Mad Hedge Biotech and Healthcare Letter
March 2, 2023
Fiat Lux
Featured Trade:
(AN UNBEATABLE STOCK REFORMING THE SECTOR)
(LLY), (JNJ), (SNY), (NVO)
Posts
After starting 2023 with such great promise, practically all major stock indexes in the United States fell last month. Stocks dipped because of the unrelentingly rising inflation, which economists anticipate to lead to another round of seemingly unstoppable interest rate hikes later in the year.
What can stock investors do in this climate?
The ideal stocks in this situation are those defensive in nature because they tend to be less reactive or sensitive to macroeconomic conditions. As a result, defensive stocks deliver relatively solid price performance in bear and bull markets.
Defensive stocks are companies whose products or services are considered essential or necessary, regardless of economic conditions. These companies typically provide products or services that people and businesses cannot easily do without, such as healthcare, utilities, and consumer staples. Because these companies are less susceptible to fluctuations in the economy, they are often viewed as a safe investment option during times of market uncertainty.
Eli Lilly (LLY) stands out as one of the best defensive stocks in the biotechnology and healthcare sector today.
With over 38,000 employees across the globe and products commercially available in at least 120 countries, the company is no doubt a dominant presence in the industry. It is a global pharmaceutical organization that develops, manufactures, and markets drugs for a wide range of medical conditions, including diabetes, cancer, and autoimmune disorders.
The company has been in operation for over 140 years and has a strong reputation for innovation and research. Apart from Johnson & Johnson (JNJ), Eli Lilly’s market capitalization of roughly $327 billion makes it the most prominent pharmaceutical business worldwide.
Meanwhile, Eli Lilly pays out a dividend that yields around 1.1%. Over the trailing decade, this giant drugmaker’s dividend has experienced a consistent increase of about 130%.
Given that Eli Lilly is a healthcare company that produces medicines for life-threatening and chronic conditions, it can be considered a defensive stock.
In 2022, the company’s shares gained approximately 32.4% thanks to its solid organic growth and deep and diverse new treatments and drugs pipeline. Considering its history and track record combined with the market's volatility, Eli Lilly also benefited from its image of being a “safe” stock.
Despite the uncertainties, Eli Lilly looks to be poised for another healthy run in 2023. In terms of growth, the company is projected to climb higher courtesy of its newly approved diabetes and obesity drug, Mounjaro, which shows impressive potential. The company also has a promising pipeline, with several high-value candidates in the immunology and dermatology segments expected to gain approval this year.
Recently, Eli Lilly announced that it would put a cap on the out-of-pocket expenses for insulin at $35 per month for uninsured patients and those covered by commercial insurance. The company also surprised the public by announcing its plan to lower the price of this highly controversial drug by 70%.
After drugmakers jacked up the price of insulin in the past years, this drug became the symbol of out-of-control healthcare costs.
In the US alone, over 30 million people suffer from diabetes. Of these patients, more than 7 million need to take insulin every day. The alarming part of this situation is that 1 in 7 patients who require insulin daily find their budget affected at “catastrophic” levels because of the medication’s cost. These patients allot a minimum of 40% of their disposable income to the treatment alone.
This is why Eli Lilly’s announcement marked a significant development in the sector after months of aggressive lobbying to lower the price of the drug. With the company’s decision, the pressure became more intense for other drugmakers to follow suit. Specifically, major insulin distributors like Sanofi (SNY) and Novo Nordisk (NVO) are urged to apply the same rule.
All in all, Eli Lilly has a virtually recession-proof model and a positive long-term outlook. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
February 14, 2023
Fiat Lux
Featured Trade:
(BETTER SAFE THAN SORRY)
(JNJ)
The market has been unstable but upbeat this year as a mix of optimistic investor sentiment and nagging concerns about the global economy has troubled investors. This is why investing in businesses on a long-term basis appears to be the trend these days.
After all, doing so makes it easier to get past near-term issues and enables investors to focus on excellent companies that can deliver significant returns in the course of more extended periods.
With these in mind, Johnson & Johnson (JNJ) emerges as one of the stable stocks worth consideration not only in the field of biotechnology and healthcare but also across the broader market.
JNJ is one of the biggest healthcare companies across the globe, and it will soon be split into two distinct entities. This spinoff is projected to be completed by November 2023, with both companies being publicly traded and aiming to pay out dividends.
A spinoff is in the works, with the company’s consumer health business turning into a new company named Kenvue. At the same time, its pharmaceutical and medical device sectors will continue under the central umbrella of JNJ.
The company’s consumer health segment historically records moderate growth, which fails to keep up with the more rapid growth experienced by its medical devices and pharmaceutical sectors.
