Mad Hedge Biotech & Healthcare Letter
March 30, 2021
Fiat Lux
FEATURED TRADE:
(A PURE PLAY STOCK SELLING AT A BARGAIN)
(PFE), (BNTX), (MRNA), (AZN), (JNJ), (NVAX), (MRK), (VTRS), (LLY), (REGN)
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It’s virtually impossible to find a period in history when drug development gained the unmitigated attention of the whole world.
Yet, this is exactly what happened in 2020 when we all waited with bated breath for the results of COVID-19 trials from the likes of Pfizer (PFE), BioNTech (BNTX), Moderna (MRNA), AstraZeneca (AZN), Johnson & Johnson (JNJ), and Novavax (NVAX).
Despite this, it is astounding that biopharmaceutical stocks are cheaper than they have ever been in the past 20 years.
Given the fact that its collaboration with BioNTech made a central figure in the COVID-19 vaccine race, I think it’s best to put a spotlight on Pfizer today.
Pfizer was the first biopharmaceutical company to successfully market a COVID-19 vaccine, BNT162b2.
Recently, Pfizer received another good news. The FDA is no longer demanding that the company transport BNT162b2 at ultra-low temperatures.
When Pfizer revealed its strong results last year, the world was impressed and no one barely noticed the ultra-cold storage requirement that the achievement entailed.
But with competitors already gaining approvals as well, this particular requirement started to pose noticeable challenges to Pfizer’s vaccine supply chain and made it extremely challenging transporting the much-needed vaccines to remote areas.
These challenges highlight the significance of the recent FDA announcement regarding BNT162b2.
In terms of market share, Pfizer holds a significant advantage over the others.
As of the year-end of 2020, the company supplied 65 million doses to developed markets.
Meanwhile, the 2021 forecast for this product is at nearly 2 billion doses. This is estimated to rake in roughly $15 billion in revenue for Pfizer.
In comparison, Moderna’s advanced purchase deals are estimated to be worth $18 billion.
To sustain immunity, there’s the possibility that the vaccine would be needed annually.
This could lead to substantial demand for doses, with a two-dose vaccine like BNT162b2 projected to reach about 10 billion doses every year.
Realistically, the rising need for doses and the manufacturing requirements will obviously pressure profit margins.
However, if the vaccine does turn out to be an annual necessity, then it could become a valuable asset.
The entire COVID-19 market is estimated at $39 billion in 2021 and $23 billion in 2022.
Pfizer and even Moderna’s first mover advantage can easily help them dominate the market this year.
This means that the competition will heat up by 2022.
To ensure that it keeps the lead, Pfizer has commenced the Phase 1 trial for a COVID-19 pill.
Pfizer’s pill, dubbed PF-07321332, aims to inhibit the enzymes that cause the SARS-CoV-2 virus to replicate. The goal is to create an antiviral drug that works pretty much the same way as the one developed for HIV and Hepatitis C.
If the trials generate positive results, then PF-07321332 could be taken at the first sign of infection.
So far, lab results have shown the pill’s potent capacity to prevent the SARS-CoV-2 virus and other coronaviruses from replicating.
Pfizer isn’t the only one that came up with the idea of a COVID-19 pill. Merck (MRK), Eli Lilly (LLY), and Regeneron (REGN) have been conducting tests for their own version of the antiviral.
However, Pfizer is more than its COVID-19 programs.
In the past, investors wondered about the long-term growth potential of this company. Some questions are linked to its Upjohn unit, which included several products that lost patent exclusivity.
This segment clouded Pfizer’s pure play revenue and even its earnings growth. However, these questions were put to an end last year when Upjohn’s finally separated from Pfizer and formed a new company, Viatris (VTRS), with Mylan.
The effect of this move showed an amplified growth for Pfizer almost immediately.
In the fourth quarter alone of 2020, the company reported $11.68 billion in revenue, indicating a 12% increase year-over-year. If we exclude the sales from the COVID-19 vaccine, Pfizer’s revenue was still up by 8%.
Every key product segment in the company recorded revenue growth, which is remarkable considering the effects of the pandemic.
