $28.6 billion.

Overall, they have consistently proved as one of the best-managed biopharmaceutical companies in the world. Its innovative strategies and initiatives have been top-notch. Eli Lilly is a stock worthy of a spot in a recession-proof portfolio. Make sure to buy the dip.

Investors are about to discover whether Biogen’s (BIIB) latest Alzheimer’s drug, which it developed in collaboration with Eisai (ESALY), is truly as effective as they claim.

A few months ago, the partners disclosed that the drug, called Lecanemab, exceeded their expectations in the Phase 3 study. Results should be out anytime this week.

Reports show that the drug offered a statistically significant decrease in the cognitive decline of the 1,800 participants included in the trial. Biogen anticipates a FED decision for its application for accelerated approval by January 6, 2023.

Meanwhile, traditional regulatory approval in the United States, Japan, and Europe is expected by March 2023.

Basically, Biogen and Eisai believe that Alzheimer’s symptoms are linked to particular plaques that accumulate in a patient’s brain.

Despite the expectations over the results for Lecanemab’s Phase 3 trial results, the enthusiasm for the scientific hypothesis on which the treatment is based had dwindled after years of underwhelming results.

Apart from that, Biogen’s previous failure remains fresh in the minds of investors. Back in June 2021, shares of both Biogen and Eisai climbed exponentially when the Food and Drug Administration suddenly gave the green light for their previous Alzheimer’s drug, Aduhelm.

Unfortunately, this momentum wasn’t sustained because Aduhelm’s commercial promise failed to be realized. This is because there are so many factors that could quickly derail the success of a product.

Equally crucial to receiving approval from the FDA is whether the drugmakers can persuade the Centers for Medicare and Medicaid Services, which is behind the widely used Medicare program, to cover the expenses of patients needing the drug.

At that time, the CMS decided to refuse reimbursements for Aduhelm. This move effectively sunk any chances of Biogen and Eisai to salvage that Alzheimer’s candidate.

Considering the budget allocated for Aduhelm from the time of its inception to commercialization, Biogen shares practically went on a free fall when the drug was eventually scrapped and development was shut down. Needless to say, this makes Lecanemab a do-or-die candidate for Biogen’s Alzheimer’s program.

Although the broader market is focused on its Alzheimer’s candidates, Biogen has an extensively diverse pipeline. The biotech is aggressively pursuing treatments for some of the most challenging to crack older-age conditions, with substantial sales and income potential.

This covers segments including depression, amyotrophic lateral sclerosis (ALS) or Lou Gehrig’s disease, Parkinson’s, lupus, cancer, and even multiple sclerosis. To date, it has 12 solid programs expected to go through Phase 3 trials or queued for regulatory approvals in the following months.

The promise that the success of Lecanemab holds is what keeps Biogen on the radar of many investors. These days, the stock is trading somewhere between $280 and $290.

If the biotech’s latest candidate for Alzheimer’s disease actually manages to meet (or exceed) expectations and hit the market, then the price could reach $370 or more.

Meanwhile, peak sales for Lecanemab are projected to be $14 billion—a figure substantially higher than Biogen’s recent revenue base.

However, there are risks to this investment.

Obviously, any investor buying Biogen stock must deal with the risk of a repeat of the Aduhelm drug debacle. That means the biotech, which regularly trades somewhere in the $200s, could face a minimum of $80 dip or roughly 30% loss.

Overall, Biogen can be considered cheap if we base it on the potential approval of Lecanemab. But, this biotech faces a binary situation where any disappointing result or a failure to gain regulatory approval could send the stock spiraling to new lows.

Meanwhile, an outlier scenario for investors to consider is that Biogen remains an immensely attractive target for a takeover by a bigger and more successful biopharmaceutical company. It offers a one-of-a-kind and solid growth pipeline with a reasonably sound valuation on trailing results that are rare in this economic condition.