In 2022, JNJ reported its total sales to be $95 billion, which was 1.3% higher than in 2021, with net earnings worth $18 billion. Broken down by division, the operational sales of consumer health climbed by 4%, while the pharmaceutical sector rose by 7%, and the medical devices sector increased by 6% compared to the prior year.
These results are somewhat expected considering the maturity of the consumer health segment along with the profit margins for the products in its portfolio. Nevertheless, having brands like Benadryl, Tylenol, Listerine, and Motrin would undoubtedly boost the consumer health arsenal. These widely known brands would enable this segment to sustain its growth, translating to stable ongoing gains over the long run.
JNJ’s move to buy Abiomed, the developer of the world-famous smallest heart pump, bolstered the company’s medical device sector.
Meanwhile, the company estimates its pharmaceutical sector to reach $60 billion in terms of revenue by 2025 courtesy of top-selling treatments such as cancer drug Erleada and Darzalex and plaque psoriasis medication Tremfya. In addition to the company’s robust pipeline, these projections propel JNJ’s top line forward.
Recently, JNJ increased its investment in biotech stock MeiraGTX (MGTX), lifting its stake from 3.7 million to 6.6 million shares. The two companies have been working together on the central nervous system, salivary glands, and eye treatments since 2019, with JNJ being the second-largest shareholder in this clinical-stage gene-therapy firm.
While its 2022 figures do not seem to be as impressive as others in the sector, it’s nothing to sneeze at either. In fact, it should be appreciated in the context of the longevity of JNJ’s business as well as the company’s long-established ability to continue delivering moderately-paced growth. Reviewing the last five years of JNJ, the business has grown its top and bottom line by approximately 17%.
The sheer size of JNJ and its leadership across practically all critical healthcare sectors ensured solid business and shareholder returns in the past years.
Over the last 10 years, this top-tier stock has delivered a total return of 190% for its shareholders. Meanwhile, its dividend, which the company has boosted for 60 consecutive years and counting, has climbed by 90%. Hence, investors on the lookout for a resilient company to buy and hold for a long time would be hard-pressed to find a more stable stock than JNJ.
Mad Hedge Biotech and Healthcare Letter
February 9, 2023
Fiat Lux
Featured Trade:
(AN EMERGING KING OF BIOSIMILARS)
(AMGN), (ABBV), (JNJ), (BAYG), (AZN), (REGN)
Patience is one of the key attributes that long-term investors need to cultivate, but practicing it is challenging. Stock markets are entirely unpredictable, and their ups and downs tend to rattle even the most experienced investors.
However, it’s essential to keep a calm mind and to be confident that the businesses you invest in have the fortitude to overcome even the most challenging economic or market downturn.
The biotechnology industry is an excellent place to search for stocks that can overcome market turmoils and succeed in the long run because the treatments they develop are so crucial to the lives of their clients.
Amgen (AMGN) is a biotech that would make an excellent long-term investment.
This business, which has been a leader in the biotech sector since the 1980s, is among the largest in the world.
Amgen is also a member of the renowned Dow 30 companies, with a focus on oncology, biosimilars, and inflammatory diseases. In the past 10 years, it has established a strong track record and solid revenue growth trajectory.
The company recently released its fourth-quarter results, and they looked a tad flat on the surface. The report disclosed a total revenue growth of only 2%, which could have been caused by the pressures linked to pricing and competition around the company’s top-selling cholesterol-lowering treatment Repatha, migraine drug Aimovig, and immunology medications Otezla and Enbrel.
Still, Amgen continues to be a solid profit-making business, holding an A+ grade in terms of profitability. It sustains considerable pricing power on its treatments under exclusive patents and from its up-and-coming portfolio of biosimilar candidates.
Amgen has maintained a BBB+ rated balance sheet. It also pays a respectable dividend yield of 3.5%, with a well-protected payout ratio of 44%.
The company has also recorded consecutive growth in this aspect for 11 years. Looking at these figures, Amgen has scored primarily As in terms of consistency, growth, dividend, and yield.
Notably, the company’s foray into the biosimilar landscape would make long-term investors of the company quite happy soon.
Its long-awaited biosimilar version of the No. 1 selling drug worldwide, AbbVie’s (ABBV) Humira, has recently been launched to market.
Amgen’s version, called Amgevita, is the leading biosimilar in this market to date. It already has a five-month lead over the next competitor, arming it with a lot of time to establish a more competitive standing.
Beyond this candidate, Amgen has at least six more biosimilars that it plans to launch in the US and across the globe from 2023 until the end of 2030. This timeline would give the company excellent visibility in the long run.
