Mad Hedge Biotech and Healthcare Letter
March 30, 2023
Fiat Lux
Featured Trade:
(ANOTHER MONOPOLY ON THE RISE)
(ZTS), (PFE)
Posts
Whether you’re a devoted dog mom or a tough-as-nails cattle rancher, you’ll most likely agree that animals should have healthcare, pretty much like humans. This is where Zoetis (ZTS) comes in, a company that focuses exclusively on developing treatments and other healthcare needs for livestock and, of course, pets.
Zoetis is the only pure-play animal health company in the world. It sells everything related to animal healthcare, from painkillers for your beloved pets to diagnostic equipment needed in veterinary clinics. Spun off from Pfizer (PFE) roughly a decade ago, Zoetis’ profits have consistently climbed thanks to the steady rise in spending on domestic animals.
Admittedly, macroeconomic issues and a pause in earnings growth recently affected the stock negatively, which saw its price fall by almost 13% since 2022. However, short- and long-term catalysts are anticipated to boost the stock this year, with the company expected to report at least a 33% increase in price in the following months.
Pet ownership across the globe has been exhibiting an increase in demand even before the pandemic, with pets gaining more importance and getting treated as part of the family. This indicates lower chances of skimping when it comes to their health, paving the way for more innovative treatments and possibly more expensive trips to the vet.
The increasing demand for animal protein has also called for higher livestock production worldwide, which translates to more sales in the animal healthcare sector. In fact, over half of the antibiotics sold in 2022 were used for the improvement of farm yields.
Incredibly, even concerns over recession have not hampered these trends. If anything, the demands continue to rise.
This is one of the most compelling reasons to consider Zoetis stock. It is already the biggest name in the global markets, particularly for companion animals, cattle, swine, and even fish. Since it is virtually a monopoly in the animal healthcare industry, it is strategically positioned to sustain its momentum and penetrate the market quicker than the up-and-coming competition.
Its total addressable market is estimated to be approximately $45 billion. For context, this market recorded an annual growth of 5.8% over the past 20 years.
Surprisingly, Zoetis only spent $529 million out of its $8 billion revenue for research and development, which means it won’t cost the company too much money to continue churning out new drugs, vaccines, software packages, treatments, and other animal healthcare needs for the foreseeable future.
The company is also expanding faster compared to the broader market, with Zoetis’ earnings forecast to rise at an average of 13% each year over the following five years.
Another underappreciated factor that makes Zoetis attractive is its pipeline of innovation. Unlike competitors that depend on price hikes for their growth, Zoetis leverages its cutting-edge innovations.
An excellent example is its game-changing drug, Simparica Trio, a triple combo product for parasite prevention launched in 2020. By 2022, sales of this drug jumped by an impressive 57% to hit $744 million. Another example is Librela, an osteoarthritis treatment for dogs, which achieved the blockbuster status of $100 million in sales outside the United States and is slated for release in the country sometime this 2023. Meanwhile, a feline counterpart of the drug, Solensia, received FDA approval last year and raked in $30 million in revenue.
These types of innovations provide Zoetis with a competitive edge in the form of a unique organic volume growth trajectory that’s not found in other companies.
Notably, a mere $100 million qualifies an animal health drug as a blockbuster. This is one reason that discourages potential Big Pharma rivals from entering the space and challenging Zoetis. After all, they are used for human drugs worth $1 billion or more.
However, it’s essential to remember that many animal treatments are paid out of pocket. That means there are no insurance companies pressuring the patients to get or switch to cheaper drugs or generics even when Zoetis’ products lose their patent exclusivity. Actually, in 2019, about 75% of the company’s revenue was generated from its products that had already lost patent protection.
Overall, Zoetis is a solid investment thanks to its growth potential and highly competitive moat. It has a strong track record and an impressively diverse revenue stream, making this animal health company well-equipped to sustain its momentum in the years to come at a fast pace. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
February 28, 2023
Fiat Lux
Featured Trade:
(NO REST FOR THE WEARY)
(PFE), (BNTX), (SGEN), (MRK)
Pfizer (PFE), along with its partner BioNTech (BNTX), developed one of the first COVID-19 vaccines to receive emergency use authorization from regulatory bodies worldwide. The Pfizer-BioNTech vaccine has been highly effective in preventing COVID-19 infection and has played a significant role in the global effort to curb the pandemic.