Revenue for its oncology sector went up 23% to reach $3 billion, with breast cancer treatment Ibrance leading the charge with an 11% boost to its sales to hit $1.4 billion.
To ensure that it corners the market, Pfizer also launched biosimilars Zirabev and Ruxience in the same quarter. Both generated $171 million in total.
Outside its COVID-19 program, other products in Pfizer’s vaccine segment significantly contributed to the 17% increase in revenue to reach $2 billion.
For example, the pneumonia vaccine Prevnar generated $1.8 billion thanks to the 10% boost in its revenue year-over-year.
As for Pfizer’s rare disease unit, revenue went up 24% to reach $865 million.
The segment leader so far is cardiomyopathy treatment Vyndagel, which achieved a jaw dropping 96% year-over-year boost in its revenue to generate $429 million. This product won’t face patent loss until 2026, so Pfizer still has a few more years to take advantage of it.
Pfizer’s revenues in 2020 were up 2% at $41.9 billion. Considering that it still managed to boost sales despite the pandemic, there’s a good chance that 2021 will be a better year for the company.
In fact, Pfizer estimates that it would reach nearly $60 billion in revenue, with an annualized EPS of roughly $3.15 in 2021.
Global sales in the biotechnology and healthcare industry are projected to be worth $1.2 trillion annually. This is a massive market that is all but guaranteed.
The S&P 500 trades at nearly 21.5x forward earnings, with pharmaceutical companies trading at only 13.2x. That’s a whopping 60% discount.
Considering that drug stocks have historically traded at roughly the same level as the S&P 500, the current situation still offers an unmistakable promise even if nothing else happens.
Continuous development in the sector not only advances our quality of life but also offers reasonable returns to investors.
Mad Hedge Biotech & Healthcare Letter
March 23, 2021
Fiat Lux
FEATURED TRADE:
(THIS ISN’T THE TIME TO HIT THE PANIC BUTTON)
(AZN), (PFE), (BNTX), (ALXN), (MRK), (RHHBY)
Everybody will have heard about the issue in Europe these days, with more countries suspending dosing of the COVID-19 vaccine from AstraZeneca (AZN) and Oxford.
However, I think gaining clarity over the situation is important.
I haven’t been the greatest advocate of the AstraZeneca vaccine because its initial rollout was, to put it mildly, botched.
At the time, it was difficult to determine just how efficacious the vaccine, AZD1222, really was, and the latest figure I heard is that it’s 60% effective.
While the European Medicines Agency declared AZD1222 as safe, many member states of the EU seem to disagree, pointing out the reports of blood clotting issues after dosing.
I can see several apparent levels of this concern, but the most pressing, clearly, is medical.
The main problem that the experts are figuring out isn’t about the fairly common blood clots, which actually occurred at background levels and can generally be observed among elderly folks.
Their focus is the extremely rare autoimmune disorder that’s triggered when the body starts aggressively destroying the platelets needed for clotting.
That particular condition is hard to treat and can even be fatal.
Although they haven’t zeroed in on the specifics of the problem just yet, the experts agree that the blood clot issue is caused by some sort of overreaction in the immune system.
The stimulus for this reaction is still under review, but there’s a growing consensus that it could be genetic predisposition in a rare group of people.
This could be the same case as the doctor in Florida who died because of his immune system’s overreaction, which was triggered by the vaccine from Pfizer (PFE) and BioNTech (BNTX).
That’s not conclusive though, since it’s the only case cited in the United States.
The experts also pointed out that the condition is extremely rare, which was why it was not observed even in the Phase 3 trial of AZD1222.
While this is clearly a medical issue, there’s also an image issue for AstraZeneca to think about. How does this negative news on AZD1222 affect the stock?
Here’s a key point to keep in mind when analyzing AstraZeneca’s potential: The company is not selling AZD1222 for a profit while we’re going through the pandemic.
That means that suspending the dosing of AZD1222 won’t hurt AstraZeneca’s profit for 2021.
However, that doesn’t mean that AZD1222 has absolutely no effect on the company’s standing.
If anything, AZD1222 is an earnings opportunity for AstraZeneca in the future because the company’s expected to raise prices and generate a profit after the pandemic.