Another potential biosimilar blockbuster is ABP 654, which is a biosimilar of Johnson & Johnson’s (JNJ) top-selling immunology treatment Stelara.
Amgen also has biosimilar versions of Bayer's (BAYG) and Regeneron’s (REGN) eye disorder drug Eylea and AstraZeneca’s (AZN) rare kidney disease treatment Soliris.
Basically, biosimilars are knock-offs for biologic drugs. They cost less because the manufacturers do not spend less in the research, trials, and approval stages. The processes are also shorter and less risky.
Biosimilars provide a way for patients and the whole healthcare system to save billions of dollars, signaling a bright future for this segment. They offer more affordable options to patients, which is an excellent response to the rising prices of medicines.
This means biosimilar development is far less speculative than creating a new drug, as manufacturers only need to replicate the already established results and success of the existing “original” drug.
Moreover, biosimilars bring with them a degree of pricing power. Unlike traditional treatments, no two biosimilars are allowed to carry the same biologic profile and should still undergo a stringent FDA assessment prior to gaining approval.
Overall, Amgen is a good option for long-term investors on the lookout for a quality biotech to add to their portfolios. Thanks to its burgeoning portfolio of potentially top-selling biosimilars, it has long-term solid revenue growth catalysts. These factors make Amgen a compelling buy on the drop.
Mad Hedge Biotech and Healthcare Letter
January 31, 2023
Fiat Lux
Featured Trade:
(A SAFE HARBOR IN TUMULTUOUS TIMES)
(JNJ), (AZN), (BGNE)
Investors are still determining what to expect in 2023. The stock market could either gradually make a recovery or plummet deeper. In any case, it’s an excellent plan to add some high-quality stocks to your portfolio.
When choosing which company to invest in, it’s good to keep in mind Warren Buffett’s advice: "If you aren't willing to own a stock for 10 years, don't even think about owning it for 10 minutes.”
A safe and reliable stock to bet on is Johnson & Johnson (JNJ).
JNJ recently disclosed its fourth quarter and full-year financial report, wrapping up a resilient showing in 2022 amid the macro headwinds. In fact, the stock is up compared to 2021, outperforming the broader market and underscoring JNJ’s position as an undisputed “blue-chip” leader.
Apart from highlighting JNJ’s position, this healthcare titan’s earnings typically serve as a bellwether for the rest of the companies in the biopharma space. This means that the relative rosiness of JNJ’s report could back up the belief that Big Pharma is one of the defensive havens in this tumultuous market environment.
In its fourth-quarter earnings call, JNJ shared some ambitious sales growth projections for the following years. For instance, pharmaceutical sales that reached $52.6 billion in 2021 are anticipated to hit $60 billion in 2025. While this is exciting for investors, the road to that goal would be challenging.
JNJ has recently been struggling with the declining sales of two major drugs. The first is its blood cancer treatment called Imbruvica, which has been losing its market share to newer drugs like AstraZeneca’s (AZN) Calquence and BeiGene’s (BGNE) Brukinsa.
On top of the falling sales for Imbruvica, JNJ would also need to battle it out with biosimilars of its top-selling anti-inflammatory injection called Stelara by the end of 2023.
Nonetheless, JNJ’s overall sales climbed by 6.2% in 2022, with the business’ pharmaceutical sector expanding a little faster at 6.8%. As for its medtech segment, it grew a bit slower at 6.1%.
Then, JNJ has the consumer health sector. The segment’s operational sales recorded only 3.9% growth, which was well below the company’s two key business units. Clearly, this division is holding back JNJ’s overall development.
In an effort to resolve this situation and enable the company to grow into a more streamlined business, JNJ plans to spin off the consumer health sector into a new and separate company. This will be Kenvue, which is expected to be launched by the second half of the year.
This move will turn JNJ into a nimbler and more rapidly growing business with a renewed focus on medtech and pharmaceuticals. Moreover, the planned spinoff could offer a short-term catalyst for JNJ stock.
On top of all these, JNJ will most likely announce its 61st consecutive annual dividend increase in April. It’s expected that the company will pay shareholders $4.52 per share every year, showing off a dividend yield of 2.67%. In comparison, the industry average is approximately 2.15%.
These issues cast some doubt on JNJ’s ability to hit its $60 billion target. Nevertheless, it reported a positive outlook for 2023. In its full-year guidance, JNJ projected sales to be between $96.9 billion and $97.9 billion. This indicates an annual growth rate of 5%.
Let’s circle back to the idea that JNJ serves as a good bellwether for the rest of the broader market. This Big Pharma leader is a part of the Dow Jones Industrial Average (DIA) and is included in the Top 10 names in the S&P 500. These are critical factors in using JNJ as an indicator for the rest of the companies.
