Mad Hedge Biotech & Healthcare Letter
June 11, 2020
Fiat Lux
Featured Trade:
(THE BIOTECH MERGER BOOM ACCELERATES)
(AZN), (GILD), (BMY), (ABBV), (AGN), (TAK), (CI), (SNY), (JNJ), (UNH), (RHHBY), (LLY)
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Nothing can ever be absolutely shocking in the biotechnology and healthcare world.
I’ll admit though that the reports on AstraZeneca’s (AZN) interest in acquiring Gilead Sciences (GILD) surprised me.
The two companies touched base last month on a potential acquisition deal.
If this rumor turns into a reality, then we’re looking at what could be the biggest healthcare deal to date.
That’s saying something considering the massive mergers we’ve seen in the past years.
So far, the biggest biotechnology and healthcare deal is the $87.6 billion acquisition of Celgene (CELG) by Bristol-Myers Squibb (BMY) in 2019.
In the same year, AbbVie (ABBV) acquired Allergan (AGN) for a whopping $83.8 billion, making it the third biggest deal in the healthcare sector to date.
The year 2018 paved the way for two more massive deals in the form of Takeda’s (TAK) $81 billion acquisition of Shire, which ranks fourth overall, and Cigna’s (CI) $68.4 billion deal with Express Scripts (ESRX) in seventh place.
Fifth on the list is by Sanofi’s (SNY) $73.5 billion deal with Aventis in 2004.
Although it has been two decades since it happened, the $72.5 billion merger of Glaxo and SmithKline Beecham in 2000 still counts as one of the biggest deals in the industry. This agreement gave birth to GlaxoSmithKline (GSK).
Prior to Bristol-Myers Squibb and Celgene deal, it was Pfizer’s (PFE) $87.3 billion acquisition of Warner-Lambert in 1999 that topped the list.
AstraZeneca’s current market capitalization is roughly $140 billion. Meanwhile, Gilead Science’s market cap stands at approximately $96 billion.
With all these in mind, the AstraZeneca-Gilead Sciences merger is estimated to reach roughly $250 billion on top of the significant synergies expected throughout the years.
If these two health industry heavyweights merge, then their newly formed company would become the third biggest healthcare company in the world behind Johnson & Johnson (JNJ), which has a market cap of $384.55 billion, and UnitedHealth Group (UNH) with $293.85 billion.
Looking at this potential merger in the context of the coronavirus race, it’s safe to say that the combined efforts of AstraZeneca and Gilead would create a COVID-19 titan.
AstraZeneca’s partnership with the University of Oxford resulted in a COVID-19 vaccine candidate that was recently selected as one of the top five candidates worthy of US government support through Trump’s Operation Warp Speed program.
Meanwhile, Gilead’s antiviral medication Remdesivir has been constantly hailed as the standard of care for COVID-19 treatment since the pandemic broke.
The drug which was previously marketed as an HIV medication is now expected to generate $2 billion in sales as a COVID-19 treatment in 2020 alone.
In 2022, Remdesivir is estimated to rake in roughly $7.7 billion in sales. After that, the antiviral drug is projected to generate annual sales somewhere between $6 billion and $7 billion.
Although everything is hypothetical, let’s take a quick look at where each company stands at the moment outside their COVID-19 efforts.
AstraZeneca has been a consistent strong stock market performer throughout the years.
In the first quarter of 2020, sales improved in practically all of AstraZeneca’s territories. Although it has a diversified portfolio of drugs and a robust pipeline, the company’s hottest segment is its oncology business.
A good example of this is non-small cell lung cancer treatment Tagrisso, which is starting to live up to expectations as the next mega-blockbuster for AstraZeneca.
The cancer drug’s first quarter sales reached an impressive $982 million, showing off a 56% jump year over year.
This is promising considering that its competitors include Roche’s (RHHBY) Tarceva and Eli Lilly’s (LLY) Cyramza.
As for its 2020 revenue forecast, AstraZeneca is reported to rake in $25 billion, from which it will generate approximately $7.5 billion in operating profit.
On the other hand, Gilead also has an impressive portfolio that it can bring to the table.