To underscore this goal, AstraZeneca has actually been ramping up capacity to manufacture at least 3 billion doses every year.
Considering this target, AstraZeneca is clearly signaling that it has the infrastructure to become a dominant player—if not the ultimate market leader—in the coronavirus vaccine sector.
If the issues with AZD1222 are resolved, then AstraZeneca holds a product that could rake in billions in revenue in the years to come.
Notably, AstraZeneca’s shares haven’t budged much regardless of the vaccine news released.
Since April 30, which was the day that the company announced its plans to join the COVID-19 vaccine race, AstraZeneca stock has fallen by roughly 6%.
In the past 11 months, which was filled with ups and downs for AZD1222, and up until the European countries suspended dosing in March 2021, the shares barely changed.
On the whole, AstraZeneca isn’t exactly known for massive one-year gains.
Rather, investors enjoy long-term wins, as seen in the company’s impressive 75% climb in over the past five years.
So far, AstraZeneca has 38 candidates in its pipeline queued for Phase 1 trials, 54 are slated for Phase 2, and 41 are lined up to go through Phase 3.
To fight off stagnation, AstraZeneca acquired biotechnology company Alexion Pharmaceuticals (ALXN) for a whopping $39 billion last December.
This deal offers a major expansion in AstraZeneca’s portfolio because Alexion brings with it its famed rare disease drug Soliris, which generates approximately $1 billion in revenue every quarter.
For 2020 alone, Alexion was estimated to add up to $5.95 billion in sales.
By 2025, AstraZeneca projects that Alexion will be on track to consistently contribute double-digit growth in its annual revenue.
It’s reasonable to say that AstraZeneca is one of the frontrunners in the COVID-19 race.
However, the past weeks have seen the company’s woes multiply due to questions on AZD1222’s side effects.
It’s worth reminding ourselves though why huge biopharmaceutical companies like AstraZeneca, Pfizer, Merck (MRK), and Roche (RHHBY) are not sensitive to these vaccine updates: They do not rely on their vaccine revenue alone for growth.
AstraZeneca markets an extensive array of products, which include eight blockbuster drugs.
In 2020, the company’s sales climbed by 10% to reach over $25 billion year-over-year.
Therefore, the reports on AstraZeneca’s AZD1222 isn’t a cause for alarm. The company’s overall portfolio is well-positioned to drive profit higher in the next several years.
More importantly, if AstraZeneca’s track record serves as any indication, then long-term shareholders should remain optimistic about the company’s growth trajectory.
Mad Hedge Biotech & Healthcare Letter
March 9, 2021
Fiat Lux
FEATURED TRADE:
(AN MRNA STOCK TO CONSIDER)
(BNTX), (MRNA), (PFE), (NVS), (SNY), (AZN), (JNJ), (NVAX), (MRK), (BMY), (REGN), (DNA), (CVAC), (FB), (TSLA), (GOOG)
Mad Hedge Biotech & Healthcare Letter
March 4, 2021
Fiat Lux
FEATURED TRADE:
ARE WE THERE YET: HOW THE JNJ VACCINE COULD BE THE ANSWER
(JNJ), (MRNA), (PFE), (BNTX), (MRK), (SNY)
Since the pandemic started, we’ve had two extremely similar COVID-19 vaccines approved: the mRNA vaccines created by Moderna (MRNA) and Pfizer (PFE) / BioNTech (BNTX).
Now, there’s another coronavirus shot that gained FDA approval: Johnson & Johnson’s (JNJ) adenovirus jab.
In fact, JNJ’s candidate received a unanimous approval from the FDA—a first among the COVID-19 vaccine developers.
Results showed that JNJ’s shot has 66% effectivity at preventing coronavirus infections and 85% effective at blocking severe COVID-19 cases when allowed at least four weeks to take effect.
Taken at face value, the numbers from JNJ’s trials may not seem as impressive as the two-shot vaccines of Moderna or Pfizer, which both demonstrated efficacy results of over 94% in their 2020 reports.
However, it’s important to not make any conclusions based on incomplete data.
After all, drawing comparisons among different vaccine studies performed at different periods is practically comparing apples to oranges.