In addition to its vaccine, Pfizer also developed a COVID-19 treatment called Xeljanz, which has shown promising results in clinical trials. Xeljanz, originally developed to treat rheumatoid arthritis, is an oral medication that works by blocking a molecule involved in the immune response, which can reduce the risk of severe illness and death in some COVID-19 patients.
The Pfizer-BioNTech vaccine and Xeljanz have contributed to the company's financial success during the COVID-19 pandemic. In fact, this lineup made up the bulk of Pfizer’s operational growth of an impressive 30% year over year, pushing the company’s sales in 2022 to a whopping $100 billion.
But now that the pandemic has come to an end, Pfizer faces a massive revenue hit. With its boatload of cash, however, the company is in excellent shape and position to make an acquisition.
The latest name under Pfizer’s radar is Seagen (SGEN).
This is the second time Seagen has found itself the center of acquisition reports. In 2022, the biotech was said to be in serious discussion with Merck (MRK). At one point, Merck reportedly offered $200 per share, but the talks fell apart because neither party was happy with the final price.
Now it’s Pfizer’s turn to pitch its offer. The Big Pharma company is said to be in discussions to buy the cancer-focused biotech for a deal worth more than $30 billion.
This deal could prove to be a boon for Pfizer as the company sustains its momentum and continue to boost its portfolio and late-stage programs. Aside from the waning sales of its COVID products, it also faces a patent cliff as some of its blockbuster drugs will soon lose their exclusivity.
Seagen focuses on a group of cancer therapies called antibody-drug conjugates, or ADCs.
Basically, ADCs are a type of cancer treatment that combines the specificity of antibodies with the potency of chemotherapy. ADCs consist of three components: an antibody that targets a specific cancer cell marker, a cytotoxic drug that kills the cancer cell, and a linker that connects the two components.
Once the ADC is administered to the patient, the antibody portion of the ADC selectively binds to the cancer cell surface marker. Then the entire ADC is internalized into the cancer cell. Once inside the cancer cell, the linker is degraded, and the cytotoxic drug is released, killing the cancer cell.
The advantage of ADCs over traditional chemotherapy is that they are more selective and can target cancer cells more precisely while minimizing damage to healthy cells. ADCs have shown promising results in clinical trials and are currently approved for the treatment of several types of cancer.
In 2019, Seagen received FDA approval for its ADC named Padcev. The treatment raked in $451 million in 2022, but sales are projected to reach $2.4 billion in 2027.
Since Merck has been working on its own ADCs, a Pfizer acquisition of the sought-after Seagen seems likely as it would not attract anti-trust investigations.
One of the main reasons Big Pharma names are fighting over Seagen is the biotech’s revenue forecasts. By 2026, Seagen is projected to rake in $5 billion in revenue and peak at $9 billion by 2030.
Aside from Padcev’s current indication, Seagen has been working on how it could be used as a combo treatment alongside Merck’s top-selling Keytruda to target bladder cancer. The company also queued the drug for several trials. These would boost the company’s $2 billion annual revenue and $30.1 billion market value if approved.
Pfizer has been sitting on a massive war chest thanks to the success of its COVID programs. Despite its impressive cash flow, the company has no time to rest as it scrambles to ride the momentum and ensure that all its progress doesn’t go to waste.
Since then, the company has been aggressive in striking deals, including its $11.6 billion purchase of Biohaven Pharmaceuticals, which came with a top-selling migraine treatment, and its $5.4 billion agreement with Global Blood Therapeutics, which brought with its rare hematological therapies.
If Pfizer buys Seagen, it will mark the most significant deal since the Big Pharma’s acquisition of Wyeth for $68 billion back in 2009.
Pfizer disclosed that it plans to add $25 billion to its annual revenue via business development agreements at the end of the decade as it aims to mitigate the projected $17 billion loss from its products going off-patent. Considering that the company would buy Seagen shares at a premium, the deal would be a win-win for both parties.