In the first quarter of 2020, the company earned $5.47 billion in revenue compared to the $5.20 billion it generated in the same period last year.
Despite the decline in its hepatitis products from $790 million in the first quarter of 2019 to $729 in the same period of 2020, Gilead’s HIV line made up for the loss by bringing in over $4 billion in sales compared to the $3.6 billion it earned last year.
Not only that, some of Gilead’s other candidates are exciting.
For example, rheumatoid arthritis drug Filgotinib is expected to become another blockbuster and generate $5 billion in revenue annually.
Meanwhile, the anti-tumor treatment Magrolimab is estimated to rake in $3 billion in peak sales.
With the company’s older drugs still capable of generating strong revenue and its new candidates showing their potential for revenue expansion, Gilead can be assured of a continued cash flow well into the 2030s.
Regardless of whether this rumored mega-merger pushes through, both Gilead and AstraZeneca are attractive stocks worthy of their premium valuations.
Since I first recommended this stock two months ago, it has risen a ballistic 35%. In fact, so have most of our other Biotech and Healthcare recommendations.
Vertex Pharmaceuticals Inc. (VRTX) is the unequivocal king of the genetically rare lung condition cystic fibrosis (CF). To further prove its stronghold of the market, the company recently received FDA approval for its fourth CF treatment called Trikafta — five full months ahead of schedule and merely three months following the company’s application.
In a few weeks, the drug will be available in pharmacies carrying a price tag of $311,000. This puts Trikafta somewhere in the range of another prized Vertex CF treatment, Kalydeco. Sales of this newest drug is estimated to reach $4.6 billion by 2023 and more than $6.6 billion by 2025, with the drug projected to hit its peak at $10 billion by the second half of 2020.
Hence, this latest addition to Vertex’s pipeline practically guarantees the company’s supremacy over the lucrative multi-billion-dollar sector for the next decade or so. More importantly, sales from this CF drug could — at the very least — double the annual revenue of Vertex.
The projected earnings of Trikafta places it in the blockbuster tier as early as 2020, with the drug anticipated to be marketed as a treatment with a “whole new level” of efficacy compared to the earlier CF medications released by Vertex. With this new addition, the company can now reach 90% of CF patients in the United States — a huge leap from 50% it’s currently allowed to treat.
However, the launch of Trikafta is a bittersweet deal with Vertex as sales of older CF treatments are anticipated to weaken. In particular, the company expects Symdeko and Orkambi to eventually fade away from the market as more and more patients opt for the newer and more potent Trikafta.
Despite the impending success of Trikafta, it appears that Vertex has no intention of letting up. Since its CF products have translated into healthy profits in the past four quarters and a whopping $950 million in the third quarter alone, it’s no wonder the company continues to work on new offerings for this market.
Even with the weakening sales of Symdeko, the performance of CF drugs in the most recent earnings report showed a 21% jump over the same period in 2018. To date, the company has three additional treatments submitted for Phase II trials.
Beyond the CF realm, Vertex has also been looking to expand in other sectors. One of its exciting partnerships is with gene-editing company CRISPR Therapeutics (CRSP), another one of our core recommendations. (CRSP) has only doubled since September.
The two companies have been working closely to come up with game-changing treatments that could pioneer therapies for rare conditions like sickle cell disease, Duchenne muscular dystrophy, and beta thalassemia. All three of these orphan designation drugs have the potential to turn into blockbuster treatments.
For 2019, Vertex projects a product revenue somewhere between $3.70 billion to $3.75 billion. Meanwhile, its full-year earnings per share is estimated to be $4.77, which is a 17% increase from last year’s report.
A clear downside of Vertex is the fact that it’s one of the most highly valued stocks in the biotech industry at 31.1 times forward earnings. Nonetheless, a long-term study of the company’s performance would show that the shares are actually grossly undervalued even at their present-day levels.
After all, this biotech stock has the potential to triple or even quadruple its yearly revenue over the next five years or so especially if its partnership with CRISPR Therapeutics comes into fruition.
Overall, the growth and profitability profile of Vertex makes it an attractive stock to own. Add to that its promising pipeline and you have one of the most attractive names in the biotech sector. Hence, now is the ideal time for investors to buy Vertex shares as you can confidently bet on its dominance on the CF market as well as its exciting gene-editing ventures and potential revenue stream.
