Mad Hedge Biotech and Healthcare Letter
December 12, 2023
Fiat Lux
Featured Trade:
(A REBOUNDING BLUE CHIP)
(PFE), (LLY), (NVO), (RHHBY), (AZN), (SGEN), (VKTX), (TERN), (GPCR), (ALT)
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In the maelstrom of 2023, Pfizer (PFE) found itself navigating through a tempest, much to the dismay of shareholders. The aftermath? A harrowing -40% total return loss, leaving shareholders reeling.
This downturn followed Pfizer's COVID-19 vaccine triumph, a success story that lost its sheen as global government demand for the vaccine and Paxlovid antiviral dwindled.
Looking back, Pfizer's narrative in 2023 could rival a Shakespearean tragedy. The demand dip for its COVID arsenal was just the beginning; a cascade of other factors compounded the company's misfortunes.
Take, for instance, the controversial $43 billion acquisition of Seagen (SGEN) in March. While this move aimed for cancer treatment breakthroughs, it was widely seen as a Hail Mary, signaling gaps in Pfizer's drug pipeline.
I estimate this strategy might have slashed shareholder value by at least 10%, given the immediate financial aftermath of the merger.
Then, adding to the woes, Pfizer's Nash County production facility in North Carolina faced devastation by a tornado in July.
It seemed as though, for Pfizer in 2023, trouble came not just in droves but in torrents.
The final blow? The discontinuation of the twice-daily dose development for Danuglipron, Pfizer's weight-loss drug candidate.
This decision casts a shadow over the prospects of its once-a-day dosage, still in trials, and simultaneously cracks open the door for other biotech players in the oral weight-loss drug arena.
Meanwhile, the company also aimed to join the race for obesity treatment innovation. In this arena, injectable weight-loss drugs from Eli Lilly (LLY) and Novo Nordisk (NVO) have set the stage, and now, the demand for oral solutions is burgeoning.
Pfizer once pegged this market's potential at an eye-watering $90 billion a year — a target that has not gone unnoticed by keen biotechs.
Yet, with Pfizer stepping back from its Danuglipron project due to adverse side effects, it finds itself trailing in this race. In comparison, Lilly and Novo are forging ahead with their products, turning Pfizer's stumble into a potential windfall for other biotech firms.
Notably, the biotech sector is witnessing a flurry of activity in response to Pfizer’s failed attempt.
Firms like Viking Therapeutics (VKTX), Terns Pharmaceuticals (TERN), Structure Therapeutics (GPCR), and Altimmune (ALT) have seen their share prices soar following their own positive trial results or strategic announcements.
The diverse approaches these biotechs are employing in their anti-obesity drug development have piqued investors’ interest.
In effect, speculation is rife about which one might emerge as a desirable acquisition target for Pfizer — and this speculation isn't without basis.
I previously shared that Roche Holding (RHHBY) recently acquired Carmot Therapeutics for $2.7 billion, and AstraZeneca (AZN) entered a licensing agreement with Eccogene.
With a history of significant acquisitions, Pfizer might well consider a similar path to address its challenges in the weight-loss pill sector.
Pfizer's journey through 2023 was a series of unfortunate events, to say the least. As we look to the future, questions about potential challenges in 2024 loom.
While major acquisitions seem unlikely in the wake of the Seagen deal, shareholder sentiment is fragile. The immediate risks for Pfizer include the possibility of a 2024 recession impacting sales and a generally bearish stock market, potentially keeping share prices around the $30 mark.
Historically, however, Pfizer has stood as a bastion of strength during recessions and bear markets.
Looking longer term, the specter of Medicare drug price negotiations looms large, threatening to dampen growth investor sentiment.
This challenge isn't unique to Pfizer; it's a cloud hovering over all of Big Pharma.
Yet, despite these formidable challenges, there's a sense that Pfizer's tumultuous 2023 journey might be approaching a pivotal turning point. Investor sentiment is at a nadir, marred by negative press and shareholder dissatisfaction, painting Pfizer as a stock currently out of favor.
As we look ahead into 2024, a cautious optimism emerges. Should Pfizer return to operational normalcy and continue to reduce its reliance on COVID-related sales — now a smaller part of its business — the company could reassert itself as a prime value and dividend player in the Big Pharma space.
For the resilient investor willing to delve into a bruised yet potentially rebounding blue-chip, Pfizer merits a closer examination. After a year where Murphy's Law seemed the only law, Pfizer stands as a beacon of resilience and a potential phoenix in the biotech and healthcare sector.
Mad Hedge Biotech and Healthcare Letter
April 25, 2023
Fiat Lux
Featured Trade:
(SMALL BIOTECHS, BIG OPPORTUNITIES)
(PFE), (SGEN), (MRK), (RXDX), (BMY), (BIIB), (ETNB), (KRTX), (MORF), (IDYA)
The biopharma sector has seen a flurry of merger and acquisition activity recently, and the trend seems to continue. This is good news for smaller biotech stocks looking to capitalize on the trend.
In the first quarter of 2023, the total healthcare and life sciences M&A in the United States reached roughly $71 billion, more than double the $28 billion seen in the same quarter in 2022. Notably, this figure includes Pfizer's (PFE) acquisition of Seagen (SGEN) for $43 billion.
Still, the situation isn't as dire as it may seem especially considering that in 2022, the total M&A spending in the U.S. dropped to about $300 million year over year from the $400 billion recorded in 2021.
The main culprit behind this trend appears to be higher interest rates, which have made financing a deal less appealing for buyers, particularly when there is the potential for a less optimistic profit outlook due to a slowing economy.
Even with these concerns, pharmaceutical deals have been far from stagnant since the end of the first quarter.
Merck (MRK), a biopharmaceutical company with a market capitalization of $288 billion, announced that it would purchase Prometheus Biosciences (RXDX) for roughly $11 billion, representing a premium of about 75% over the pre-announcement price. The announcement had a considerable impact on Prometheus stock, which saw a surge in value.
Shareholders of Prometheus enjoyed significant gains as Merck seeks to replace its revenue stream from cancer treatment Keytruda, which generates just over $20 billion annually.
Keytruda's patent is set to expire in 2028, leaving room for competitors to gain market share and making Merck's acquisition of Prometheus a critical move. For context, Prometheus's ulcerative colitis product alone has a total available market worth roughly $30 billion.
This deal could be just the beginning of a wave of new mergers and acquisitions in the biotechnology and healthcare industry. Experts note that we are entering a "smart optimism" period in the sector.
It makes sense for larger pharma companies to explore mergers and acquisitions in the current market for several reasons.
For one, many larger companies are seeking to revamp their drug pipelines. Take Bristol Myers Squibb (BMY), for example, which has a market capitalization of $146 billion. Sales of its myeloma treatment, Revlimid, likely peaked at just over $12 billion in 2021. As the patent for Revlimid expires, the company is expected to lose market share, causing sales to plummet to the low hundreds of millions.
While the company has several new drugs in development, it may still seek to acquire smaller firms to safeguard its future. However, given that Bristol has just over $9 billion in cash, any significant acquisitions it pursues could require taking on debt. Such a move would not be unprecedented, as Pfizer financed roughly 70% of its Seagen purchase with long-term debt.
Another big name that could be on the lookout for an attractive deal is Biogen (BIIB), a company with a market capitalization of $42 billion. Biogen is reportedly interested in the neuropsychiatric and inflammatory sectors and could strike a deal as early as the latter half of 2023.
Looking at things from a seller's point of view, many of these companies are now much less valuable than they once were on the public market and, therefore are easier targets for acquisition.
The SPDR S&P Biotech ETF (XBI) has taken a 50% hit from its all-time high set in February 2021. This is mainly due to higher interest rates, which have diminished the perceived value of future profits. Since many small biotechs are valued based on their projected earnings well into the future, this has significantly affected their stock prices.
Some biotech companies have been eyed as potential takeover targets due to their reduced market value.
One is 89bio (ETNB), with a market cap of $1.2 billion and a stock price falling by more than 50% from its all-time high, could be a potential target.
Similarly, Karuna Therapeutics (KRTX), which has a market cap of $7.4 billion and has seen a decline of almost 30% from its all-time high, is also considered an acquisition candidate.
Morphic Holding (MORF), with a market cap of $1.8 billion and a drop of more than 35% from its all-time high, and Ideaya Biosciences (IDYA), which has a market cap of $706 million and has lost almost half its value from its all-time high, could also be targeted for acquisition.
Overall, this is a promising period for the sector. So, take a moment to consider some of the smaller biotech firms in the market. Suppose these companies have a hard time finding interested buyers. In that case, there is still hope for shareholders as there's a chance that a larger corporation may step in and make an acquisition, leading to a substantial payout.
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
August 18, 2022
Fiat Lux
Featured Trade:
(MORE THAN JUST A ONE-TRICK PONY)
(MRK), (SGEN), (SNY), (PFE), (BNTX), (GSK), (CVAC), (MRNA)
When executed correctly and sufficient time is allocated, stock market investing can be highly rewarding. But, what can investors do to make the most of their opportunities in the market?
The short answer: Choose businesses that have or are building a strong competitive advantage.
Those investing in the biotechnology and healthcare sector know that buying companies with promising portfolios and diverse pipelines is vital.
After all, a solid lineup can generate and secure steady cash flow to fund R&D efforts as well as acquisitions to expand the pipeline. Consequently, this guarantees steady growth in revenues as existing products face patent exclusivity losses.
Within this sector, one of the companies with a strong portfolio and promising pipeline is Merck (MRK).
Merck has become practically synonymous with Keytruda—the #1 cancer drug in terms of sales globally. In the first 6 months of 2022 alone, this drug already raked in $10.1 billion in sales.
While several biotechnology companies would be content with this top-tier drug in its portfolio, Merck refuses to be a one-trick pony.
Leveraging its $222 billion market capitalization, the fifth-biggest pharmaceutical company on the planet has been steadily expanding its portfolio.
In fact, Keytruda only made up 33% of its total $30.5 billion sales in the first half of the year.
Merck has built a formidable oncology lineup and developed several blockbuster treatments in this space.
Its flagship, Keytruda, climbed 30% year-over-year in its second-quarter earnings report to record $5.3 billion for that period. Other cancer treatments improved their performance as well. Lynparza grew 17% while Lenvima rose 33%.
Amid these growths, Merck remains aggressive in expanding its oncology lineup. Earlier this year, the healthcare world has been abuzz with Merck’s plan to buy cancer-centered biotech Seagen (SGEN).
The deal, if it pushes through, would be reportedly worth $40 billion and add 4 already approved cancer drugs to Merck’s portfolio.
On top of these market-ready products, Seagen will also bring numerous late-stage candidates to the table.
Merck also recently inked a smaller deal with Orion Corporation. The agreement, worth $290 million, will grant Merck access to Orion’s drug candidate for prostate cancer.
Meanwhile, Merck just announced its plan to catch up with its peers in the COVID-era race. Specifically, the biotech giant has finally become more invested in entering the messenger RNA technology segment.
Earlier this week, Merck struck a $3.7 billion deal with Cambridge-based private biotech Orna Therapeutics for the latter’s novel take on mRNA called oRNA.
Basically, Orna’s approach involves altering the mRNA strands in such a way that it creates a circle instead of a line.
According to the firm, this will be a more effective way to apply the technology to mRNA-based vaccines and therapies.
This isn’t the first time Merck collaborated with a smaller firm to pursue mRNA technology.
As early as 2015, Merck has already been investing in this segment. In fact, it was one of the early partners of Moderna (MRNA), signing a series of agreements with the latter including collaborations on infectious diseases programs.
While some of the programs have been discontinued, Merck and Moderna continue to work together on a personalized cancer vaccine program.
Amid these efforts, Merck is still regarded as a laggard compared to its Big Pharma peers in terms of making huge investments in the mRNA space.
Recent mRNA collaborations include Sanofi’s (SNY) $3.2 billion deal with Translate Bio, Pfizer’s (PFE) massive investment in BioNTech’s (BNTX) technology, and GlaxoSmithKline’s (GSK) deal with CureVac (CVAC).
Nevertheless, the deal with Orna suggests a shift with Merck’s strategy.
Overall, Merck is a premier biotech and healthcare business with a strong portfolio and a promising pipeline.
Its profitability and expansion over the past years have been proven to be top-notch, and it’s not farfetched to expect the same or even better results in the future. I recommend buying the dip.
Mad Hedge Biotech and Healthcare Letter
July 12, 2022
Fiat Lux
Featured Trade:
(THE LEADERSHIP BATON IS IN BIOTECH’S HANDS NOW)
(MRK), (SGEN), (CRSP), (VRTX), (BLUE), (BIIB), (LLY), (RHHBY)
Biotechnology companies have taken the reins and are expected to outperform the general market in the near future.
To date, the Nasdaq Biotech Index (NBI) has been up by 2.41% while the iShares Biotechnology (IBB) exchange-traded fund has climbed by 2.47%.
Numerous crucial factors place this industry in an advantageous position for growth. Alongside other segments of the pharmaceutical and healthcare industries, the biotechnology sector is essentially recession-proof.
With a roughly 40% fall in the biotech sector from 2021’s high, it’s highly likely for us to witness a boost in takeover activity in this space.
This is evident in recent reports of Merck (MRK) attempting to acquire cancer biotech Seagen (SGEN), as discussed in the June 30 issue of this biotech and healthcare letter.
The talks have progressed, and it appears that Merck is nearing the end of the process. The goal is to have the details worked out by the time the quarterly earnings report is released on July 28.
While no specifics have been made public, it is estimated that the larger healthcare company will pay a staggering $40 billion for this Seagen acquisition.
If this goes through, Merck will pay more than $200 per share for Seagen.
The news of this acquisition bolstered Seagen’s business as the stock rose by 4.6% at the time of the announcement.
This is welcome news given the perceived slowdown in biotech M&A activity since 2020. As a result, the idea fueled pessimism among investors who failed to see the big picture during this time period.
Analysis of 101 contracts signed by small, medium, and large biotechnology companies between January 2015 and June 2022 reveals that this year's contract volume and size are comparable to those of previous years.
In fact, there have been $17.7 billion in transactions so far in 2022. This translates to more than $13.9 billion in 2020 and $7.2 billion in 2021.
Some investors may be concerned about the quality of these acquisitions.
Even though the companies involved paid good premiums, the last 12 months' acquisitions were done at a big discount to the highest share prices of the businesses being bought.
To put it simply, there has been a problem with pricing in the sector as of late.
This is admittedly a "bittersweet" reality of recent biotech M&A transactions. As a result, market perceptions are clouded and investors are misled into believing that a much larger problem is brewing in the sector.
Executing megadeals is an obvious solution. This is why the Merck-Seagen merger is such good news for the industry.
The impact of this report suggests that large-scale M&A could be part of the path to the biotech sector's recovery.
The mere possibility of this transaction has already increased the SPDR S&P Biotech exchange-traded fund by approximately 20%.
In addition to Merck and Seagen, other biotechnology companies have been widely discussed as potential acquisition targets.
CRISPR Therapeutics (CRSP), which has a long-term partnership with Vertex Pharmaceuticals (VRTX), is a fan favorite. By the fourth quarter of 2022, the two intend to submit their sickle cell and beta-thalassemia treatment for approval.
Bluebird Bio (BLUE) is another company that has been on the radar whenever acquisition discussions begin.
This gene therapy and cancer biotech has been unnerving investors for months, even before the pandemic triggered an economic crisis, due to its lackluster performance. Despite this, its gene-editing program has enormous potential.
With a market capitalization of $368 million, it is an ideal candidate for Merck and even Moderna (MRNA). After all, both have been considering expanding its oncology program, and a dirt-cheap acquisition target appears to be an appealing option.
Biogen is another name associated with multiple interested parties (BIIB). Since its Alzheimer's treatment failed to materialize and deliver despite the biotechnology company exhausting virtually all available options to salvage the situation, the stock has yet to exhibit any signs of recovery.
After betting the farm on this candidate, Biogen has struggled to maintain its financial stability. In an effort to improve its cash flow and pay off its debts, the company has also been working overtime to advance the other programs in its pipeline.
Eli Lilly (LLY) and Roche (RHHBY), which have been working on their own Alzheimer's treatment, have recently been linked to Biogen.
With a market capitalization of $32 billion and a money-losing program, however, any transaction involving this biotech would require significantly more time.
Overall, it appears that biotechs are gradually regaining their footing. It is only a matter of time before all the pieces fall into place and the sector begins to move forward with full force.
