Mad Hedge Biotech and Healthcare Letter
February 22, 2024
Fiat Lux
Featured Trade:
(FROM BLAND TO BOLD)
(GILD), (CBAY), (MDGL), (AKRO), (IVA), (ETNB), (GNFT), (SGMT), (CWBR)
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So, Gilead Sciences (GILD) dropped their Q4 2023 bombshell earlier this month, and it was kind of like expecting a gourmet meal and getting airplane food instead. Their product sales were underwhelming, not budging an inch year-on-year, and even took a tiny step back quarter-to-quarter.
Now, if you're like me, hoping for some spicy growth forecasts for 2024, you'd be left with a bland taste in your mouth. The market seemed to agree, with Gilead's shares taking a nearly 10% nosedive post-announcement. But, let's not judge a book by its cover just yet.
Peeking under the hood, Gilead's story gets a bit more colorful. Looking closer feels like discovering a hidden layer of nougat in a seemingly plain chocolate bar.
Sure, Veklury, their COVID-19 therapy, didn't get a standing ovation this time around, but let's not forget how it was the belle of the ball when the pandemic hit. Fast forward, and it has turned into that party guest who overstayed their welcome, with Gilead's top-line growth itching for the door.
Nevertheless, all's not gloomy in Gilead's kingdom. Their HIV franchise, led by the star, Biktarvy, is hogging the limelight with a 47% market share in the U.S. That's nearly half the patients on HIV meds swearing by Biktarvy.
Meanwhile, their oncology lineup is also stepping up its game, and with 61 programs in the pipeline, including 19 in phase 3 studies, it's like Gilead's got a magic potion brewing.
Now, for dividend lovers, Gilead's continues to be that reliable friend who always shows up. Despite the pandemic's chaos, they've been upping their dividend game by 19% since 2019, boasting a comfy 3.9% yield. Talk about a silver lining.
That’s not all, though. Just when you thought Gilead would take their ball and go home, they pull a $4.3 billion rabbit out of their hat, announcing they're buying CymaBay Therapeutics (CBAY) and aiming to seal the deal by Q3 2024.
Why? Because CymaBay's working on seladelpar, a potential game-changer for liver disease. And the cherry on top? Seladelpar got a VIP pass from the FDA for a priority review for Primary Biliary Cholangitis (PBC), with the red carpet rollout set for August 14.
Meanwhile, seladelpar's revenue is projected to hit the sweet spot of around $768 million by 2028. Needless to say, this could be the new blockbuster Gilead's been looking for.
In terms of competitors in this field, Gilead would most likely go head-to-head against giants like Madrigal Pharmaceuticals (MDGL) and Akero Therapeutics (AKRO). Both are also making waves with their NASH (non-alcoholic steatohepatitis) fighters, scoring double-digit gains.
Aside from these more widely recognized names, Inventiva (IVA), 89bio (ETNB), Genfit (GNFT), Sagimet Biosciences (SGMT), and the underdog CohBar (CWBR) are all in the race as well, turning heads with their own NASH breakthroughs.
Despite all the excitement, Gilead had a couple of stumbling blocks with their other drugs, which might have contributed to their stock's slip n' slide. Yet, the company’s leadership seems unfazed, especially about the concerns surrounding their cancer drug, Trodelvy. It's like they’re saying, "Keep calm and carry on," betting big on its future.
Overall, Gilead's multi-billion bet on CymaBay and seladelpar is a bold move, aiming to beef up their liver disease creds. With a market cap lounging at $91.80 billion and eyes set on a steady climb to $28.71 billion by 2026, this biotech is no longer just looking to play the game; they're trying to change the rules.
So, what's my take? Pour yourself a glass of whatever you fancy, and let's watch how this unfolds before making any moves. Gilead's foray into new territories with seladelpar is a mix of high stakes and high hopes. It's a bit of a rollercoaster, but hey, that's what makes the market so thrilling, right?
Mad Hedge Biotech and Healthcare Letter
September 28, 2023
Fiat Lux
Featured Trade:
(TIPPING THE SCALES)
(NVO), (LLY), (PODD), (TNDM), (DXCM), (RMD), (INSP), (MDGL), (ISRG), (AKRO), (ETNB)
The pharmaceutical world is buzzing, and it’s all thanks to the groundbreaking obesity drugs from Novo Nordisk (NVO) and Eli Lilly (LLY). In my previous newsletter, I delved into the massive potential of these new treatments, and it sparked a flurry of discussions. So, this time, I want to peel back the layers and explore how these advancements affect other companies within the same market.
