Mad Hedge Biotech and Healthcare Letter
January 11, 2024
Fiat Lux
Featured Trade:
(HEALTHCARE GIANTS GO SHOPPING)
(JNJ), (MRK), (AMAM), (PFE), (HARP), (NVS), (CYTK)
Posts
Ah, San Francisco, the city of fog and fabulous biotech and healthcare feasts. In case you missed it, the J.P. Morgan annual healthcare conference, the biotech Super Bowl, just kicked off this January.
Imagine a bustling downtown San Francisco, where hotels are as jam-packed as a can of sardines, but instead of fish, they're brimming with investors and healthcare execs.
Let's focus on the biotech sector, which, let's be honest, has seen its fair share of ups and downs. The past three years? More like watching paint dry.
But, as if by magic, we've seen a recent upturn. A two-month price surge that’s as unexpected as it is welcome.
The SPDR S&P Biotech ETF (XBI), our financial barometer here, has gone from a nosedive (down over 60% since February 2021) to a rocket ship (up nearly 40%). Interest rate cuts and M&A buzz are like the Red Bull in this energy drink mix.
Now, to the heart of the story: big pharma's shopping spree.
The day of surprise comes when Merck & Co. (MRK) and Johnson & Johnson (JNJ) strut in with deals that leave us wide-eyed.
And these are not just any deals, but the kind where these healthcare giants are practically throwing money like it's going out of style – over 100% premiums over the last prices. It's like offering to pay double for a house just because you love the wallpaper.
Johnson & Johnson swoops in on Ambrx Biopharma (AMAM) for a cool $2 billion. At $28 per share, they're paying a 105.4% premium.
For context, this isn't your run-of-the-mill biopharmaceutical company. Oh no, Ambrx is more like the Elon Musk of the biotech world, innovating like there's no tomorrow.
This biotech is all about cooking up some of the most cutting-edge therapies out there – think antibody-drug conjugates (ADCs) and other engineered marvels that give the immune system a superhero makeover.
On top of that, Ambrx actually has a secret weapon – their expanded genetic code technology platform called Engineered Precision Biologics (EPBs).
This technology isn't just smart; it's Einstein-level genius. It brings together site-specific conjugation with proprietary linkers and payloads. It's like building a custom-made luxury car, except this one's designed to obliterate cancer.
Researchers are raving about Ambrx's ADCs, calling them “guided missiles.” And they're not exaggerating.
These bad boys zero in on cancer cells with the precision of a sniper, taking them out without wreaking havoc on the innocent bystanders – the healthy tissue. It's pretty much like having a Swiss watch in your medical arsenal, sleek, sophisticated, and super effective.
Impressively, Ambrx isn't stopping at just being a one-hit wonder. They're pushing the envelope with enhanced antibody-drug conjugate, immuno-oncology conjugate, and bispecific candidates. These aren't just treatments; they're potential game-changers in the war against cancer.
So, when Johnson & Johnson ponied up $2 billion for Ambrx, they weren't just buying a company; they were investing in a future where cancer might just meet its match.
In fact, Pfizer (PFE) recently grabbed Seagen for $43 billion in 2023, just to get a slice of this ADC pie. It's the latest fashion in cancer treatment, and everyone wants in.
Meanwhile, Merck, not to be outdone, grabs Harpoon Therapeutics (HARP) for $680 million, a 118% premium at $23 per share. It's a biotech-feeding frenzy, and Merck's got its teeth out.
Harpoon is a clinical-stage immunotherapy company that's not just playing in the big leagues, but changing the game. They're all about developing a novel class of T-cell engagers, and let me tell you, this stuff is like the Navy SEALs of cancer treatment.
Imagine these T-cell engagers as tiny, engineered proteins. They're like undercover agents directing a patient’s own T-cells (the body's immune commandos) to seek and destroy cells waving the bad guy flag – specific proteins or antigens carried by those nasty cancer cells.
Basically, it's like having a GPS-guided missile system in your body, targeting only the rogue cells.
And Harpoon isn't just dabbling here, but also innovating with their proprietary Tri-specific T cell Activating Construct (TriTAC) platform.
Picture a pipeline, but instead of oil, it's flowing with novel TriTACs focusing on laying siege to solid tumors and blood malignancies. If successful, they plan to arm the immune system with a whole new arsenal.
