Mad Hedge Biotech and Healthcare Letter
July 18, 2023
Fiat Lux
Featured Trade:
(BIG PHARMA, BIGGER OPPORTUNITIES)
(AMGN), (HZNP), (BMY), (GILD), (PFE)
Posts
The irresistible charm of pharma companies often boils down to their potential pot of gold at the end of the rainbow: the groundbreaking drugs they're tirelessly laboring to introduce. But let's not be reckless.
As appetizing as these stocks may be, they carry a hefty price tag. Moreover, the road to drug development is fraught with unexpected potholes that can leave a nasty dent in the stock's value.
Alternatively, you could pivot to buying a cluster of the more affordable ones.
After all, embracing the tried-and-true philosophy of "a penny saved is a penny earned" can be a winning strategy across diverse sectors, and pharma stocks are no exception.
Here are some options you can explore.
Hovering at $222, Amgen (AMGN) carries a price-to-earnings ratio slightly shy of 12. The firm is grappling with the challenge of a potential few-billion-dollar-a-year dip in sales for some of its drugs while making ambitious strides to enhance its annual revenue of $27 billion.
So far, the most notable beacon of hope for Amgen is its experimental obesity treatments, AMG133 and AMG786, positioned in a market that has the potential to skyrocket beyond a whopping $30 billion annually.
Meanwhile, in a bold move, Amgen has proposed a $27 billion acquisition of Horizon Therapeutics (HZNP).
This strategic takeover could directly bolster Amgen's earnings per share (EPS) by more than $5, significantly enhancing the firm's current annual EPS of $18.
Amgen remains resilient despite facing hurdles from the Federal Trade Commission, which has launched legal proceedings to halt the transaction. The company is not just fixated on Horizon; it has the bandwidth to explore other potential acquisitions or augment its stock buyback program.
Another stock to consider is Bristol Myers Squibb (BMY). Priced at a humble $63, it’s trading at a modest valuation, barely touching eight times its earnings.
The market trembles at the potential stagnation—or worse, reduction—of its annual EPS, currently soaring just above $8. This anxiety is fuelled by the projected multi-billion dollar decline in sales for several drugs as the sands of time run out on their patents. These drugs, after all, form a substantial portion of this year's anticipated revenue of $46.6 billion.
However, it's not all gloom and doom. Bristol Myers Squibb has not one, not two, but a whopping eight new drugs jostling their way through clinical trials. One to keep an eye on is milvexian, a stroke prevention formula that shows immense promise.
These innovative concoctions could eventually inject a stunning $30 billion into the company's annual revenue stream, with the stock potentially reaching an ambitious price target of $85, projecting a handsome upside of 32%.
Gilead Sciences (GILD) is one more stock to take into consideration. Trading at an enticing 11 times earnings, it’s a steal at $76.
Yes, some of its products are on the downhill, but here's the game-changer: Trodelvy, an innovative cancer treatment.
Anticipated to triple revenues, this treatment’s sales is projected to surge from a humble $1 billion this year to a staggering $2.7 billion by 2028.
This suggests an upward trajectory for Gilead's sales, hurtling from just shy of $27 billion this year to well over $30 billion by 2028. The earnings per share (EPS) is poised to see an annual gain of about 6%, potentially reaching nearly $9 by then.
There’s also Pfizer (PFE), priced at a modest $36 and trading just shy of 11 times earnings.
As the dark cloud of Covid-19 gradually disperses, the pharmaceutical titan projects a significant contraction in its annual vaccine sales - halving it down to nearly $14 billion this year, contributing to the overall $67.8 billion income.
But don't be too hasty to dismiss Pfizer's prospects. Its innovation pipeline is teeming with promising solutions like its groundbreaking meningitis therapy. Moreover, it's poised to breathe fresh life into its vaccine division by fusing a flu and Covid vaccine.
Come 2026, the company anticipates its vaccines will arm over 130 million Americans, a notable surge from this year's 79 million recipients of the Covid vaccine alone.
You may find a less treacherous path by adopting a strategic approach of integrating more economically priced pharma stocks into your portfolio.