After all, their emergence creates a paradoxical narrative, a dance of shadows and lumens. These drugs, renowned as the modern panacea for the obesity crisis, have catapulted the companies behind them into unprecedented valuations, making them luminaries in a market awash with investors hungry for the next big thing.
The enthusiasm surrounding these drugs is not unfounded; they are pivotal in treating type 2 diabetes and are seen as the desperately needed solution to the widespread obesity crisis. The groundbreaking medications introduced by Novo Nordisk and Lilly are enabling individuals to lose approximately 15% to 20% of their body weight, with Wall Street anticipating the combined annual sales of these revolutionary drugs to surpass $40 billion by the close of this decade.
However, the shadows of GLP-1s cast a contrasting pallor on companies that burgeoned in tandem with America’s expanding waistlines.
Firms like Insulet (PODD) and Tandem Diabetes Care (TNDM) are witnessing a decline of 40% and 50% in their values this year, respectively.
Similarly, DexCom (DXCM), the frontrunner in glucose monitoring, has experienced a 16% dip, and ResMed (RMD), the stalwart in CPAP machines treating sleep apnea, has seen its stock plummet by 30%. Inspire Medical Systems (INSP) and Madrigal Pharmaceuticals (MDGL) have also encountered significant drops in their shares.
These companies, once the darlings of the medical stock market due to their escalating sales growth, are now facing the brunt of a shifting investor focus. This is because the investment community is envisioning a future with a reduced prevalence of diabetes and sleep apnea and is consequently retracting their stakes in these stocks, leaving companies and investors navigating through a sea of uncertainties.
By early spring, the potential impact of widespread GLP-1 usage became the focal point of strategic discussions at numerous hedge funds. That led to a shift as some started withdrawing from stocks like DexCom and Madrigal, subsequently opting to short-sell these shares. The broader market tuned in this summer.
A case in point is Intuitive Surgical (ISRG), a leader in surgical robotics, which noted during its earnings call that a preference for trying GLP-1s was leading to a deferment in weight-loss surgeries. Although these procedures constitute a minor segment of robotic surgeries, they have been instrumental in driving Intuitive’s growth.
GLP-1s have also affected the demand for insulin injections. Recently, endocrinologists have suggested that GLP-1s could potentially delay the transition to insulin for a significant portion of Type 2 patients. This revelation triggered a recalibration of sales forecasts and stock price targets, with Insulet experiencing a downgrade in both target price and rating.
Meanwhile, the growth prospects of glucose monitor manufacturer DexCom in the Type 2 market remain positive. The integration of glucose monitors with GLP-1s is anticipated to become a prevalent trend among diabetic patients. Despite a temporary rally in DexCom stock, the lingering question remains whether the expanding use of GLP-1s will eventually reduce the demand for glucose monitoring.
Vendors of sleep apnea devices, such as ResMed and Inspire Medical, are also conveying to investors the minimal impact of GLP-1s on their markets. However, the debate continues on the intrinsic link between obesity and sleep apnea and the potential repercussions of GLP-1s on the entire sleep apnea spectrum. As market dynamics continue to shift and the ripple effects of GLP-1s become the focal point of discussions, more and more questions about the future landscape of obesity-associated medtechs arise.
The positive developments in GLP-1s have also cast a shadow over another sector: liver medications.
In June, revelations about Lilly's investigational drug, retatrutide, sent ripples through the sector. The drug not only facilitated a 24% weight reduction in subjects but also significantly diminished fat levels in their livers. This development impacted the stock values of companies like Madrigal Pharmaceuticals, Akero Therapeutics (AKRO), and 89bio (ETNB), pioneers in crafting remedies for the fatty liver condition known as NASH. While it remains to be seen how much these stocks will fall, it’s evident that their decline has already started.
The market is a tumultuous sea of uncertainties, with companies and investors meticulously navigating the evolving dynamics. For the astute investor, the key is to learn how to strike a balance between the old and the new.
The allure of GLP-1s might lead to a reevaluation of the medtech sector’s prospects, but companies like Insulet, ResMed, and Inspire still hold resilience in a GLP-1-dominated landscape.
Ultimately, it’s about understanding the intricate push and pull of shadows and light. The wise investor doesn’t just follow the light; they also understand the shadows, learning to see the opportunities lurking within.
So, delve deep, recalibrate your strategies, and remember, the paradox is not a roadblock; it’s a guidepost to new horizons in pharmaceutical innovation.
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.