That’s why Dr. Anthony Fauci and other experts declared that they’ll just take whichever vaccine shot they could avail of.
Actually, the JNJ vaccine may be the ideal option for some people.
Since the JNJ vaccine shows less severe reactions compared to Pfizer and Moderna’s vaccines, this could be preferable for people who couldn’t tolerate the side effects.
Although the side effects of Pfizer and Moderna are temporary, some people need to take days off to recover. Sadly, not everyone has the luxury to do that.
The fact that it’s a single jab vaccine makes it an attractive option for young and healthy individuals, who can’t afford to go back to get a second shot.
It’s also less fragile and can be stored in a regular fridge for three months without the need for any hyper-cold storage system like the mRNA vaccines require. This would make it an attractive option for rural areas.
Plus, JNJ tested its candidate at the height of the pandemic. That means the numbers the company released could have been affected by the situation at the time.
Although JNJ’s vaccine does not completely get rid of the disease, it delivers on the promise of protecting the patients from the worst possible scenarios of COVID-19: hospitalization and death.
Basically, the JNJ vaccine is cheap to manufacture as well as pretty simple to administer and get.
People can get some dependable viral protection within a span of four weeks, without the need to return for a second jab.
As a bonus, the JNJ vaccine could even protect you better from the new variants that are starting to spread fast.
Despite the $410 billion market capitalization of JNJ though, it looks like the New-Jersey-based giant isn’t up for the massive rollout the world expects from its vaccine.
This is where Joe Biden steps in.
With the goal of having every American vaccinated by the end of May, Biden tapped Merck—a fierce rival of JNJ—to help out with the production.
While Merck’s own COVID-19 vaccine program was shut down, this company remains the leading vaccine developer across the globe.
This means it knows a thing or two about fast-moving mass production during outbreaks—and this is exactly the kind of expertise JNJ needs.
If things work out, JNJ should be able to produce 94 million doses by the end of May—roughly 7 million doses ahead of what’s stipulated in its contract—and the full 100 million by June.
This arrangement isn’t anything new. Since the COVID-19 pandemic, competitors have been joining forces to find ways to put an end to the crisis.
In January this year, Sanofi (SNY) announced that it would be collaborating with BioNTech to help manufacture additional doses of the COVID-19 vaccine it developed with Pfizer.
When JNJ receives authorization from the EU as well, Sanofi would also be there to help with the production.
The JNJ vaccine could just be the escape hatch we’ve all been waiting for since the pandemic started.
With this FDA authorization, we’d be able to vaccinate millions more at a breakneck speed.
Global Market Comments
March 4, 2021
Fiat Lux
Featured Trade:
(THE BARBELL PLAY WITH BERKSHIRE HATHAWAY),
(BRKA), (BRKA), (BAC), (KO), (AXP), (VZ), (BK) (USB),
(TLT), (AAPL), (MRK), (ABBV), (CVX), (GM), (PCC), (BNSF)
It’s time to give myself a dope slap.
I have been pounding the table all year about the merits of a barbell strategy, with equal weightings in technology and domestic recovery stocks. By owning both, you’ll always have something doing well as new cash flows bounce back and forth between the two sectors like a ping pong ball.
After all, nobody gets sector rotation right, unless they have been practicing for 50 years, like me.
Full disclosure: I have to admit that after 50 years of following him, I love Buffet. He was one of the first subscribers to my newsletter when it started up in 2008. Some of his best ideas have come from the Mad Hedge Fund Trader, like buying Bank of America for $5 in 2008.
Oh, and he hates Wall Street for constantly fleecing people. Ditto here.
In reading Warren Buffet’s annual letter (click here for the link), it occurred to me that his Berkshire Hathaway (BRKB) shares were in effect a one-stop barbell investment.
For a start, Warren owns a serious slug of Apple (AAPL), some $120 billion worth, or 2.5% of the total fund. That gives (BRKB) some technology weighting. It cost him only $20 billion. The dividends he received entirely paid for the initial cost. So he owns 4% of Apple for free.
I remember the battle over the initial “BUY” five years ago. Warren fought it, insisting he didn’t understand the smart phone business. In the end, he bought Apple for its global brand value alone.