If JNJ can deliver, or even exceed, EPS estimates and report positive earnings this 2023, then the projections are optimistic for other big companies expected to face similar headwinds.
Big Pharma notably outperformed the broader market in 2022, with investors looking into this segment as a safe harbor amid the economic and financial meltdowns. For context, the S&P 500 Pharmaceuticals industry sector increased by 5.6%. Meanwhile, the broader index fell by 19.4%.
Overall, JNJ is a top-quality stock that maintains a positive outlook in the long run amidst the short-term macro headwinds.
Mad Hedge Biotech and Healthcare Letter
January 24, 2023
Fiat Lux
Featured Trade:
(A MARKET-BEATING HEALTHCARE STOCK)
(LLY), (ABBV), (AMGN), (BMY), (GILD), (JNJ), (MRK), (PFE), (MRNA)
The previous year was horrible for the stock market, with the S&P 500 dropping in value by roughly 19%, marking its first decline since 2018 and only the second time it sank since the 2008 financial crisis.
It was an even more horrid year for the biotechnology industry, with the flagship SPDR S&P Biotech ETF (XBI) sinking by 26% following its more than 20% decline in 2020—a catastrophic blow for such a promising index which delivered an impressive over 30% gains in 6 of the last 10 years.
Meanwhile, the stock prices in the large-cap pharmaceutical segment generally stayed buoyant. The “Big 8,” in particular—AbbVie (ABBV), Amgen (AMGN), Bristol Myers Squibb (BMY), Eli Lilly (LLY), Gilead Sciences (GILD), Johnson & Johnson (JNJ), Merck & Co (MRK), and Pfizer (PFE)—reported an average share price gains of roughly 15%.
Among the names in this list, Eli Lilly has become one of the go-to “safe” stocks during these turbulent times.
In contrast to the broader market, the company has performed exceptionally well in the last 12 months, with its share prices climbing by 12% within the timeframe.
One of the critical reasons that propelled Eli Lilly’s performance was the regulatory approval it obtained for Mounjaro, a diabetes treatment, in May 2022. Although this pharma giant has been hailed as the leader in the diabetes care segment for decades, Mounjaro is a game changer.
This newly approved diabetes treatment could blow any competitor out of the water, with peak sales estimated to hit $25 billion.
Besides diabetes, Mounjaro is also under review as a potential obesity treatment, signifying label expansions for this drug.
If this pushes through, then Eli Lilly would become one of the first movers in the diabetes and obesity markets, with only Novo Nordisk (NVO) standing as a realistic challenger. Based on the market size and the lack of competitors, the profit margins for these segments could be likened to those recorded by Pfizer and Moderna (MRNA) for the COVID-19 vaccines.
There are also other promising candidates in Eli Lilly’s portfolio. One is Donanemab, which is a potential treatment for Alzheimer’s disease. According to the company's Phase 3 study, its candidate delivered better results than Biogen’s (BIIB) approved Alzheimer’s treatment, Aduhelm.
Eli Lilly recently sent its atopic dermatitis treatment candidate, Lebrikizumab, for regulatory review in both the US and Europe. This marks another potential blockbuster for the company, with many treatments queued for review and possible approval by the end of 2023.
As for the company’s current portfolio, most of its products still report good results. For instance, sales of its cancer drug Verzenio rose by 84% year over year to record $617.7 million in the third quarter of 2022. Revenue for the diabetes treatment Trulicity climbed 16% year over year to reach $1.9 billion.
Another factor that makes Eli Lilly attractive is its dividend. Over the past five years, the company has doubled its payout. In 2022, the company disclosed a 15% hike to its dividend payouts. This marked the fifth consecutive year Eli Lilly implemented.
In December 2022, Eli Lilly shared its updated guidance for 2023. For 2022, the company projected that its top line would be between $28.5 billion and $29 billion. That represents a modest growth rate. Eli Lilly shareholders can anticipate better performance this year.
For 2023, the company estimates sales to climb to $30.8 billion. While that amount may appear underwhelming, it’s essential to keep in mind that this is a very conservative estimate. Eli Lilly is taking into account several concerns that may affect its growth, such as patent exclusivity losses and a decline in its COVID-19 sales.
Overall, Eli Lilly has proven itself to be a good and solid business that looks in excellent shape to continue delivering market-beating returns.
With a market capitalization of over $350 billion and several candidates in its pipeline, this company has a strong potential to be worth much more in the following years. Also, it’s critical to bear in mind that since 2020, Eli Lilly shares have skyrocketed by 176%, dwarfing the S&P 500’s 20%—a trend I expect to continue. I suggest you buy the dip.
