Mad Hedge Biotech and Healthcare Letter
June 30, 2022
Fiat Lux
Featured Trade:
(A SOLID BIOPHARMA WITH A GAMECHANGER UP ITS SLEEVE)
(MRK), (SGEN), (AZN), (ABBV), (BMY)
Posts
The mounting uncertainty over fears of a global recession, heightened volatility, and ongoing geopolitical concerns resulted in the decline of the S&P 500 index, pushing it towards a bear market.
In this type of environment, investors can lean on solid dividend stocks to smooth out losses and generate some much-needed passive income.
A great biotechnology and healthcare stock that fits the bill is Merck (MRK).
For one, Merck’s business is solid, rising by 23% year-to-date. The company, with a market capitalization of $233 billion, is the fifth-biggest pharma stock globally.
It develops products for humans and animals, excelling and becoming a frontrunner in both fields.
Among its programs, the most noteworthy is the top-selling cancer drug Keytruda. This product continues to gain more indications despite already having over two dozen regulatory approvals under its belt.
In 2021, Merck launched five blockbuster products. Even its animal health sector posted double-digit growth in net sales for that period.
This also included its COVID-19 antiviral treatment, Lagevrio, which raked in $3.2 billion in sales in the first quarter of 2022 alone.
Merck also has roughly 77 programs queued for Phase 2 trials and 29 more for Phase 3 studies in its pipeline. These cover diverse projects ranging from vaccines, cardiovascular, and diabetes treatments to oncology and endocrinology therapies.
Needless to say, the continuous expansion of the company’s drug portfolio bodes well for its future. Moreover, Merck offers investors a 2.9% dividend yield.
To put that in perspective, 2.9% is about twice the S&P 500’s 1.6% yield.
While Merck is considered one of the top companies in the healthcare industry, reporting almost $50 billion in revenue in 2021, the business has been missing something in the past years: a big growth catalyst.
Despite its solid performance and steady expansion of existing products, Merck’s sales have only increased by roughly 15% from 2019 to 2021.
This might change soon.
Merck has been persistently linked with biotech company Seagen (SGEN) in an effort to bolster its oncology portfolio.
If this plan pushes through, it could be a massive game-changer for both companies.
With a market capitalization of over $32 billion, buying Seagen won’t be cheap for Merck. More than that, other names are supposedly interested in acquiring this company as well. However, it looks like Merck has the best shot at actually sealing the deal.
Growing its revenues impressively over the past 10 years, Seagen is an attractive target for any Big Pharma.
In fact, this biotech has grown from raking in only roughly $200 million in revenue in 2012 to $1.57 billion in 2021. It has also since then expanded its portfolio and broadened its pipeline. This means that the company’s 2027 revenue estimate of $6.9 billion and $10.2 billion by 2031 are within reach.
Seagen would be an excellent fit for Merck because of the overlapping interests of both businesses.
The deal would expand Merck’s oncology footprint, bolster its foothold in the market, and introduce new technology to its pipeline while simultaneously allowing Seagen to inject substantial cash flow to sustain and bring to market its innovative programs.
If this goes through, the deal would be expected to benefit Merck in the same way AstraZeneca (AZN) benefited from Alexion, AbbVie (ABBV) with Allergan, and Bristol-Myers Squibb (BMY) with Celgene.
While it’s risky to speculate on a potential acquisition, Merck remains a good buy regardless of the plans with Seagen.
Considering that the company’s dividend payout ratio is projected to be at 38% in 2022, its dividend seems to be safe and should be able to increase almost as fast as its earnings.
This means Merck could reasonably deliver high-single-digit yearly dividend growth, making it a stock with an excellent combo of income on the side and high growth potential.
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)
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.
Followers of the Mad Hedge Fund Trader Alert Service have the good fortune to own TEN deep in-the-money options positions, all of which are profitable. Six of these expire in six trading days on Friday, January 15, and I just want to explain to the newbies how to best maximize their profits.
These involve the following:
(TLT) 1/$164-$167 put spread
(TSLA) 1/$430-$460 call spread
(TSLA) 1/$570-$600 call spread
(WPM) 1/$39-$41 call spread
(GOLD) 1/$21-$23 call spread
(TSLA) 1/$830-$860 put spread
Provided that we don’t have a huge selloff in gold, silver, or Tesla, or monster rallies in bonds or Tesla, all six of these positions will expire at their maximum profit point.