Mad Hedge Biotech and Healthcare Letter
February 7, 2023
Fiat Lux
Featured Trade:
(AN ICONIC BLUE-CHIP PHARMA SELLING AT A DISCOUNTED PRICE)
(PFE), (MRNA), (NVAX), (BNTX), (LLY), (NVO)
Pfizer (PFE) possibly contributed more than any other business in getting the world back to normal from the pandemic. It was rewarded with an impressive windfall courtesy of its twin COVID-19 programs: the blockbuster vaccine and the top-selling treatment, Paxlovid.
However, the world has already stopped fretting over COVID. As expected, Pfizer is paying the price for this turn of events. Sales of its COVID blockbusters are estimated to decline by more than 60% in 2023 after raking in a total of roughly $57 billion in 2022.
The company projects that Comirnaty vaccine sales would fall from $37.8 billion in 2022 to $13.5 billion in 2023, while Paxlovid would drop from $18.9 billion to $8 billion. After all, the United States and several countries already have massive stockpiles of the Pfizer vaccine and Paxlovid, recorded under the 2022 revenue. It would take until June 2023 to work through them.
In effect, Pfizer and other COVID plays like Moderna (MRNA), Novavax (NVAX), and BioNTech (BNTX) have fallen out of favor.
Still, Pfizer remains positive about the future of its COVID franchise. The company anticipates that 24% of Americans, or about 79 million, will get a COVID vaccine in 2023. In comparison, 31% or roughly 104 million, received the vaccine in 2022. Pfizer also expects to sustain its dominance, with a 64% market share for the vaccine alone.
Moreover, Pfizer has a robust pipeline—and pipelines are the driving force behind drug stocks.
With mRNA technology's momentum, Pfizer is optimistic about its combined flu-COVID vaccine. The company foresees around 132 million Americans lining up for this two-disease vaccine, which it hopes to launch by 2026.
Shifting the discussion away from COVID, Pfizer estimates non-COVID revenue to increase by 6% annually through 2025, then projects a similar trajectory or better every year through 2030 to hit at least $70 billion.
Announcing these projections is a bold move, especially since Pfizer faces one of the most significant patent cliffs starting 2025 to 2028. Several top-selling treatments, which generate roughly $17 billion in yearly sales, will lose patent protection and face generic competition.
Pfizer is aggressively filling these anticipated voids with acquisitions, including three exciting companies: Global Blood Therapies, Biohaven Pharmaceuticals, and Arena Pharmaceuticals.
In 2022 alone, the company spent $26 billion, which granted Pfizer access to promising drugs for sickle-cell anemia, migraines, and ulcerative colitis.
By 2030, the company projects these and its subsequent acquisitions to generate at least $25 billion in annual revenue. This means it’s still on the lookout for more acquisitions.
Actually, the company estimates that it’s just 40% on the way to hitting its target of $25 billion in 2030 revenue coming from acquired treatments. This means the company would most likely spend another $50 billion in acquisitions to reach its goal.
In terms of its internal pipeline, Pfizer’s candidates can rake in at least $20 billion in sales by 2030. Some of its key launches include vaccines for the flu, meningitis, and respiratory syncytial virus (RSV). It also has treatments targeting blood cancer and atopic dermatitis.
Meanwhile, its oral diabetes and obesity products, which are currently in clinical trials, have the potential to generate roughly $10 billion in annual sales. If approved, these would allow Pfizer to go head-to-head against Eli Lilly (LLY) and Novo Nordisk (NVO).
Overall, Pfizer is an “iconic, blue-chip company” that’s on a discount these days. It is down roughly 15% this 2023, offering an excellent window for investors who want to buy the stock.
The company trades for 13 times its estimated earnings in 2023 and yields 3.7%, which is over double the S&P’s dividend rate. With this payout, along with its solid earnings and one of the best balance sheets across the industry, Pfizer looks incredibly safe.
However, it’s essential to be realistic. Pfizer’s goal is to go through this year minimally unscathed. Although its performance in 2022 was impressively strong, with revenue surging to a whopping $100 billion compared to $42 billion in 2020, the year 2023 is a reset period for the business.