These stocks may grapple with dwindling sales from established drugs and the relentless onslaught of generic brands.
Nevertheless, they also harbor promising new entrants that, if successful, could spark a significant rally.
All things considered, the companies mentioned above are not mere “cheap” stocks but intriguing opportunities laced with robust potential. I suggest you take advantage of the dip.
Mad Hedge Biotech and Healthcare Letter
July 6, 2023
Fiat Lux
Featured Trade:
(BETWEEN HEADWINDS AND HORIZONS)
(AMGN), (HZNP), (NTLA), (RYTM)
In the pursuit of safe, sustainable, and substantial dividend yields, my quest often leads me to the realm of dividend aristocrats.
A particular entity that has caught my interest is the biotech behemoth Amgen Inc. (AMGN).
Although the company has been treading on a rocky path, with its shares plunging below their previous highs and year-to-date performance, it continues to pique my curiosity. After all, this downward trend does present a silver lining.
It unlocks an investment opportunity in the form of a record 3.9% dividend yield that AMGN currently offers, with its strong business performance and anticipated robust free cash flow countering any valuation concerns.
Still, investing in biotech is more than just a mere bet on a company's innovative prowess. It's also a gamble on the company’s skill to maneuver through the labyrinth of policy interventions.
Recent headlines talk about AMGN's ongoing battles, with a plethora of challenges leading investors to remain on the sidelines.
The IRS' quest for billions in back taxes from the company, the Federal Trade Commission's move to halt its massive acquisition of Horizon Therapeutics (HZNP), and a Supreme Court ruling against Amgen in a crucial patent case are just some of the headwinds the company faces.
Amidst these, the impending patent cliff hangs like a Damocles sword, with several of its blockbuster drugs, such as Enbrel and Otezla, likely to witness revenue shrinkage owing to patent expirations and intensifying competition.
Yet, despite the grim scenario, there are silver linings.
AMGN's proposed acquisition of Horizon Therapeutics was driven by the latter's key drug, Tepezza. However, declining sales have put the future of this acquisition into question.
Despite the swirling questions, AMGN remains confident about the eventual success of the Horizon deal. Its leadership foresees no anti-competitive barriers obstructing this merger and anticipates a positive outcome from the FTC hearing later this year.
In relation to Tepezza, the company underscores the synergistic benefits post-merger that can enhance the drug's value. Notably, the larger scale and international presence of AMGN, coupled with its manufacturing expertise, will give a significant boost to Tepezza's sales.
The company has other acquisition options if the Horizon deal hits a roadblock.
Potential targets could be Intellia Therapeutics (NTLA) and Rhythm Pharmaceuticals (RYTM), both of which offer great value at the current price point. The addition of these companies could enhance AMGN's portfolio with promising therapies for rare genetic disorders while providing a potentially novel gene-editing technology.
Furthermore, AMGN is upping the ante in its biosimilar initiatives, viewing its protein manufacturing and clinical development capabilities as its unique strengths. An excellent example is the successful launch of its recent biosimilar, AMJEVITA. Moreover, the company’s plans for more candidates attest to this optimism.
Meanwhile, AMGN's efforts are showing results. Despite a dip in the first quarter of 2023’s net income due to higher expenses, there was a robust volume growth powered by several tailwinds, including the fading impact of COVID. This, along with record sales of key drugs, lends the company confidence for the rest of the year and beyond.
The company also sees growth in international markets, especially in aging populations like Japan and China, and remains optimistic about its growth potential despite price erosion and competition.
On the dividends front, AMGN scores highly with its current yield of 3.9%, backed by a modest 46% payout ratio. Its impressive dividend growth record, coupled with anticipated free cash flow, makes it a promising candidate for dividend growth investors.
Overall, the company’s current stock price offers an attractive opportunity despite the challenges ahead. Given its current trajectory, it’s apparent that AMGN's track record of outperforming the market could very well repeat in the future, promising potentially lucrative returns for those who dare to navigate through the headwinds.