Aside from these, Harpoon also whipped up something they call the ProTriTAC platform. Think of it as the James Bond of T-cell engagers – it stays under the radar (inactive) until it gets to the tumor. Once there, it's “license to kill” mode on. This prodrug concept is slick, ensuring that the therapeutic action happens right where the trouble is, and not anywhere else.
And for their third act, Harpoon presents the TriTAC-XR platform. This one's a bit of a tightrope walker, designed to dodge a potential pitfall known as cytokine release syndrome – a sort of overreaction from the immune system. It’s like having a safety net under your high-wire act.
Now, these premiums are not just showing off. They're a sign of desperate love from big pharma for these biotech beauties, a stark contrast to the recent cold shoulder of stock market blues.
Recently, there have also been whispers of Novartis (NVS) eyeing Cytokinetics (CYTK), a biotech belle with a $9.2 billion price tag. It's like the gossip at a high school prom, only with more zeros.
So, what's the takeaway from this biotech bazaar? It's simple: after a snooze-fest of a bear market, biotech's back, and it's hotter than a stolen Ferrari.
For investors, it's like watching a new season of your favorite show, only this time, the plot twists involve billion-dollar deals and cutting-edge cancer drugs. I suggest you buy the dip.
Mad Hedge Biotech and Healthcare Letter
January 4, 2024
Fiat Lux
Featured Trade:
(A TURNAROUND TALE WORTH WATCHING)
(MRNA), (PFE)
Let's take a step back and get a bird's-eye view of what's shaking up in the biotech world.
Remember Moderna (MRNA)? The big shot of the Covid-19 vaccine saga? It’s suddenly back in the spotlight.
After a year that saw its shares nosedive by 45% — landing it in the not-so-coveted spot of one of 2023's worst S&P 500 performers — things are looking up. And, boy, are they looking up!
Moderna's woes weren't just about falling vaccine sales. Oh no, it was more than that. They had to scale back their manufacturing footprint, trimming costs left and right. The company doesn't see itself breaking even until 2026, but who's rushing?
Now, here's where it gets interesting. Moderna's not just sitting around licking its wounds. They've been busy bees, pouring money into their mRNA-based product pipeline. And guess what? It's starting to look like money well spent.
December brought some news that made investors sit up straight. In partnership with Merck (MRK), Moderna's cooking up a cancer treatment that's looking pretty darn promising. And it's not just any partnership.
We're talking about combining forces with Merck's Keytruda, the oncology heavyweight, raking in a cool $20.9 billion in 2022.
Moderna's mRNA-4157, however, is the new kid on the block. It's a custom-tailored cancer vaccine, shaping up to be a real game-changer. The idea? Target each patient's cancer uniquely, making it a one-two punch with treatments like Keytruda.
The latest data? It's the stuff of dreams. High-risk melanoma patients showed a 49% drop in cancer recurrence or death risk and a 62% plunge in distant metastasis or death risk. All this without ramping up severe side effects. The phase 3 trial is already on the drawing board and the scope? It's widening.
And, let's not forget the big picture. In 2020, around 325,000 cases of malignant melanoma were diagnosed.
If Moderna and Merck hit the bullseye with their candidate, they're looking at a vast market to tap into. And if this duo outperforms Keytruda alone for certain conditions, we're talking serious revenue potential.
Needless to say, these developments hint at a future where Moderna's not just about Covid-19 jabs. By 2026, this biotech company is projected to have a lineup of at least five products.
But why this sudden investor love? Part of it is the resurgence of COVID-19 cases and a new variant, JN.1, causing a stir. Adding to these are clearer visibility on vaccine sales and a more structured expense outlook.
On the back of these developments, Moderna's shares leaped 13% to $112.57. That's their best day since December 13, 2022, when they soared 20%. Meanwhile, Pfizer (PFE), their vaccine rival, saw a modest 3.8% bump in roughly the same period.
The broader Wall Street narrative? It's echoing optimism for Moderna. The average price target sits at $126.72, with shares currently hovering around $100. It's a glimpse of potential gains for the vaccine maker.
Clearly, Moderna is no longer just a one-trick pony. More importantly, their shares are currently a bargain, sporting a P/E ratio of just 7 against the market average of 26. This might be riskier than your usual index fund investment, but the growth potential? It's likely being underestimated.
Short-term, Moderna might see more dips as its Covid-19 vaccine windfall wanes. But long-term, their collaboration with Merck, along with other pipeline projects, spells growth.
