Mad Hedge Biotech and Healthcare Letter
January 27, 2022
Fiat Lux
Featured Trade:
(A BLUE-CHIP STOCK POISED FOR MORE GROWTH)
(BMY), (SGEN), (IPSC), (PFE)
Posts
What I’m about to share with you isn’t the most pleasant news, but it’s the truth.
You need to prepare for a stock market crash or a steep correction in the near future.
Since the early 1950s, the S&P 500 benchmark has experienced a total of 38 double-digit percentage declines.
While Wall Street doesn’t necessarily follow these trends, it’s vital to understand and accept that crashes and corrections will always be staples of the investing cycle.
On the flip side, these kinds of dips in the market also offer remarkable opportunities to buy high-quality businesses at a discount.
One of the wisest decisions you can make if the stock market does crash soon is to pick up shares of biopharmaceutical company Bristol Myers Squibb (BMY).
The allure of most healthcare and biotechnology stocks is that they make for good defensive investments.
We can never really fully control or even predict when we’ll get sick or what kinds of diseases we’ll develop.
That means that the volatility of the stock market or even the broader economy tends to have minimal effect on the demand for prescription treatments, medical devices, and healthcare plans.
This type of assurance offers a steady cash flow to the likes of BMY.
However, the healthcare industry continues to evolve. That also requires adjustments from companies regardless of their size and history.
Recently, there have been talks of BMY acquiring Seagen (SGEN), with investors hoping this could lead to an added revenue stream. After all, company executives have been hinting at plans to do some “shopping” this year.
While BMY has never shied away from massive acquisitions, it looks like it plans to expand its portfolio more conservatively as opposed to making splashy deals.
The latest move from BMY towards that direction is its licensing agreement with Century Therapeutics (IPSC).
According to the agreement, BMY will pay Century $100 million upfront and invest an additional $50 million to gain access to four of the smaller company’s off-the-shelf cancer therapies.
Potentially, Century could receive up to $3 billion from BMY in milestone payments on top of double-digit royalties.
Although not a splurge by any means, this deal would actually be an excellent addition to BMY’s cell therapy portfolio.
One potential treatment that would benefit from this licensing agreement is lymphoma therapy Breyanzi, which is estimated to get a list price of $410,000 and peak sales of roughly $3 billion.
Another is multiple myeloma treatment Abeam, which is expected to be listed at $419,500 and reach peak sales of approximately $1 billion.
Besides being a top-quality defensive play, BMY is excelling at taking advantage of its plan to combine organic with acquisition-based expansions.
In terms of organic growth, a good example is its blood-thinning treatment Eliquis, which BMY developed with Pfizer (PFE). In 2021, this drug raked in an impressive $10 billion in sales.
Another example is its cancer treatment Opdivo, which contributed $7 billion in 2020 and holds the potential to exceed $10 billion in annual sales given the continuous expansion of its applications.
In terms of acquisitions, BMY’s last huge acquisitions are the $13.1 billion deal with MyoKardia and, of course, the jaw-dropping $74 billion agreement with Celgene.
Looking at how the acquisitions helped BMY, saying that the company landed a whale when it acquired Celgene is an understatement.
Considering that Celgene’s Revlimid is the highest-grossing drug in BMY’s portfolio today, it’s apparent that these deals have proven to be a fast, albeit costly, strategy to guarantee that the company will continue to hold a diverse lineup of proven products with the capacity to provide consistent revenues and boost R&D.
Since that 2019 deal, the company has enjoyed the perks of Celgene’s blockbuster drugs like Revlimid, which has a proven track record of double-digit growth in annual sales and has recorded $15 billion in yearly revenue.
More importantly, Revlimid is protected from generics until 2026, offering BMY a lot of elbow room to take more advantage of the cash flow coming from this drug
Celgene has also provided an extremely valuable lineup of pipeline assets, apart from its blockbusters.
For instance, beta-thalassemia treatment Reblozyl holds the potential to bring in $2 to $4 billion in annual sales, while autoimmune medication Zeposia is projected to add $3 billion in yearly sales.
To date, it’s clear to see that BMY welcomed 2022 with promising momentum, and the healthcare stock should be anticipated to perform well in the first six months of the year.