Mad Hedge Biotech and Healthcare Letter
June 22, 2023
Fiat Lux
Featured Trade:
(A ROLLERCOASTER RIDE ON THE BIOTECH HIGHWAY)
(AMGN), (HZNP), (AMZN), (MSFT)
What gets my heart racing about Wall Street's wild rodeo is its capricious personality. This unpredictable creature weaves a tapestry of inflated possibilities, stretching across a vibrant spectrum of asset classes. It's like being at an all-you-can-eat financial buffet; every day, there's a fresh plate of opportunities to dig into.
Just last year, for instance, we saw a grand opportunity to pack our portfolios with tech titans like Amazon (AMZN) and Microsoft (MSFT) when the market was frolicking after cash-flush pharmaceutical stocks, allured by their pricing power and inflation defense.
But oh, how the pendulum swings. Today, we find the market donning its risk-taking garb again, pursuing high-growth stocks and leaving value stocks eating its dust.
This brings us to Amgen (AMGN).
Amgen, a trailblazer in the biotech industry since its inception in 1980, has earned its stripes, boasting membership in the esteemed Dow Jones Industrial Index and Nasdaq 100. Over the past year, AMGN churned out an impressive $26 billion in total revenue.
The company proudly displays a well-rounded product portfolio experiencing a strong global thirst. This is echoed by the hearty 14% YoY volume growth in the first quarter.
Notably, much of this surge was fueled outside U.S. borders, with the Asia Pacific region flexing a muscular 47% volume growth. Credit this partly to the rapidly aging populations in Japan and China, where medicines like Amgen’s Repatha and Prolia are enjoying a burgeoning demand.
However, we're not getting the complete picture from these favorable metrics.
Amgen is embarking on a journey into a period filled with question marks, marked by stiff competition from biosimilars for its aging blockbusters, pushback from the Federal Trade Commission over its proposed acquisition of Horizon Therapeutics (HZNP), and valid doubts surrounding the rationale behind this hefty $28 billion buyout.
The firm has had a tough time finding a true growth engine in recent years, despite launching several new drugs for high-value indications such as lung cancer, cardiovascular disease, and migraine headaches. Can Amgen sail past these patent headwinds?
While most in the industry are betting on Amgen to win its legal battle to acquire Horizon, this move carries its own set of hitches.
The spotlight is on Horizon's primary growth engine, Tepezza, which is dealing with recent commercial setbacks.
In Q1 2023, Tepezza sales took an 18% sequential dip from Q4 2022 and were down 19% YoY.
Horizon blamed seasonality for this significant sales dip, which is disheartening for a drug slated to hit $4 billion in annual sales.
If Tepezza is the mainstay behind the proposed merger with Amgen, the biotech could set itself up for a rocky journey.
And remember, Amgen's previous attempts at value creation via business development haven't always been home runs.
Take the 2013 acquisition of Onyx's cancer drug Kyprolis. Despite initial excitement, Kyprolis has underperformed expectations, illustrating that Amgen's $28 billion bid for Horizon may not be a guaranteed solution to its patent woes.
Furthermore, Amgen's clinical pipeline isn't bursting with potential stars.
Its metabolic disorder candidate AMG 133 has been flagged as a potential blockbuster by some analysts, but the obesity treatment market is heating up. The same applies to Amgen's various candidates in hematology and immunology. Therefore, its current pipeline might not be the panacea to its legacy medicine challenges.
So, what's the play for investors?
The silver lining here is that Amgen isn't predicted to suffer a sharp drop in annual sales anytime soon, irrespective of the Horizon deal or its internal pipeline.
The main concern lies with the drugmaker's potential to resurrect robust top-line growth in the latter part of the decade. Given its low trailing-12-month payout ratio of 54%, the dividend appears to be on solid ground, which is a tick-in-the-box for its prospects as an income stock.
Overall, this stock could be a top pick for income investors considering its ample yield coverage, substantial margins, and double-digit average dividend growth.
Although the top line may seem a little shaky, buybacks should help keep EPS growth on track. Given its resilience, the stock presents an attractive opportunity for income investors. Just don't hold your breath waiting for a sudden surge.