Come 2025, Moderna's management is betting on a growth rebound, eyeing break-even by 2026. By 2028, they're aiming to add 15 more medicines to their arsenal. And with $7.6 billion in cash and equivalents, they're set to weather the storm without diluting shareholder value.
So, should you buy into Moderna now? It's not a half-bad idea.
If you're the patient type, ready to ride out some short-term turbulence for potential long-term gains, then Moderna's current narrative might just be your kind of investment story.
Mad Hedge Biotech and Healthcare Letter
January 2, 2024
Fiat Lux
Featured Trade:
(FROM LIMPING TO LEAPING)
(LLY), (NVO), (PFE), (AMGN), (VRTX), (BMY), (CRSP), (NTLA)
The year 2023 in the biotechnology and healthcare world has been a rollercoaster with more dips than peaks.
While Eli Lilly (LLY) and Novo Nordisk (NVO) are hitting the jackpot with their new weight loss drugs, the rest of the healthcare sector is limping behind.
By year's end, the S&P 500 Health Care index had slipped by 0.4% since the start of the year, starkly contrasting the broader S&P 500's robust 24% growth.
That’s not just a minor setback; it's the sector's most significant underperformance in 30 years.
Fast forward to 2024. Conventional wisdom suggests healthcare stocks might lag in an election year. Why? Presidential candidates love to shake things up with healthcare reform promises, usually sending investors into a sell-off frenzy.
But this time around, the air is tinged with an unexpected optimism. After a year of hefty sell-offs, healthcare valuations have become irresistibly low, presenting a fertile ground for investment opportunities.
Plus, there's less regulatory uncertainty now, with major acquisitions like Amgen's (AMGN) of Horizon Therapeutics and Pfizer's (PFE) of Seagen sailing through without a hitch. And let's not forget the anticipated interest rate cuts could be a game-changer for the sector.
Interestingly, the typical election-year healthcare jitters might be less intense in 2024. After all, the likely presidential candidates are familiar faces, and the healthcare changes they've made (or not made) are well known.
Trump’s healthcare impact was minimal, and Biden has already pushed through significant drug pricing reform with the Medicare drug price negotiation program. This program, despite legal hurdles, is moving forward and has been priced into the market's expectations.
In a surprising turn of events, the Biden administration's recent move to potentially invalidate patents of some high-priced drugs didn't send investors running for the hills like it might have in previous years. It seems the fear of drug price regulation may be losing its sting.
Now, let's take a closer look at some of the healthcare sectors that are drawing attention.
Biotech has been in a slump since 2020, but things are starting to look up. The sector's last three-year downturn was in 1992, followed by a significant rebound.
Despite challenges like high capital-raising costs and a deluge of IPOs, biotech is showing signs of life. As these pandemic-era companies mature and produce valuable data, they offer both buying and selling opportunities.
M&A activity in biotech is also on the rise, and if interest rates fall, the sector's prospects look even brighter.
Keep an eye on Vertex Pharmaceuticals (VRTX), which is set to reveal more data on its experimental pain drug, and Amgen, which is awaiting data on its new obesity pill. CRISPR Therapeutics (CRSP) and Intellia Therapeutics (NTLA) should be on your watchlist, too.
Over in MedTech, the hype around GLP-1 weight loss drugs led to a sector-wide selloff.
The iShares Medical Devices ETF took a hit, dropping 13.9% by the end of October, but it started to recover in the last two months of the year. The GLP-1 concerns might continue to cast a shadow, but there's a growing sense that their impact might be more long-term, especially if interest rates fall.
In the pharma world, 2023 was a tale of two halves: Eli Lilly and Novo Nordisk on one side, with their successful weight-loss drugs and the rest trailing behind.
While the S&P 500 Pharmaceuticals index slightly declined, Lilly and Novo surged ahead with 56% and over 45% gains, respectively.
But 2024 might bring new challenges, especially for Lilly, as it rolls out Zepbound, its highly anticipated weight-loss drug.
For Novo, the focus will be on how Ozempic fares under Medicare's new drug pricing negotiations set to take effect in 2027.
The key to success in pharma now is finding companies with innovative drugs that promise revenue acceleration without the looming threat of patent cliffs. Pfizer and Bristol Myers Squibb (BMY), for instance, are under the microscope as they navigate impending patent expirations and strive to reassure investors.
In 2023, the healthcare market was a stock picker's paradise, especially given its complexity. The year ahead promises more of the same. Investors should be on the lookout for opportunities among stocks that underperformed last year but have solid fundamentals.