Keep buying both (VRTX) AND (CRSP) on the next substantial dip.
Mad Hedge Biotech & Health Care Letter
November 28, 2019
Fiat Lux
Featured Trade:
(THE BATTLE FOR YOUR HEART IS ON),
(NOVN), (MDCO), (SNY), (AMGN), (TAK)
The rumors are confirmed. Novartis AG (NOVN) has no plans of sitting out the lucrative heart treatment race. The Swiss biopharma giant made its presence known via a $9.7 billion takeover of The Medicine Company (MDCO), putting Sanofi SA (SNY), Amgen (AMGN), and Regeneron Pharmaceuticals (REGN) on high alert for some major league rivalry.
This takeover signifies the latest attempt by Novartis to redirect the future of the company, which currently has a market value of $203 billion through a number of takeovers, mergers, and disposals.
Novartis will be paying $85 in cash for every share, marking a 24% premium over The Medicine Co.’s recent closing price. In return, Novartis will gain control of the smaller biotech’s experimental cholesterol-lowering injection Inclisiran. This breakthrough treatment is currently being prepared for US approval by the end of 2019. Meanwhile, the company will mark the first quarter of 2020 with an EU filing for the treatment.
The pricey bid puts Novartis at the forefront of a market where at least one drug, high cholesterol treatment Repatha, is projected to give Amgen another blockbuster by 2021. Another similar challenger is Sanofi and Regeneron’s joint cholesterol-lowering drug Praluent. So far, these companies have been pounding away to carve out markets with steep prices.
Unfortunately, payer resistance fueled by the estimated patient population affected has been dragging their sales revenue. To add to that, prices for both medications have been limited to somewhere around $6,000 annually.
This is where Novartis’ partnership with The Medicines Company comes in handy.
To be effective, Inclisiran is only needed to be injected twice yearly to patients. This is a far cry from the 26-injection procedure required by both Amgen’s Repatha and Sanofi and Regeneron’s Praluent. The key to Inclisiran’s potency is a technology involving gene silencing or RNA interference, which basically limits “bad cholesterol” production.
Needless to say, Novartis offers an attractive option to over 58 million patients in the United States alone who cannot keep their “bad cholesterol” at bay given the current standard of care. If it gains approval, the company is looking at annual peak sales of roughly $4 billion, with Inclisiran expected to start contributing to their revenue by 2021.
Apart from that, Inclisiran is anticipated to complement Novartis’ existing combination heart failure drug Entresto, which topped the $1 billion yearly revenue threshold in 2018.
Entresto isn’t the only foray of Novartis in the cardiovascular market. Prior to this blockbuster drug, the company led the sector with high blood pressure medication Diovan, which used to rake in $6 billion annually until 2012 when it lost its patent protection.
Now, Novartis appears to be ensuring that history does not repeat itself. That is, the company has been actively seeking acquisitions in an effort to bolster its drug pipeline and portfolio with promising products and groundbreaking technologies.
While this latest deal with The Medicines Company sounds promising, Novartis remains on guard as it looks for alternatives, especially with the upcoming patent expirations of some of its main moneymakers like eye medication Lucentis, genetic blood disorder drug Exjade, and multiple sclerosis treatment Gilenya.
This deal with The Medicines Co fits hand-in-glove with the type of diversification and development projects that Novartis has been pursuing as of late. These deals include the $8.7 billion AveXis (AVXS) agreement, which allowed Novartis access to a landmark gene therapy for spinal muscular atrophy.
Prior to that, the giant biopharma acquired nuclear medicines business Advanced Accelerator Applications (AAAP) for $3.9 billion in 2017. A $2.1 billion deal with target cancer therapy maker Endocyte (ECYT) followed in 2018. Earlier this year, Novartis completed its $5.3 billion acquisition of dry eye treatment Xiidra from Takeda Pharmaceutical (TAK). So far, the Swiss giant has already spent $27.5 billion in its deal spree -- and the company isn’t going to stop anytime soon.
I know I’ve said this already, but keep buying (NOVN) on dips.