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.
Mad Hedge Biotech and Healthcare Letter
January 19, 2023
Fiat Lux
Featured Trade:
(AN UNBEATABLE BIOTECH AMID A MARKET BEATDOWN)
(GILD), (PFE), (MRNA)
With 2022 in the books, it’s easy to assume investors won’t be reminiscing about it too fondly. The world economy and the stock market struggled the entire year, severely depleting the resources of many businesses across the globe. These headwinds dragged down several quality stocks.
This year doesn’t look like an improvement, with experts predicting a recession. Such a debilitating economic event would extensively impact practically all sectors. If this is what we’re looking forward to in 2023, then it’s high time to look for stocks that are safe to hold.
Fortunately, some businesses have proven resilient to significant downturns' adverse consequences. Actually, there are a handful of companies that managed to perform so much better than the rest despite all the economic and financial woes of the world.
One of the companies that successfully delivered market-beating returns is biotechnology giant Gilead Sciences (GILD). More importantly, this business has the tools to do it again in 2023.
Gilead Sciences recently announced promising data on its antiviral pill, dubbed GS-5245. Before this, the company had Remdesivir, now marketed as Veklury, which was the first authorized treatment for COVID-19 back in May 2020.
Unlike the ultra-blockbuster sales of the COVID-19 candidates of Pfizer (PFE) and Moderna (MRNA), Veklury only raked in $3.4 billion in 2022.
This is because the treatment is administered intravenously, which poses limitations in terms of its usefulness. With the new GS-5245, however, Gilead Sciences holds a better chance of competing against the market leaders.
While it is similar to Veklury, GS-5245 is in pill form, making it far more convenient and helpful. Although Gilead Sciences’ antiviral pill works very differently from Pfizer’s Paxlovid, the two are expected to become close competitors.
For context concerning potential revenue, Paxlovid alone could add a jaw-dropping $67.1 billion to Pfizer leading up to 2024.
Prior to COVID-19, Gilead Sciences had already been considered a top biotechnology stock that is notably safer than its peers in a recession.
A key reason for this confidence is rooted in the nature of the treatments the company develops. Most of the products in its portfolio and candidates in its pipeline are vital to patients.
HIV treatments are crucial parts of Gilead Sciences’ operations, with drugs in that sector accounting for about 75% of its core business.
For the first nine months of 2022, the company’s HIV-related sales reached $12.4 billion and climbed by 5% year over year. These figures demonstrate resiliency despite the inflation.
Its highest-selling drug in this field, Biktarvy, recorded a revenue run rate that exceeded $10 billion. Sales of this product continue to sustain their momentum and possibly grow rapidly as it expands its 45% market share in the HIV treatment market in the US.
Last December 2022, Gilead Sciences announced another development in this sector as its new drug, Sunlenca, received FDA approval.
This new treatment to the company’s portfolio is an important win.
For one, it all but cements Gilead Sciences as the leader in HIV treatment, as Sunlenca serves as a long-acting drug option. Instead of going through regular treatments, patients now have the option to receive this twice-a-year HIV regimen—the first of its kind.
Another reason is that the market for HIV treatments showed a decline during the pandemic. It has only just started to exhibit some recovery. Hence, launching a new and innovative treatment at this crucial period is a surefire way to attract a lot of eligible patients, mainly since the company provides a long-acting regimen.
With these in mind, Sunlenca has the clear marking of a potential blockbuster. In adding a new and more attractive treatment to the list of its top-selling HIV products, Gilead Sciences has set itself up to be strategically positioned to take advantage of the growing HIV treatment market.
The HIV drug market worldwide is estimated to be worth over $45 billion by 2028, rising at a compound annual growth rate of 5.9%.
On top of its solid and consistent core business, Gilead Sciences also offers an above-average dividend yield of 3.4%. In comparison, the average yield of the S&P 500 is 1.7%.
Overall, Gilead Sciences is a solid business, getting shots in the arm with its new long-term HIV treatment and antiviral pill. Although its valuation has been climbing as of late, this stock remains reasonably priced and is a good investment in the long run. I suggest you buy the dip.