Despite the unpredictability of election years and the bumpy ride of 2023, the healthcare sector, buoyed by low valuations and potential rate cuts, is gearing up for what could be a significant turnaround this 2024. For savvy investors, this could be an opportunity not to be missed.
Mad Hedge Biotech and Healthcare Letter
December 28, 2023
Fiat Lux
Featured Trade:
(CLOSING THE YEAR WITH A BANG)
(XBI), (ABBV), (IMGN), (RHHBY), (PFE), (MRK), (AMGN), (VKTX), (TERN)
The biotechnology sector, pretty much like a phoenix rising from the ashes of its recent lackluster performance, is experiencing a renaissance as 2023 draws to a close. The recent spree of high-stakes deals has set the stage for what could be a significant rebound, a situation that savvy investors should watch closely.
In a remarkable display of strategic maneuvering, AbbVie (ABBV) has been on an acquisition tear.
Earlier in December, they've recently snapped up Cerevel Therapeutics for an eye-popping $8.7 billion, only a week after announcing their intent to acquire ImmunoGen (IMGN) for a formidable $10.1 billion.
And in this high-stakes game, Roche Holding (RHHBY) isn't playing second fiddle, having declared their acquisition of Carmot Therapeutics for $2.7 billion.
This flurry of activity isn't just a few isolated incidents. It's actually a trend. Of the 18 biotech acquisitions exceeding $1 billion announced this year, a significant one-third have emerged since October. This surge is like a shot in the arm for the sector, suggesting a much-anticipated uptick.
But let's take a step back and consider the broader picture.
The SPDR S&P Biotech ETF (XBI) has shown some muscle in November and December. However, it's still trailing behind this year, down by 3%, while the S&P 500 has surged by 19.5%.
Now, focusing on the XBI, a temperature check for the sector: trading around $80, it's a steep drop from its heyday in the $140 range during late 2020 and early 2021. It's down nearly 50% from its peak in February 2021.
This isn't just a dip; it's a nosedive.
Looking at the turn of events, it’s possible that the AbbVie-ImmunoGen deal is perhaps the precursor to a more consistent pattern of mergers and acquisitions in 2024. It seems that we've hit the floor and the only way now is up, with M&A activities poised to inject some much-needed vitality into the sector.
In previous years, the biotech valuations took a hit, and understandably, companies were hesitant to settle for offers that undervalued them compared to their pandemic-era zeniths. But this year, the tide has turned.
Notably, the cumulative value of biopharma deals at a whopping $128 billion this year, shooting up from $61 billion in 2022.
Key transactions fueling this jump include Pfizer's (PFE) massive $43 billion deal for Seagen and Merck’s (MRK) $10.8 billion acquisition of Prometheus Biosciences.
The shift in the regulatory landscape is also worth noting.
Antitrust regulators, who initially seemed poised to block deals like Amgen's (AMGN) $27.8 billion acquisition of Horizon Therapeutics, have shown more flexibility. This change in stance is likely emboldening companies to pursue larger deals.
Now, let's talk about the financial clout.
Large-cap biopharma companies are projected to have about $199 billion in cash by year-end. There's a noticeable dip in dividends and stock buybacks, hinting at a strategic pivot towards mergers and acquisitions. It could indicate that we can expect Pharma to maintain an aggressive stance on the M&A front.
So, what's in store for the XBI and investors alike?
This uptick in M&A activity is like untying the strings of a tightly held purse, releasing cash back into the sector. It's a magnet for both specialist and generalist investor interest, a potential boon for the XBI.
Predicting the next wave of M&A is basically like reading tea leaves. Yet, this year has shown a marked preference for biotechs specializing in obesity, immunology, and cancer.
A notable example is the speculation around Pfizer eyeing a deal with a biotech firm developing an anti-obesity pill.
The ripple effect? Shares of Viking Therapeutics (VKTX) and Terns Pharmaceuticals (TERN), both in the obesity pill race, have seen their stocks jump 47% and 62.5%, respectively, in December.
Evidently, the biotech sector, once in the doldrums, is now witnessing a renaissance. This resurgence is marked by major deals reshaping the industry landscape, holding significant implications for 2024 and beyond.
For investors, this sector represents a fertile ground for growth and opportunity. Staying informed and nimble is key to capitalizing on these dynamic developments. The biotech sector, it seems, is back in the game, and how!