In fact, if you're on a DRIP (Dividend Reinvestment Plan), you'd rather want the shares to slump for a bit.
After all, Amgen has the makings of a SWAN (Sleep Well At Night) stock. So, keep those midnight snacks handy.
Mad Hedge Biotech and Healthcare Letter
December 13, 2022
Fiat Lux
Featured Trade:
(A LONGER-TERM INVESTMENT FOR PATIENT BIOTECH HOLDERS)
(AMGN), (HZNP), (JNJ), (SNY), (ABBV)
Amgen (AMGN) announced what could be the biggest M&A deal in the biotechnology world this 2022.
The giant biotech disclosed its deal to acquire Horizon Therapeutics (HZNP) for $27.8 billion in cash, amounting to roughly $116.50 per share which is quite a move for Amgen. Prior to this, Amgen was engaged in an aggressive bidding war against fellow bigwigs Johnson & Johnson (JNJ) and Sanofi (SNY).
While they is a massive company with a market capitalization of $140 billion, shelling out $27.8 billion is still a significant risk.
Aside from that, Horizon is based in Ireland; Irish takeover rules Amgen and its competitors needed to comply with repeated disclosure of its key documents throughout the course of the negotiations.
This begs the question: Why was Horizon so sought-after by some of the biggest names in the biotechnology and healthcare world?
One reason is that all companies, regardless of size, need a blockbuster—and this doesn’t spare Amgen and its peers.
Actually, Amgen has been preparing for patent expirations of some of its top-selling drugs for years. By 2030, the company would be dealing with the threat of a very serious decline in revenue of key products Otezla and Enbrel. When that comes, these two blockbusters would need to battle it out with the slew of generics and biosimilars raring to compete with their market share.
Meanwhile, Enbrel, which is projected to rake in $4.1 billion in revenue in 2022, will face biosimilar competition as early as 2023. Its main and biggest rival, AbbVie’s (ABBV) Humira, will lose patent exclusivity next year. That opens the floodgates for biosimilars and generics, pushing back against Enbrel’s share of the market while attempting to take over Humira’s.
Looking at how much these blockbusters contribute to Amgen, it’s projected that $10 billion or approximately 40% of the company’s revenue could be lost by the end of the decade.
This is where Horizon comes in.
The most crucial among Horizon’s products is Tepezza, which targets a rare condition know as thyroid eye disease. Based on its performance since getting launched in 2020, this drug is estimated to rake in roughly $2 billion in 2022.
Another potential blockbuster from Horizon is Krytexxa, which was developed for uncontrolled gout, and is projected to record $706 million in sales this year.
The third potential blockbuster is Uplinza, which targets an autoimmune disease called neuromyelitis optics spectrum disorder. This product is anticipated to reach $159 million in sales in 2022.
These three could bring in roughly $3.3 billion in revenue for 2023.
Based on the company’s pipeline and portfolio, it can add $2 to $5 billion of new product sales from 2024 to 2030. Needless to say, this would offset the patent cliffs faced by Amgen.
In terms of pipeline, Horizon has several of promising candidates as well. In 2021, the company acquired a biotech named Viela Bio. At that time, the smaller company’s candidates focused on inflammatory diseases and are valued at $3.1 billion.
On top of these, Horizon’s pipeline has candidates targeting rare diseases like myasthenia gravis, lupus, and Sjogren’s Syndrome. With Amgen’s size, experience, and resources, the development of these products would most likely be accelerated.
Originally, Horizon’s strategy was to keep buying clinical-stage treatments from smaller biotechs then pushing them through to commercial approval. Since then, it has transformed into a company that develops its own candidates targeting rare diseases and lucrative markets. Given its portfolio and pipeline, Horizon seamlessly fits with Amgen’s strategy.
Overall, this acquisition is an excellent deal for both companies.
While Amgen shareholders shouldn’t expect any significant increase in dividends any time soon or substantial share buybacks, it’s reasonable to believe that the company is poised for more growth in the coming years.
This makes Amgen a worthwhile buy for longer-term investors who are committed to staying with the company until 2030 or longer.