That is Warren Buffet to a tee.
The next five largest publicly listed holdings are Bank of America (BAC), Coca-Cola (KO), American Express (AXP), and Verizon Communications (VZ). These are your classic domestic recovery sectors. And with a heavy weighting in other banks (BK) (USB), Buffet is effectively short the bond market (TLT), another position I hugely favor.
Also included in the package is a liberal salting of pharmaceuticals, Merck (MRK) and AbbVie (ABBV). He has a small energy weighting with Chevron (CVX). He even has a position in old heavy metal America with General Motors (GM).
Berkshire is also one of the world’s largest property & casualty insurance owners. Its current “float” is $138 billion. You all know his flagship holding, GEICO. And the gecko mascot isn’t going anywhere as long as Warren lives. It was Warren’s idea.
It all seems to work for Warren. In 2020, he earned a staggering $42.5 billion. All told, Berkshire’s businesses employ 360,000, second to only Amazon (AMZN), and is the largest taxpayer in the United States, accounting for 3% of government revenues. Berkshire is also the largest owner of capital goods & equipment in the US worth $156 billion, topping (AT&T).
Many of Warrens's early 1956 $1,000 investors are millionaires many times over….and over 100 years old, prompting him to muse if ownership of his shares extended life.
Warren’s annual letter, which he spends practically the entire year working on, is always one of the best reads in the financial markets. There isn’t a better 50,000-foot view out there. He also admits to his mistakes, such as his disastrous purchase of Precision Castparts (PCC) in 2016 for $37 billion, which later suffered from the crash in the aerospace industry. In 2020, Buffet wrote off $11 billion of that acquisition.
He can do worse. In 1993, he bought the Dexter Shoe Company for $433 million worth of Berkshire stock. The company went under, but the Berkshire stock today is worth $8.7 billion.
Buffet’s letters always refer back to some of his “greatest hits,” today legends in the business history of the United States: GEICO, Furniture Mart, Berkshire Hathaway Energy, and See’s Candies, one of the largest employers of women in the US using 150-year-old recipes. Its peanut brittle is to die for.
In 2009, Buffet snatched away from me BNSF for a song, now the most profitable railroad in the country, an amalgamation of 360 railroads over 170 years. I say “snatched away” because it was my favorite railroad trading vehicle for decades until he bought the entire company. I hear its trains run by my home every night as a grim reminder.
Another benefit to owning (BRKB) is that Buffet is far and away the largest buyer of his own shares, soaking up $25 billion worth in 2020. And he is buying the shares of other companies that are also aggressively buying their own shares, like Apple ($200 billion with last year). It all sounds like the perfect money creation machine to me.
It gets better. Berkshires “B” shares trade options, meaning you can buy LEAPS (Long Term Equity Anticipation Securities), which by now, you all know and love. I’ll run some numbers for you.
With (BRKB) now trading at $254, you can buy the January 2023 $300-$310 call spread for $2.50. If the shares close anywhere over $310 by the 2023 expiration, the position will be worth $10.00, giving you a gain of 300%. And you only need an appreciation of $56, or 22% in the shares to capture this blockbuster profit, giving you upside leverage of an eye-popping 13.63X in the best run company in America.
See, I told you you’d like it.
This is how poor people become rich. In fact, my target for (BRKB) is $300 for end of 2021 and $400 for 2022, right when the two-year LEAPS expire.
One question I often get about Berkshire is what happens when Warren Buffet goes to his greater reward, not an impossible concept given that he is 90 years old.
I imagine the shares will have a bad day or two, and then recover. Buffet has been hiring his replacements for a decade or more, and he handed off day-to-day operation years ago (I didn’t want to move to Omaha, no mountains).
When that happens, it will be the best buying opportunity of the year. And another chance to load up on those LEAPS.
Mad Hedge Biotech & Healthcare Letter
February 23, 2021
Fiat Lux
FEATURED TRADE:
(IS THIS THE YEAR OF BIOTECH UPSTARTS?)
(PFE), (GSK), (MRK), (SNY), (MRNA), (BNTX), (NVAX), (AZN)