Mad Hedge Biotech and Healthcare Letter
December 26, 2023
Fiat Lux
Featured Trade:
(A MARATHON, NOT A SPRINT)
(AMGN), (ABBV), (DNA), (PFE), (RHHBY), (GILD), (NVO)
Navigating the stock market, where fortunes are made and lost faster than a New York minute, can be as exhilarating as it is nerve-wracking.
And when you're hunting for that quick win, that short-term stock buy that'll make your year, you realize you're playing a game where even the big guns like Warren Buffett don't always have the magic crystal ball.
But let's pivot a bit. What about when you're not sweating under a cash crunch — when you can afford to play the long game?
That's when you shift your sights to those long-term compounders, the kind that churn out robust returns on capital like a well-oiled machine. Here, initial valuations play second fiddle to the long-term prospects.
This is where Amgen (AMGN) struts onto the stage. It's not just any old player in the biotechnology and healthcare arena; it's a front-runner with a knack for keeping its coffers brimming and its profitability soaring.
In terms of therapeutic innovation, Amgen is a leader in the fields of oncology, inflammation, neurology, and pulmonary diseases. Their biosimilar practice is also on the rise, churning out replicas of blockbuster drugs like AbbVie’s (ABBV) Humira and Genentech’s (DNA) Herceptin.
Essentially, investing in Amgen is like finding a gold mine in your backyard – and then realizing there's oil under there, too.
Now, let's talk numbers because that's where the rubber meets the road. Amgen's moat-worthy drug franchises make it as solid as a rock for those seeking stability in their cash flows, especially when economic clouds are gathering.
And in the healthcare segment, it's akin to building your house on a rock – it withstands economic storms.
Amgen is known for its industry-leading profitability, flashing its A+ grade like a badge of honor. Their 11% return on total capital and a jaw-dropping 134% return on equity? That's not just good; it's like winning the financial Olympics.
Over the last decade, Amgen's total return of 218% didn't just outdo the S&P 500; it left peers like Pfizer (PFE), Roche (RHHBY), and Gilead (GILD) in the dust. Sure, AbbVie is still ahead, but that's mostly thanks to their Humira magic.
Fast forward to the present, and Amgen's showing no signs of slowing down.
Their total revenue shot up by 4% YoY to $6.9 billion in the third quarter, courtesy of a surge in volumes across their star products. We're talking double-digit growth in BLINCYTO, EVENITY, Repatha, and Nplate. This is like watching a relay race where every runner is Usain Bolt.
Peeking into the future, Amgen's pipeline is a treasure trove of potential.
The company has six first-in-class oncology assets and three FDA Breakthrough Therapy designations. Mirroring Novo Nordisk's (NVO) success with Ozempic, Amgen’s wrapped up Phase 2 studies for their obesity contender, Maridebart cafraglutide.
But here's where it gets even more interesting. Amgen's leap into multi-specific drugs, particularly with tumor treatment AMG 193, is like stepping into a sci-fi novel – it's groundbreaking, it's futuristic, and it just might revolutionize drug delivery.
Let's not forget the FDA's priority review of tarlatamab for small-cell lung cancer. This isn't just good news; it's a potential game-changer, a sign that Amgen might just be first across the finish line in this high-stakes race.
Of course, the recent acquisition of Horizon Therapeutics adds another feather to Amgen's cap, expanding its rare disease portfolio. The incoming drugs from this deal, including Tavneos, Tepezza, KRYSTEXXA, and UPLIZNA, are in the early stages of their lifecycle, making them ripe for growth.
However, every silver lining has a cloud. The integration of Horizon Therapeutics carries its own set of risks, and Amgen's legacy drugs like Enbrel and Otezla face the ticking clock of declining sales.
We also can’t gloss over the elephant in the room – Amgen's ballooning long-term debt, expected to hit a whopping $65 billion by year-end. The recent downgrade of Amgen's credit rating to BBB is like a cautious tap on the shoulder, a reminder to tread carefully.
But don't let that dampen your spirits. Amgen's 3.3% dividend yield is as solid as it comes, with management showing a vote of confidence with a 5.6% raise for the upcoming Q1 2024 payout.
The company's history of rewarding shareholders through share buybacks – a 19% reduction in share count over five years is nothing to scoff at either.
So, where does that leave Amgen's valuation? At a current price of $275 and a forward PE of 14.8, it's not exactly a bargain basement, but it's far from sky-high. It's in that sweet spot where quality meets value.
For long-term investors who value stability and growth, consider adding Amgen to your portfolio playbook.