Given its track record and projected trajectory, it won’t come as a surprise if this blue-chip stock soars above its competition this year.
Mad Hedge Biotech and Healthcare Letter
January 25, 2022
Fiat Lux
Featured Trade:
(WHAT TO WATCH OUT FOR IN 2022)
(PFE), (BNTX), (AZN), (JNJ), (MRNA), (RHHBY), (RXRX), (TAK), (PSTX), (ZY), (DNA)
The past two years have been focused on finding solutions to end the COVID-19 pandemic.
More have been attempting to join Pfizer (PFE), BioNTech (BNTX), AstraZeneca (AZN), Johnson & Johnson (JNJ), and Moderna (MRNA) in sustaining and even boosting the momentum in terms of vaccine development and launch of new drugs in the market.
While the biotechnology and healthcare industry will still predictably have COVID-19 as one of its priorities, I can see a number of promising developments waiting to be unleashed to the public this year.
One is the expansion of mRNA applications to go beyond its potential as a coronavirus vaccine.
In the first three quarters of 2021, Moderna recorded $10.7 billion in sales for its mRNA vaccine while Pfizer-BioNTech raked in $39 billion—and these numbers are expected to soar even higher for 2022.
However, what’s more promising is that the pandemic revealed an undeniable and irrefutable fact: mRNA-based treatments could be administered safely and successfully to patients.
That discovery appears to have bolstered investor confidence in the technology, as an increasing number of RNA-based drug developers managed to lure hundreds of millions in terms of financing.
China’s Abogen Biosciences received over $700 million in its Series C round last August, while another RNA-focused biotech, Massachusetts-based Laronde, raked in $440 million in a Series B round during the same period.
Another technology on the rise is artificial intelligence (AI).
For years, AI has grown from science fiction tales to real-life applications. Lately, this segment has shown signs of finally coming up with a breakthrough.
In fact, something groundbreaking might arise in the healthcare world courtesy of Roche (RHHBY) and its Genentech subsidiary.
After all, these two became the talk of the industry in December 2021 when they committed roughly $12 billion in exchange for access to the revolutionary operating system of Recursion Pharmaceuticals (RXRX).
Ultimately, the collaboration aims to come up with advanced treatments—40 programs in total—for various conditions, focusing on neuroscience and oncology.
Aside from mRNA and AI, another sector that’s expected to rally this year is the cell and gene therapy segment.
So far, more capital has poured into this area and a growing number of programs are entering Phase 3 trials.
In the first six months of 2021 alone, gene therapy companies raised approximately $6.4 billion in funding and queued 376 trials.
This notably surpassed 2020’s performance, which recorded $2.2 billion and 359 trials.
By the second half of 2021, big money started to come in with billion-dollar partnerships cropping up everywhere.
These included Takeda Pharmaceutical’s (TAK) collaboration with Poseida Therapeutics (PSTX), worth roughly $3.6 billion, as well as Roche’s partnership with Washington’s Shape Therapeutics at $3 billion.
On top of these exciting breakthroughs is another exciting development: synthetic biology.
In the first six months of 2021, the synthetic biology segment attracted about $8.9 billion in venture funding.
To top it off, the sector managed to launch two successful IPOs last year: Zymergen (ZY) and Ginkgo Bioworks (DNA).
Considering the growing momentum in this field, synthetic biology is anticipated to remain on track and achieve full-scale marketing and manufacturing across many applications. These can span from essential medicines to even various foods such as dairy and meat.
Although the biotechnology and healthcare sector struggled in the past months, it’s undeniable that the market still has faith in the industry’s future and potential.
In fact, investors showered the biotechnology segment with a record-breaking $24 billion in terms of venture capital in the first three quarters of 2021, exceeding the $20 billion total generated in 2020.
Throughout the years, biotechnology has transformed from a restrictive academic enterprise into a booming industry with real-world applications.
Looking at the history and trajectory of this sector, I can say that the trend will continue into 2022 and beyond.
