Mad Hedge Biotech and Healthcare Letter
August 30, 2022
Fiat Lux
Featured Trade:
(THE TIMES ARE A-CHANGING)
(NVS), (LLY), (ALC), (GSK), (PFE), (JNJ), (BMY)
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With the US GDP sliding for another quarter, the economic projections are becoming increasingly hostile.
However, investors who have consistently been buying quality stocks could easily consider the gloomy economic conditions as a bump in the road.
One of the most resilient companies in the biotechnology and healthcare industry is Novartis (NVS).
The Swiss drugmaker, which has a massive market capitalization of $207 billion, is ranked as the sixth biggest pharma stock worldwide.
Over the past 12 months, Novartis has delivered better results than the overall pharmaceutical industry and the S&P 500. Its performance, albeit marginally better than the rest, proved its resilience amid such chaotic and complex situations.
Recently, Novartis announced that it would cut loose its Sandoz division, turning it into a standalone spinoff by the second half of 2022.
Basically, Novartis has two main segments: Innovative Medicine and Sandoz.
The company’s Innovative Medicine section comprises roughly 80% of its sales and centers on everything involving patented to prescription products.
Its Sandoz section, approximately 20% of the total sales, is further categorized into franchises: Biopharmaceuticals, Retail Generics, and Anti-Infectives.
The stay-behind business would be composed solely of the products in the Innovative Medicines segment, a combination of Novartis’ oncology and pharmaceuticals business divisions.
This makes Novartis the latest name to be added in the long line of Big Pharma players letting go of their generics division to strip away all but their core products in development.
The plan to spin off Sandoz, Novartis’ division concentrating on generics and biosimilars, has been in the works for quite some time now.
Prior to this announcement, there were even talks of a potential acquisition instead of creating a standalone company. However, no attractive enough offer was given, pushing Novartis to go ahead with its original plan.
Sloughing off the generics and biosimilars divisions could help solve some of the company’s issues.
The generic drug sector has been causing issues for drugmakers as of late, and sales of the Sandoz division have been notably stagnant compared to the steady growth of Novartis’ new drugs sector.
To put things in perspective, Sandoz’s net sales in 2021 was only $9.6 billion, while the company’s Innovative Medicine division raked in a whopping $42 billion.
Getting rid of Sandoz means Novartis could focus on more promising products in its portfolio and develop more blockbuster drugs in its pipeline.
For instance, the company can focus on expanding the treatments involving Cosentyx.
The top-selling drug in Novartis’ portfolio, making up 10% of total revenues, Cosentyx continues to rise rapidly, reporting double-digit growth.
This drug targets psoriatic arthritis and was valued at $7.15 billion in 2019. By 2027, this drug is expected to be worth $13.64 billion.
Most importantly, its patent will last longer as it will expire by 2028 in the US, 2029 in Japan, and 2030 in Europe.
Another blockbuster drug in Novartis portfolio is chronic heart failure treatment Entresto, which accounts for roughly 9% of the company’s total revenues. The growth of this product has been impressive thanks to the high demand in Europe, which means an increase in its sales is almost guaranteed.
Like Cosentyx, its patent will also last longer and is estimated to reach until 2036. This makes Entresto one of the most interesting—if not the most exciting—drug in Novartis’ pipeline.
Novartis is also becoming a significant player in the metastatic breast cancer market, estimated to grow from $15.52 billion in 2020 to $41.74 billion in 2030.
The company’s product in this segment, Kisqali, has been gradually taking up market share and is expected to gain more traction as it expands its indications.
In terms of growth, though, multiple sclerosis drug Kesimpta is the top performer in Novartis’ portfolio. In the second quarter of 2021, sales were at $22 million. In the same period in 2022, the number skyrocketed to $239 million.
Kesimpta is anticipated to become another blockbuster, especially with the projections in the multiple sclerosis market.
This segment is estimated to be worth $25.43 billion in 2022 and will grow to $33.17 billion by 2029. While the growth isn’t as massive as other segments, the exciting news is that Kesimpta has been outpacing the growth rate of the reference market thus far.
The move to eliminate Sandoz is in line with the ongoing aggressive slimming down of the company’s operations.