So far, so good.
The storming of Capital hill on Wednesday worked to the benefit of every one of these positions. Gold and silver took off, bonds stabilized, and Tesla ceased its heroic rally.
I’ll do the math for you on our oldest and least liquid position, the Tesla January 15 $430-$460 call spread, which I initiated on December 10, 2020 and will definitely run into expiration. At the Wednesday high, it was an astonishing $315, or 68.47%, in-the-money.
This is the biggest one-month stock gain I have seen in one of my positions in the 13-year history of this service.
Your profit can be calculated as follows:
Profit: $30.00 expiration value - $25.00 cost = $5.00 net profit
(4 contracts X 100 contracts per option X $5.00 profit per options)
= $2,000 or 20% in 18 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning January 18 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday January 15. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
If for some reason your short position in your spread gets “called away,” don’t worry. Just call your broker and instruct them to exercise your long option position to cover your short option position. That gets you out of your position a few days early at your maximum profit point.
If your broker tells you to sell your remaining long and cover your short separately in the market, don’t. That makes money for your broker, but not you. Do what I say, and then fire your broker and close your account because they are giving you terrible advice. I’ve seen this happen many times among my followers.
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade
Global Market Comments
July 10, 2020
Fiat Lux
Featured Trade:
(HOW TO HANDLE THE FRIDAY, JULY 17 OPTIONS EXPIRATION),
(REGN), (ILMN), (SGEN), (JPM)
Followers of the Mad Hedge Fund Trader alert service have the good fortune to own FOUR deep in-the-money options positions that expire on Friday, July 17, and I just want to explain to the newbies how to best maximize their profits.
These involve the:
Seattle Genetics (SGEN) 7/140-$145 call spread
Illumina (ILMN) 7/$320-$330 call spread
Regeneron (REGN) 7/$570-$580 call spread
JP Morgan Chase (JPM) 7/$80-$85 call spread
Provided that we don’t have another 3,000-point move down in the market by next week, these positions should expire at their maximum profit points.
So far, so good.
I’ll do the math for you on our oldest and least liquid position which I almost certainly will run into expiration. Your profit can be calculated as follows:
Profit: $5.00 expiration value - $4.30 cost = $0.70 net profit
(23 contracts X 100 contracts per option X $0.70 profit per option)
= $1,610 or 16.27% in 18 trading days.
Many of you have already emailed me asking what to do with these winning positions.
The answer is very simple. You take your left hand, grab your right wrist, pull it behind your neck, and pat yourself on the back for a job well done.
You don’t have to do anything.
Your broker (are they still called that?) will automatically use your long position to cover your short position, canceling out the total holdings.
The entire profit will be credited to your account on Monday morning July 20 and the margin freed up.
Some firms charge you a modest $10 or $15 fee for performing this service.
If you don’t see the cash show up in your account on Monday, get on the blower immediately and find it.
Although the expiration process is now supposed to be fully automated, occasionally machines do make mistakes. Better to sort out any confusion before losses ensue.
If you want to wimp out and close the position before the expiration, it may be expensive to do so. You can probably unload them pennies below their maximum expiration value.
Keep in mind that the liquidity in the options market understandably disappears, and the spreads substantially widen, when a security has only hours, or minutes until expiration on Friday, July 17. So, if you plan to exit, do so well before the final expiration at the Friday market close.
This is known in the trade as the “expiration risk.”
One way or the other, I’m sure you’ll do OK, as long as I am looking over your shoulder, as I will be, always. Think of me as your trading guardian angel.
I am going to hang back and wait for good entry points before jumping back in. It’s all about keeping that “Buy low, sell high” thing going.
I’m looking to cherry-pick my new positions going into the next month-end.
Take your winnings and go out and buy yourself a well-earned dinner. Just make sure it’s take-out. I want you to stick around.
Well done, and on to the next trade.
You Can’t Do Enough Research
Global Market Comments
July 8, 2020
Fiat Lux
Featured Trade:
(TRADING THE BLUE WAVE STOCK MARKET),
(FB), (AAPL), (MSFT), (AMZN), (ADBE), (SQ), (PYPL), (CRM), (SGEN), (REGN), (ILMN) (FEYE), (PANW), (AMD), (MU), (NVDA), (TSLA), (LEN), (PHM), (KBH), (XOM), (CVX), (XOM), (RTN), (NOC), (LMT), (KOL), (X), (GE)
At this point, it is possible that the president may lose the November election.