Mad Hedge Biotech and Healthcare Letter
January 13, 2022
Fiat Lux
Featured Trade:
(NO REST FOR THIS PANDEMIC SUPERSTAR)
(PFE), (MRK), (RHHBY), (DNAY), (JNJ), (LLY), (BNTX), (EDIT)
Amid the pandemic fatigue hounding everyone these days, one name continues to attack the situation with consistent vigor: Pfizer (PFE).
It’s not a stretch to say that its COVID franchise is the most popular line in Pfizer’s portfolio today.
Needless to say, this is highly lucrative from a shareholder’s point of view. The company’s vaccination business has recorded over 3 billion doses to generate roughly $36 billion in sales from Comirnaty alone in 2021.
Riding the momentum of its successful 2021, the company anticipates an even more successful 2022.
So far, Pfizer is targeting an increase in its Comirnaty production to hit at least 4 billion doses this year.
Aside from being one of the first companies to develop a vaccine, the company has also created a highly effective antiviral COVID treatment that can be taken orally: Paxlovid.
While Merck (MRK) has earlier announced its move to come up with a similar oral treatment, Pfizer’s pill proved to be more effective.
Actually, customers are starting to take note of the difference and are switching brands. France already canceled their agreement with Merck and decided to order Pfizer’s Paxlovid instead.
This once again underscored the dominance of Pfizer’s brilliant R&D segment and the company’s capacity to rapidly come up with highly effective solutions for issues involving COVID.
The way Pfizer has been handling the COVID situation can be compared to Roche’s (RHHBY) approach and eventual blockbuster success with Tamiflu over 20 years ago.
Although the flu is obviously not as deadly as the coronavirus, it still caused widespread economic breakdown and health problems.
When Tamiflu eventually entered the market, the world was finally granted a simple medical answer for what was initially thought to be an unsolvable health problem.
Pfizer’s Paxlovid could very well be the Tamiflu for COVID.
Looking at Paxlovid’s effect in terms of revenue, it’s safe to say that this oral treatment can drive medium-term growth for Pfizer.
To date, Pfizer disclosed that Paxlovid would be sold for roughly $700 for each treatment course.
Let’s use the US numbers as an example to help put things in perspective. So far, the country has recorded approximately 170,000 cases per day.
If we assume that this will be the average for 2022, then there will be about 62 million COVID patients this year.
Let’s say that only 40% of these patients qualify for Pfizer’s treatment; then this would reach 24 million people at $700 each to rake in roughly $17 billion in total revenue in the US alone.
The number would definitely be significantly higher considering that Paxlovid will be offered as a global COVID treatment.
It’s evident that Pfizer’s efforts are paying off, as the sheer earnings power of the company’s COVID-19 pandemic franchise could provide a medium-term boon for its investors.
In 2021, Pfizer recorded a 130% growth in its revenue, with the numbers still climbing.
While its pandemic response has become its primary growth driver, Pfizer’s other key segments also posted promising revenues.
To sustain its climb, the company has continued to invest in R&D heavily.
A notable investment it made recently is an $8 million upfront payment to Codex DNA (DNAY) for the smaller biotechnology company to “produce certain materials of interest to Pfizer.”
According to the deal involving the exclusive product, Codex expects $10 million in technical milestone payments, up to $60 million in clinical development milestones, and $180 million in sales milestones.
Codex DNA is a small biotechnology company with a market capitalization of $267 million. It’s a spinoff from a California company called Synthetic Genomics.
While Pfizer and Codex have yet to share their plans publicly, we can hypothesize that it has something to do with the large biopharma using the small biotech’s technology to accelerate its mRNA vaccine development process.
After all, Codex’s distinct value proposition lies in its rare ability to automate various elements of the entire process. Its push-button, end-to-end solutions promise to build functional grade synthetic mRNA and DNA.
In effect, this will save cost and time for its clients.
Aside from Pfizer, this small biotech has been collaborating with other organizations like Duke University and MIT.
It has also been working with large biopharmas, including Johnson & Johnson (JNJ), Eli Lilly (LLY), BioNTech (BNTX), Merck, and even gene therapy expert Editas (EDIT).
For 2022, Pfizer is anticipated to generate at least $96 billion in sales, showing off a jaw-dropping 17.2% jump from its 2021 revenue and a 229% increase from 2020.