In 2014, Novartis sold its animal health segment to Eli Lilly (LLY). A few years after, it spun off its eye-care sector to become Alcon (ALC), then sold its consumer health segment to GlaxoSmithKline (GSK) for $13 billion.
Meanwhile, the decision to become a pure-play pharma has become a widespread trend among prominent names in the industry, with the likes of Pfizer (PFE), Johnson & Johnson (JNJ), and Bristol Myers Squibb (BMY) transforming into sleeker and slimmer businesses.
Ultimately, the goal is for these pharma giants to shed unwanted weight to compete in the faster-paced biotechnology world. The plan is to focus all their resources on advancing the science and developing the technology needed to come up with the next groundbreaking innovation.
With Novartis joining the bandwagon, we can expect its growth to accelerate over the long term as it focuses more on strengthening its already solid and impressive pipeline. I highly suggest that you buy the dip.
Mad Hedge Biotech and Healthcare Letter
August 24, 2022
Fiat Lux
Featured Trade:
(A NEW KID ON THE BLOCK)
(GSK), (HLN), (UL), (PG), (JNJ), (PRGO), (PBH)
GlaxoSmithKline (GSK) started 2022 by turning down a $60 billion offer from Unilever (UL) for its consumer healthcare division, describing the price as too low.
By June, this same division became a standalone company named Haleon (HLN), with a market value of $29 billion—less than half the amount Unilever wanted to pay.
This means investors looking to buy shares of this spinoff still have a chance to take advantage of the bargain price.
Haleon is so far valued at roughly 13.5 times the consensus average for 2023 earnings, making it a lower multiple compared to competitors selling consumer healthcare items like Unilever, which roughly trades at 17 times its projected 2023 profits, and Procter & Gamble (PG), which trades at about 24 times its estimated earnings.
Compared to Procter and Gamble and Unilever, though, Haleon is a large-cap company that’s considered a pure-play consumer healthcare company.
It started trading as a standalone company by July, with a portfolio that included oral health items such as Aquafresh and Sensodyne, some OTC drugs like Advil and Theraflu, and several supplements including the best-selling multivitamin brand Centrum.
Keep in mind that the majority of Haleon’s core products have been practically unchanged for years. This spinoff only allotted roughly $300 million for R&D in 2021.
That comprises a mere 2.7% of its turnover. Meanwhile, GSK spent over 20% of its turnover on R&D initiatives within the same period excluding Haleon.
So far, the only notable pure-play consumer healthcare competitors are Perrigo (PRGO) and Prestige Consumer Healthcare (PBH). However, these two operate at a far smaller scale, with market capitalizations of less than $6 billion.
The absence of a competitive peer group and the limited track record of Haleon as a solo company makes this GSK spinoff more speculative compared to other consumer healthcare firms.
Haleon’s future would become clearer by the end of 2022, with more earnings reports under its belt, alongside the completed deal with Johnson & Johnson (JNJ).
JNJ also plans to create a standalone company for its consumer healthcare division in 2023. Haleon will be combined with this particular spinoff to form a new category.
Based on its current portfolio, brand recognition, and years of experience under Big Pharma’s, Haleon is projected to grow by 3.3% annually from 2023 through 2026.
At this point, Haleon is already considered a dominant player in the field. In the 2021 earnings report, this division brought $11.5 billion to GSK. That’s lower than JNJ’s own consumer healthcare division, which raked in $14.6 billion, but higher than Procter & Gamble’s $10 billion.
A standalone consumer healthcare company has the capacity to attract additional investor attention and gain higher valuations for those looking for steady—albeit not jaw-dropping—growth while earning consistent income from dividends.
Haleon announced that it intends to start paying out in the first half of 2023 “at the lower end” of the 30% to 50% range of its earnings. Looking at the company’s recent price, its 2023 dividend yield is estimated to be at 2.3%.
The consumer healthcare sector is a lucrative segment. The size of this market is estimated to reach $301.4 billion by 2027, with a 7.2% growth in CAGR throughout that period.
The demand for products in this segment tends to be unaffected by economic issues like recessions. Moreover, established brands, particularly those under Big Pharma names like JNJ and GSK, can easily set a very high barrier for competitors to overcome.
Overall, Haleon presents an opportunity for investors to bag a bargain.
It has a solid lineup of strong brands, which have shown their capacity to drum up consistent sales and demand low R&D expenses. These factors make Haleon a potential cash cow that could steadily deliver rising dividends for years to come.