He is 14 points behind Democratic candidate Joe Biden in the polls. The odds at the London betting polls have him losing by a similar amount. My old employer The Economist magazine in London gives him a 10% chance of winning using a mix of economic and polling data.
And this assumes the election is held today. The fact is that the president is digging himself into a deeper hole every day, taking the wrong side of every issue confronting the country today. He seems to be refighting the Civil War….and taking the Confederate side when even the State of Mississippi is taking its symbol off its flag.
So, what will the post-Trump world look like? Will taxes go through the roof? Will the market crash? Is it time to go 100% cash, change our names, and move to a country with no US extradition treaty?
I don’t think so. In fact, with stocks soaring to meteoric new highs every day, the market expects that a Biden administration will be great news for stocks, perhaps the best ever.
Taxes will certainly go up. Favorable tax treatment of the energy, real estate, and private equity funds will get axed. Carried interest will finally become history. Marginal tax rate on net income over $1 billion could get hiked to the Roosevelt levels of 80-90%.
Biden has already announced an increase in the corporate tax rate from 21% to 28%. That will cut earnings for the S&P 500 by $9 a share. But the stock market is not the economy, with S&P earnings only accounting for 10% of US GDP.
And the $9 companies lose in taxes they will make back and more from new government spending, which isn’t slowing down any time soon. Some 14,000 American bridges need to be rebuilt. The Interstate Highway System is a shambles. High-speed broadband needs to go rural. The electrification of the US needs to accelerate to accommodate the millions of electric cars headed our way.
I believe that eventually, 51 million Americans will lose their jobs as a result of the pandemic. Perhaps a third of those are never coming back because the future has been so accelerated. That will leave the broader U-6 Unemployment rate stuck in double digits for years, maybe for decades.
So, we’re going to need some kind of Roosevelt style programs like the Works Progress Administration (WPA) and the Civilian Conservation Corps (CCC) who built much of the monolithic infrastructure that we all enjoy today.
At least 300,000 educated workers could immediately be put to work in contact tracing. Millions more could be employed in national infrastructure programs. One thing is certain. A new administration won’t stop massive government spending, it will simply redirect it.
And let's face it. A Biden win would bring a big expansion of Obamacare. With the best healthcare technology in the world, private industry has done the world’s worst job controlling the pandemic.
Countries with well-run national healthcare systems like Australia, New Zealand, Japan, and Singapore have almost wiped out the disease. This is why I am avoiding the healthcare sector for the foreseeable future.
Who are the big winners of all this? Big tech (FB), (AAPL), (MSFT), (AMZN), medium tech (ADBE), fintech (SQ), (PYPL), the cloud (CRM), and biotech (SGEN), (REGN), and (ILMN).
Cybersecurity will always be in demand (FEYE), (PANW). The global chip shortage will continue to worsen (AMD), (MU), (NVDA).
And Tesla (TSLA)? What can I say? It is already up nearly 100-fold from my initial $16.50 recommendation in 2010, and I’ve bought three Tesla’s (two S’s and an X).
Followers of the Mad Hedge Trade Alert service know that I am already long these names up the wazoo, and is why I am up 26% in 2020. It’s simply a matter of all pre-pandemic trends hyper-accelerating, which we were already tapped into.
If you have to add a purely domestic sector, a gigantic Millennial tailwind will keep homebuilders bubbling for years like (LEN), (PHM), and (KBH).
And while you won’t find me as a player here, retail will recover. The sector has not prospered during the current administration, thanks to a trade war with China and the pandemic.
And the losers? There is a classification of “Trump” stocks you don’t want to be anywhere near. Energy will do terribly (XOM), (CVX), (XOM), with Texas tea possibly revisiting negative numbers. If you take away the tax breaks, energy hasn’t really made money in decades.
Defense stocks (RTN), (NOC), (LMT) will take a big hit from budget cutbacks and fewer wars. Coal (KOL) will finally get shut down for good, probably sold to China in bankruptcy proceedings. Industrials will continue to lag (X), (GE), with no more free handouts from the government and no technology advantage.
So if Biden wins, you don’t need to slit your wrists, hang yourself from the showerhead, or cease investing completely. Just take your stock market winnings and go out and get drunk instead.