As we slowly accept that COVID will become a staple in our lives in the coming years, I think investors would be wise to add proven “experts” in their portfolio to take advantage of the ever-present and increasing demand.
Mad Hedge Biotech and Healthcare Letter
January 6, 2022
Fiat Lux
Featured Trade:
(A WONDERFUL COMPANY AT A FAIR PRICE)
(ABBV), (BRK.B), (GILD), (AMGN), (PFE)
Another year, another set of challenges and opportunities for investors. How can you make sure that you’re starting the year right?
If you’re looking to dip your toe in the biotechnology and healthcare sector, it won’t hurt to look at what the experts, such as Warren Buffett, are doing.
With a 55-year track record of 21% in annual returns for its Berkshire (BRK.B) investors, I’d say the Oracle of Omaha definitely knows his craft.
One of his most famous pieces of advice is to buy “wonderful companies at fair prices,” and I think this pearl of wisdom perfectly fits Buffett’s favored high-yield aristocrat: AbbVie (ABBV).
More interestingly, AbbVie is currently undervalued primarily due to overblown fears of patent loss for its top-selling drug Humira in 2023 and another in 2026 for Imbruvica.
Admittedly, the anxiety of investors is not entirely unfounded.
After all, AbbVie must replenish roughly $20 billion worth of annual revenue from Humira alone in the following years as the drug loses its patents and faces declining sales.
Obviously, losing revenue from a primary growth driver could be a massive problem for any company.
It could even lead to stagnating numbers in the next couple of years — a situation that the likes of Gilead Sciences (GILD), despite its $90.58 market capitalization, have become all too familiar.
Nevertheless, AbbVie isn’t simply twiddling its thumbs, waiting for the inevitable patent loss to happen.
The company has been busy preparing for the Humira and Imbruvica patent cliffs. In fact, it has been working to diversify its portfolio steadily.
One of the steps it undertook was to leverage its cash flow and $238.35 billion market capitalization to boost its R&D.
This led to AbbVie holding one of the industry’s most robust pipelines to date.
Some of the most promising products in its portfolio are Humira successors Skyrizi and Rinvoq.
Together, these two treatments are estimated to generate more than $15 billion in sales by 2025.
And AbbVie isn’t done yet.
Following its wildly successful formula in Humira, AbbVie is also looking into expanding the indications for the drug’s successors.
So far, Rinvoq has been able to deliver on this promise. Recently, this Humira successor has received FDA approval as a second-line treatment for psoriatic arthritis.
With this second indication, more and more investors are starting to believe that AbbVie has yet another blockbuster in the making.
Let’s look at the market for Rinvoq’s latest indication.
In the US alone, there are approximately 1 million to 2 million patients of psoriatic arthritis. For simplicity’s sake, let’s just say that there are 1.5 million patients in the US.
Generally, the first-line of treatment typically fails for 20% of psoriatic arthritis patients. That leads to roughly 300,000 patients who would be in need of second-line treatment.
For the sake of accuracy, it’s vital to point out that there are already a number of psoriatic arthritis treatments available in the US, such as Otezla and Enbrel from Amgen (AMGN). Moreover, JAK inhibitors are still facing potential restrictions from the FDA, thanks to the issue with Pfizer (PFE).
So, we can conservatively say that AbbVie’s Rinvoq might only be able to capture an estimated 7% of the psoriatic arthritis market share.
This translates to approximately 21,000. The annual list price for Rinvoq is at $63,000.
Taking into consideration the negotiation tactics of health insurers for price adjustments, the drug might go down to an annual list price of $44,000 instead.
Based on these conservative assumptions, Rinvoq would rake in sales of over $900 million—falling only slightly below the $1 billion blockbuster mark.
While this only hits less than 2% of AbbVie’s anticipated $56.2 billion annual revenue, this trajectory is a massive success for Rinvoq.
Bear in mind that this Humira successor has been on track to generate over $1.5 billion in sales in 2021.
Hence, adding $900 million from its psoriatic arthritis indication would offer a whopping more than 60% jump in its annual revenue.
Considering its history and trajectory, AbbVie is expected to continue to outshine its rivals in the industry.
Actually, the growth consensus for this stock is at 4% to 6.5%.
While that does not sound very impressive, it’s important to remember that the long-term growth rate for the whole industry is only 4%.
That easily puts AbbVie ahead of at least 63% of its peers in terms of growth.
Aside from the fact that this blue-chip stock is an excellent way to enjoy a solid 4.3% yield these days, the company is proving to be effective in ensuring that it delivers market-beating returns in the long run.
Needless to say, AbbVie qualifies as a classic “wonderful company at a fair price.”
Mad Hedge Biotech and Healthcare Letter
January 4, 2022
Fiat Lux
Featured Trade:
(A BIOTECH DIAMOND IN THE ROUGH)
(BDSI), (TEVA)
Small-cap names tend to have a terrible reputation. However, the possibility of discovering a diamond in the rough pulls traders back in the game over and over.
Fortunately, applying a bit of critical thinking in sifting through the seemingly endless lists of small-cap companies can yield a handful of names worth consideration.
In the biotechnology and healthcare sector, one name that holds the potential is BioDelivery Sciences International (BDSI).
While it’s understandable if you’ve never even heard of BDSI, this company has actually been making waves in the field of severe pain management.
To date, it has three drugs out in the market and holds the patent for a slow-release biofilm technology used to administer these medications. Simply, BDSI is proving to be a profitable and fast-growing company.
The company’s main product is Belbuca, an opioid medication targeting chronic severe pain.
The competitive edge of Belbuca against other drugs is that it’s not an oral pill. Instead, it’s a tiny film that patients keep in their cheeks. This film then slowly dissolves, offering more potent pain relief over time.
Moreover, Belbuca is more difficult to abuse, making it a more attractive option for physicians to prescribe.
At the moment, Belbuca has a 4.7% market share of the long-acting opioid treatment segment.
While that sounds like an unimpressive number, this achievement becomes more pronounced when you find out that Belbuca only held 0.5% of the market when it launched in the fourth quarter of 2017.
By the first quarter of 2021, its market share expanded by 25% year over year, indicating that segment penetration is moving forward swimmingly despite the pandemic.
In fact, Belbuca’s revenues increased by over 95% in the last 3 years.
It also reported that its trailing-12-month earnings since the first quarter of 2020 have skyrocketed to a jaw-dropping 233%.
More excitingly, BDSI successfully defended its patent exclusivity against competitors.
Recently, it managed to ward off attempts from more prominent names like Teva Pharmaceuticals (TEVA), which hoped to gain access to BDSI’s slow-release biofilm technology.
Bolstering its hold on the pain management market, BDSI has also been successful in marketing Symproic.
This prescription medication, which targets opioid-induced constipation therapies, has seen a steady rise in market share over the past 2 years.
By the first quarter of 2021, Symproic has managed to take hold of 12.6% market share, making it a promising partner to the company’s major growth driver, Belbuca.
Highly aware of the growing competition in the opioid market, BDSI has decided to venture into other segments as well.
In September 2021, the company acquired the rights to acute migraine pain medication Elyxyb for $15 million.
Elyxyb is the first-ever FDA-approved, ready-to-use oral drug aimed to treat acute migraine. In terms of peak sales, BDSI is projected to rake in $350 million to $400 million from this acquisition.
BDSI plans to launch its own take on Elyxyb by the first quarter of 2022, with the goal of adding another catalyst in its growth story and a new revenue stream.
Looking at its history and trajectory, it’s evident that things are heading towards a bright future with BDSI.
This small-cap company managed to sustain the expansion of its market share and boost its sales growth despite the pandemic and the patent challenges from bigger rivals.
Moreover, its balance sheet looks solid. Its margins and cash flow have been exhibiting notable improvements as well.
Simply, there remains no identifiable business concern that might cause it to tumble in the future.
Overall, BDSI’s long-term risk-reward outlook still appears to be attractive regardless of the market’s less-than-stellar reaction to the stock in 2021.
Needless to say, BDSI’s remarkable performance hasn’t been convincing enough for investors to believe that the stock is worth their money.
That turns this promising $315.16 million market cap biotechnology company into an exciting opportunity for deep-value investors searching for diamonds in the rough and an astoundingly cheap growth play.