Haleon is a good bet on an excellent emerging market—not to mention a virtually recession-proof—market.
Mad Hedge Biotech and Healthcare Letter
August 16, 2022
Fiat Lux
Featured Trade:
(A FAIL-SAFE HEALTHCARE STOCK FOR PATIENT INVESTORS)
(JNJ)
Warren Buffett is arguably one of the most celebrated investing minds in history. In the 57 years that the Oracle of Omaha was hailed as the leader of Berkshire, the business’ Class A shares (BRK.A0 grew 3,641,613% through December 31, 2021.
In fact, his company has been outperforming the broader market by leaps and bounds that even if Berkshire’s shares fall 99% tomorrow, it would still be ahead of the S&P 500—an achievement it has been celebrating since 1965.
While there’s a long list of factors behind Buffett’s long-running success, his preference for relatively safe businesses serves as one of the foundations of Berkshire’s superior and stable returns.
One of the companies in Berkshire’s portfolio is Johnson & Johnson (JNJ). Although it comprises only 0.02% of Buffett’s holdings, JNJ represents the steady and long-term holdings the Oracle has been known to chase.
Since August 2012, the company’s trailing-12-month net profit has climbed by 116%, exceeding $18.3 billion. To hit that mark, JNJ creates and markets a slew of products and treatments alongside medical devices and consumer health staples such as Tylenol and Sudafed.
It’s highly probable that JNJ’s stable track record of growth and success in expanding and diversifying its portfolio year after year is what lured Buffett to invest in the company.
JNJ’s operating segments hold a vital role in its growth as well. Although marketing brand-name pharmaceuticals comprise the majority of JNJ’s operating and growth margins, the reality is that brand-name products can only hold on to a finite period of exclusivity in sales.
To counter the issues involving patent cliffs, JNJ has implemented a myriad of tactics. For instance, it can rely on its top-performing medical device segment to help augment the loss of income.
For JNJ, when one door closes, another door or a group of doors tend to open.
Unlike most businesses that attract Buffett, which have wide economic moats, JNJ’s significant competitive edges rely on its sheer size compared to its rivals and the brand recognition attached to most of its products.
Nevertheless, a considerable part of its lineup speaks volumes in terms of highlighting Buffett’s preference for businesses that allow him to generate income without necessitating additional investments in development.
If you really think about it, you’ve likely purchased Tylenol or Listerine mouthwash several times in your life. The formulas have not been modified or changed that much, and neither has JNJ’s unit economics when it comes to manufacturing them.
Another factor that makes JNJ an excellent company is its continuity in operations. Keep in mind that this company has been in business for 136 years, and within that period, it only had 10 CEOs. Possessing continuity in critical leadership roles has guaranteed that strategic goals are constantly met.
On top of these, JNJ is one of the most financially sound—if not the most economically sound—publicly traded companies in the world. It has boosted its base annual dividend consistently over the past 60 years. It is recognized as one of the only two publicly traded companies with the highest credit rating (AAA) awarded by Standard & Poor.
Moreover, JNJ is a thriving healthcare stock.
Healthcare stocks are one of the most stable investments since they are defensive. Regardless of the economy and stock market performance, people will continue to buy prescription medicine, use medical devices, and avail of healthcare services. Therefore, this puts minimal demand on healthcare stocks. We do not stop getting sick or going to hospitals because Wall Street hits a roadblock.
Overall, JNJ is an excellent, safe, and reliable long-term investment. While it has not outperformed the broader market in the past 10 years, the business brings joy to its shareholders by steadily paying and boosting its dividend.
There’s a catch here, though. Buying a stock like JNJ signifies your willingness to hold it for years. Hence, this is a business for patient investors only.
Mad Hedge Biotech and Healthcare Letter
August 11, 2022
Fiat Lux
Featured Trade:
(BUILDING A RECESSION-PROOF PORTFOLIO)
(AMGN), (GILD), (MRK), (ABBV), (PFE), (JNJ), (BMY)
In my biotechnology and healthcare newsletter earlier this week, I talked about Amgen (AMGN) and how critical it is to determine recession-proof businesses.
In the next quarters and even years, it will no longer be as vital to identify companies that can bring high growth returns in the short term.
Instead, what’s more important is to find stocks that can withstand any bear market and a recession.
Like Amgen, Gilead Sciences (GILD) also performed better than the S&P 500 (SPY) and the Nasdaq 100 (QQQ) in the past 12 months.
Considering that we are anticipating a steep recession and a potentially brutal bear market in the following quarters, Gilead Sciences is presenting itself as a solid pick.
Some refer to Gilead Sciences as a one-trick pony, but that’s not an opinion I agree with despite the company’s over-reliance on its HIV programs and antiviral treatments.
For perspective, its antiviral portfolio comprises more than 90% of the company’s 2021 revenues while its top-selling products that year are all from its HIV segment.
Although Gilead Sciences has been expanding its portfolio, the company’s HIV program remains its best moneymaker. In the second quarter of 2022, sales of its HIV treatments have risen by 7% year-over-year.
Demand for treatments in this space has climbed in the past months, which allows for more room for growth in the foreseeable future.
Among the HIV treatments, Biktarvy is the best-selling product. It’s also the treatment that continues to gain a bigger market share.
By the second quarter of 2022, Biktarvy has been reported to claim roughly 44% of the market share in the US, marking a 4% increase year-over-year.
Meanwhile, another potential blockbuster is Lenacapavir. This is a new product, which will be marketed as a long-acting injectable HIV treatment once it gains FDA approval. If this gets the green light, this could rake in an estimated $2 billion in the first year of its release.
Aside from its HIV treatments, Gilead Science’s hepatitis franchise has also been steadily growing.
Amid the competition against the likes of Abbvie’s (ABBV) Mavyret, the company’s combo treatments with Sofosbuvir continue to generate significant cash flows and promising sales.
However, this segment raked in $1.9 billion in sales, down 9% year-over-year. The decline could be attributed to the effects of the pandemic.
Nevertheless, Gilead Sciences have been working on updating this particular program and adding newer treatments to deliver better results.
Another segment that saw a spike in 2021 is the antiviral program, primarily due to Veklury or Remdesivir.
When COVID-19 broke, Veklury was hailed as the first-in-line treatment. This led to a substantial boost in sales since 2020, with the company earning $2 billion from the product at that time.
By 2021, Veklury sales skyrocketed by 98% to hit $5.6 billion.
Frankly, no one truly expected Veklury to reach those figures—even Gilead Sciences’ management. In their first-quarter conference call in 2021, the company estimated full-year sales for the product to be roughly $2 to $3 billion.
While Veklury’s numbers are impressive, I think this product’s days are numbered because of the emergence of more competitors and better alternatives in the market these days.
In any case, this treatment is a testament to Gilead Sciences’ ability to deliver effective and reasonably priced antivirals to market.
Moving forward, Gilead Sciences looks to be exploring the oncology sector.
Its move to acquire CAR T-cell therapies via the $12 billion deal with Kita Pharma in 2017 is one of the clearest indicators of this plan.
On top of that, Gilead Sciences also acquired Trodelvy from Immunomedics in 2020. As far as fast-tracking its expansion in the oncology space goes, this definitely pushes the company to the forefront.
As a standalone treatment, this can reach peak sales of $2 billion to $3 billion.
Other than testing it with its own pipeline as a breast cancer treatment, Gilead Sciences has been collaborating with Merck (MRK) to determine the efficacy of Trodelvy when combined with Keytruda as a first-line treatment for non-small cell lung cancer.
Overall, Gilead Sciences is a great addition to a portfolio of recession-proof companies.
While it may not be as impressive as industry titans like Bristol Myers Squibb (BMY), Merck, AbbVie, Pfizer (PFE), and Johnson & Johnson (JNJ), it definitely bears the early signs of improvement, a promising future, and the ability to withstand a recession.
Mad Hedge Biotech and Healthcare Letter
August 4, 2022
Fiat Lux
Featured Trade:
(A SELLOFF SURVIVOR READY FOR MORE GAINS)
(PFE), (SRPT), (PTCT), (GSK), (JNJ), (MRNA)
The broader market hasn’t been putting that much faith in drugmakers these days, and this could very well be a mistake.
While 2022 has not been particularly kind to equities recently, several names in the biotechnology and healthcare sector still managed to keep themselves safe from the selloff.
Pfizer (PFE), with its COVID vaccine sales, is one of them. Admittedly, this pharmaceutical giant has not shown substantial growth in the past monthS. Nonetheless, its quarterly updates and, more importantly, pipeline have exhibited notably encouraging signals.
As a massive underperformed in the past 20 years, Pfizer has taken aggressive steps to transform its strategy. The most obvious way to shake up the business is to eliminate the bulk of its noncore products.
However, it’s not advisable to buy a company just because it has been underperforming and would then be sold at lower prices. Instead, it is critical to determine whether there’s a catalyst.
For Pfizer, the catalyst was clear: COVID.
The company was and still is at the heart of the coronavirus vaccine drives and treatments—a position that’s projected to be sustained for years to come.
The company has made a fortune from this program, and it’s still reaping the rewards in a massive way.
In the second quarter of 2022, Pfizer’s revenue climbed by 53% year-over-year to reach $27.7 billion. Based on the company’s record, this is the most significant quarterly sales during this period to date.
For context, its COVID vaccine, Comirnaty, raised $8.8 billion in sales. This is 20% higher than its reported sales in 2021 over the same period.
Meanwhile, Pfizer’s new COVID therapy, Paxlovid, recorded $8.1 billion in sales. Taken together, Paxlovid and Comirnaty comprise over half of the company’s total revenue for the second quarter.
Leveraging these growth opportunities, Pfizer has been steadily expanding its pipeline.
To date, the company has roughly 96 drugs in its pipeline. Of these, 6 drugs are in registration, while 29 candidates are queued for Phase 3 trials. There are 31 drugs in Phase 2 and 30 more in Phase 1.
Pfizer’s candidates range from treatments for inflammation, immunology, oncology, vaccines, and internal medicine to rare disease therapies.
Among the treatments in its Phase 3 study, two have been identified to bring in billions of dollars for Pfizer potentially.
One is PF-06939926, which is a treatment for Duchenne syndrome. The other is PF-06928316, which is for Respiratory Syncytial Virus (RSV).
Globally, 1 in 3,500 to 5,000 males suffer from Duchenne syndrome. This puts the number of patients at roughly 250,000, with about 10,000 to 15,000 found in the US. While it generally affects males, it can sometimes affect females as well.
In terms of market size, the Duchenne syndrome market is expected to be worth $4 billion in 2023 and $7 billion by 2027.
Currently, the major approved treatments for this condition are Sarepta's (SRPT) Exondys 51, Vyondys, and Amondys, as well as PTC Therapeutics (PTCT) Emflaza and Translarna.
PTC recorded $236 million in sales for Translarna, which is approved in Europe, and $187 million for Emflaza, approved in the US, for a total of $423 million in sales in 2021. Meanwhile, Sarepta’s overall sales reached $612 million for that same period.
Adding the rest of the minor competitors for Duchenne syndrome treatments, only $1.5 billion of the projected market value is held by the existing drugs. Clearly, there’s a lot of room for more companies to join the fray.
Meanwhile, RSV presents another lucrative market. According to the Centers for Disease Control and Prevention, this condition causes approximately 58,000 hospitalizations annually in the US.
Of these, 100 to 500 deaths are children under 5 years old and 14,000 are adults aged 65 and above. The average expense in managing adult patients alone has reached roughly $3 billion every year.
In terms of market value, the RSV market is projected to reach $4 billion by 2027. So far, the biggest competitors in this space are GlaxoSmithKline (GSK), Johnson & Johnson (JNJ), and Moderna (MRNA).
While its rivals are challenging, Pfizer still estimates sales for its RSV vaccine to reach at least $1.5 billion annually.
Thanks to its COVID programs, Pfizer has been hailed as the undisputed leader of the pack in terms of reputation and credibility in research.
Needless to say, these factors would serve as a valuable growth lever for the healthcare giant for decades.
As one of the largest biopharmas in the world, Pfizer has established a reputation for outstanding innovation. Over the years, the company has delivered several revolutionary treatments to the market like Viagra or Lyrica.
Simultaneously, it developed Lipitor, reaching $14.5 billion in sales over 14.5 years.
Since then, it has become a highly reputable industry name. Its diverse and extensive pipeline demonstrates that it remains a company highly capable of innovating and maintaining its dominance.
