Mad Hedge Biotech & Healthcare Letter
September 28, 2021
Fiat Lux
FEATURED TRADE:
(A RINSE-WASH-REPEAT PLAY FOR OPPORTUNISTIC INVESTORS)
(EXEL), (BMY), (RHHBY), (VRTX), (TDOC)
Posts
No matter the short-term consequences of events in the past months, what remains constant is the stock market’s ability to create wealth over the long term.
Each crash or correction that occurred in history was eventually offset by a strong bull market rally.
That’s why it pays to be prepared for when things start to turn around.
Today, I’d like to take a look at another name in the oncology sector that’s poised to skyrocket in the coming years: Exelixis (EXEL).
Here’s a quick overview of Exelixis.
Exelixis is a California-based biotech that’s focused on developing treatments for hard-to-treat types of cancer. To date, the company has three FDA-approved treatments in the market.
The stock has been trading within the $20 and $22 range and sports a market capitalization of roughly $7 billion.
For most of its existence, Exelixis’ growth story centers around its blockbuster therapy, called Cabometyx.
In the second quarter earnings report, Cabometyx’s sales went up 59% compared to its 2020 performance to contribute $275.6 million.
This comprised the bulk of Exelixis’ total revenue worth $385.2 million, which climbed an impressive 48.4% year over year.
Cabometyx is the leading treatment for first- and second-line treatment for advanced renal cell carcinoma (RCC) and advanced hepatocellular carcinoma.
Together, both indications could generate over $1 in annual sales for Cabometyx in 2021 and 2022.
To put things in perspective, the entire Cabometyx franchise was only worth about $742 million in 2020.
What makes Cabometyx an exciting revenue stream is its label-expansion capacity.
Apart from the two approved indications, Exelixis is also conducting six more clinical trials for this drug either as a monotherapy or a combination treatment.
So far, Cabometyx has proven to be effective as a combination therapy with Bristol-Myers Squibb’s (BMY) Opdivo. This additional approval has allowed Exelixis to seize an even bigger share of the RCC market today.
Considering the label-expansion opportunities for Cabometyx, this treatment is projected to become a multi-billion-dollar drug soon.
Given the solid performance of its products and successful collaborations, Exelixis has also become a cash cow.
The company estimates that it would conclude 2021 with roughly $1.6 billion to $1.7 billion in cash and investments—an amount that comprises over 20% of its market capitalization.
With this money, the company can comfortably pursue acquisitions and even strengthen its internal R&D engine.
However, not everything has been smooth sailing for Exelixis in the past months.
One of the major factors that pulled the stock down by a whopping 20% is the unimpressive results from its liver cancer clinical trial with Roche (RHHBY) last June.
However, I think the market overreacted to this piece of negative news.
If anything, Exelixis has already turned the situation around.
Unfazed by its unexpected flop with Roche, Exelixis is again pursuing a difficult-to-treat condition: prostate cancer.
The difference this time is that the company appears to have more confidence in the efficacy of its famed Cabometyx as a treatment for the condition—so much so that they intend to apply for FDA feedback in the high-risk group and possibly even an accelerated approval.
It also celebrated a recent win with the approval of Cabometyx’s label expansion to cover 12 years and older—an approval granted way ahead of their December 4 schedule.
Now, Cabometyx can also be prescribed to treat DTC, which is the most common kind of thyroid cancer in the United States.
More than that, Exelixis is the first to provide a standard treatment option to these patients, making the company a first mover in this segment.
Looking at the history of first movers, such as Vertex (VRTX) in the cystic fibrosis sector and Teladoc (TDOC) in the telehealth space, Exelixis could very well be on its way into becoming a functioning monopoly.
In terms of its pipeline, Exelixis has more than 100 studies going through different stages. These cover diverse indications including gastrointestinal cancers, neuroendocrine tumors, and lung cancer.
While Exelixis has a balance sheet akin to Fort Knox and a remarkable revenue growth, its shares remain range-bound in the past couple of years.
Nonetheless, it has continued to be an impressive “rinse-wash-repeat” covered call play during the same period and is considered a dividend stock with double-digit yields.
Moreover, Exelixis has been consistently ramping up revenue growth in the past years.
The biotech’s big cash balance along with its proven profitability indicate a minimal possibility of dilution.
Considering its price-to-earnings-growth ratio of almost 1, this company is the picture of an ideal balance of double-digit sales growth complemented with great value.
Simply put, it’s a great opportunity for long-term investors.
More importantly, its recent stock-price meltdown makes it an ideal addition to the portfolio of opportunistic investors.
Mad Hedge Biotech & Healthcare Letter
August 24, 2021
Fiat Lux
FEATURED TRADE:
A GENE EDITING PURE PLAY UP FOR GRABS
(MRNA), (EDIT), (CRSP), (NTLA), (VRTX), (REGN), (BMY),
(BLUE), (NVO), (GRTS), (INBX), (BEAM), (VERV), (SGMO)
Moderna (MRNA) is faced with a dilemma. And it’s a pretty good problem to face at this point.
The biotechnology company has a flourishing cash stockpile courtesy of the increasing demand for its COVID-19 vaccine, and it needs to find something to do with its overflowing cash.
As of the end of the second quarter, the company has already reported a cash position of over $12 billion—a figure that offers Moderna the flexibility to go on a bit of a shopping spree.
So far, Moderna has set its sights on expanding its internal R&D programs on top of the $1 billion share repurchase program approved by its board of directors.
However, the most exciting news is the company’s plans to potentially make acquisitions soon.
This is where Editas Medicine (EDIT) enters the picture.
Moderna has not been shy in declaring that it wants to add gene editing therapies to its growing pipeline along with nucleic acid technologies and mRNA.
While Moderna did not specifically mention Editas in its plans, the smaller biotechnology company looks to be the most promising candidate for acquisition, especially if the COVID-19 vaccine leader plans to jump right into the action in the gene editing space.
After all, there are only three companies in this segment with therapies under clinical testing: CRISPR Therapeutics (CRSP), Intellia Therapeutics (NTLA), and Editas.
CRISPR Therapeutics is practically joined at the hip with Vertex Pharmaceuticals (VRTX). Meanwhile, Intellia has a strong ongoing partnership with Regeneron (REGN).
That leaves Editas, which currently has no partner for its lead program, making it a prime buyout candidate for Moderna.
Editas is also the cheapest by far among all three clinical-stage biotech with $4.12 billion in market capitalization.
In comparison, CRISPR Therapeutics has a market cap of $8.93 billion, while Intellia has a market cap of $10.97 billion.
Moderna could find Editas’ lower market capitalization as an add-on, as it would allow the bigger biotech to not spend all its cash on the acquisition.
Moreover, Editas has another advantage.
While both CRISPR Therapeutics and Intellia only focus on CRISPR-Cas9, which is a way to locate and bind targeted genes, Editas has developed another option platform to do that.
Its alternative option, called Cas12, could boost the company’s capacity to develop gene editing treatments.
Simply put, its rivals only have one weapon in their arsenal, while Editas has come up with a dual-option CRISPR platform to double its chances of succeeding in gene therapy development.
If, for instance, Moderna does not acquire Editas, there are still a lot of options available for the bigger company.
One possibility is with Juno Therapeutics, which is part of Bristol-Myers Squibb (BMY), as the company is already collaborating with Editas on the development of genetically modified T-cells to come up with a powerful cancer therapy.
Meanwhile, if Editas’ pipeline and portfolio do not quite cut it with Moderna, another potential buyout candidate for this biotechnology giant is bluebird bio (BLUE).
While it’s not as advanced as CRISPR Therapeutics, Intellia, and Editas, bluebird bio has ongoing work with the likes of Bristol-Myers Squibb, Regeneron, Novo Nordisk (NVO), Gritstone Oncology (GRTS), and Inhibrx (INBX).
Other candidates that Moderna could take into consideration include Beam Therapeutics (BEAM), Verve Therapeutics (VERV), and Sangamo Therapeutics (SGMO).
Regardless of Moderna’s future decisions, its announcements that it plans to expand on the gene editing space could potentially spur other huge biopharmaceutical companies to explore their own business development agreements with up-and-coming biotechnology firms.
In fact, even if Moderna ends up not calling, there’s a big possibility that Editas could easily find others who will be interested in acquiring this pure play gene editing frontrunner.
Mad Hedge Biotech & Healthcare Letter
August 19, 2021
Fiat Lux
FEATURED TRADE:
A LOW-PROFILE BIOTECH WINNER
(VRTX), (ACAD), (SRPT), (FGEN), (MRK), (MRNA), (NVS), (XLRN), (PTGX), (IONS), (BLUE), (EDIT), (ABBV)
Choosing winners among biotechnology and healthcare stocks these days isn’t easy.
Since the year started, the sector has been marred with several unexpected disappointments like the 50% decline of crowd favorites Acadia Pharmaceuticals (ACAD) and Sarepta Therapeutics as well as the 33% fall of the ever-dependable FibroGen (FGEN).
So, how can investors pick a winner?
One tactic is taking a peek at what Wall Street analysts are doing, noting which among the companies they’re following are trading the farthest below the estimated price points.
Among the names on the list, a particular stock stands out as a strong contender these days: Vertex Pharmaceuticals (VRTX).
Although it’s one of the most widely known biotechnology companies today, Vertex actually started in a garage of a Harvard-trained chemist, Joshua Bogner, who left his cushy job at one of the most illustrious big pharma companies at that time, Merck (MRK), to pursue his vision.
The company’s raison d’être was a major selling point for a lot of talented and idealistic scientists in that era.
That is, Vertex wanted to find cures for the most challenging diseases and do this in an unbureaucratic setting.
Since then, Vertex’s goal has been straightforward: tackle the most complex and toughest diseases and deliver breakthrough treatments that offer tangible benefits to patients.
Over the years, the company has managed to keep this goal at the forefront of its efforts, starting with its work on the devastating genetic disorder called cystic fibrosis (CF).
Vertex’s work on CF took over a decade, but it eventually led to an impressive franchise that helped with the treatment of patients.
In the first quarter of 2021 alone, sales in this segment reached $1.7 billion.
Expanding on its work, Vertex has explored genetic therapies and set up a collaboration with Moderna (MRNA) in 2016.
Using the latter’s well-established expertise in messenger RNA technology, the companies are expected to come up with more aggressive and advanced CF treatments in the coming years.
Given these developments, Vertex reiterated its 2021 sales guidance to be somewhere in the range of $6.7 and $6.9 billion. Meanwhile, sales of its CF franchise are estimated to peak at $9 to $10 billion—if not higher—by 2024.
Aside from its work on CF, Vertex has also been pouring resources on developing treatments for severe sickle cell anemia and beta thalassemia, a rare blood disorder.
In fact, the company has been looking into these developments as the next major revenue stream, as seen in its bolstered collaboration deal with CRISPR Therapeutics (CRSP).
In this deal, Vertex paid the smaller biotechnology company $900 million upfront plus a potential addition of $200 million following the first regulatory approval of their therapy, CTX001.
While this may sound like a hefty deal to some, Vertex actually values CTX001 at roughly $11 billion.
CTX001, which is a one-time therapy, is priced at roughly $1 million per patient. At this point, the market for beta thalassemia is valued at $32 billion.
Needless to say, this would make CTX001 a massive income generator in the next few years.
Considering the lucrative market for beta thalassemia, though, it’s no surprise that several competitors have emerged to grab their share as well.
Some companies, such as Novartis (NVS) and Acceleron (XLRN), offer maintenance drugs for the disease.
Meanwhile, others like Protagonist Therapeutics (PTGX) and Ionis Pharmaceuticals (IONS) are attempting to develop treatments that would become direct competitors of CTX001.
However, the closest rivals of the Vertex-CRISPR candidate are from Bluebird Bio (BLUE) and Editas Medicine (EDIT).
While this has become a crowded space, Vertex and CRISPR remain the leaders in this segment, as most of the other candidates are still in the investigation phase.
Since it was founded in the 1980s, Vertex has remained true to its vision of tackling some of the toughest diseases out there.
While big pharmaceutical companies, such as AbbVie (ABBV), decided to expand their portfolio through acquisitions, Vertex leveraged its talent pool and maximized its funds by establishing strategic collaborations instead.
This tactic provided the company with enough elbow room that eventually led to its dominance in the CF space, where it now enjoys a virtual monopoly until at least the next decade.
Meanwhile, it has forged strong relationships with promising biotechnology companies and can very well be on its way to becoming the most dominant force in the rare blood disorder segment.
Overall, Vertex Pharmaceuticals is an attractive stock with an impressive portfolio and an even more impressive pipeline.
AbbVie (ABBV) is the seventh biggest biopharmaceutical company worldwide in terms of revenue.
If you’re on the lookout for stocks that also offer juicy dividends, then this is a good company to add to your list alongside Dividend Aristocrats like Johnson & Johnson (JNJ) and Pfizer (PFE).
Since its split from Abbott Labs (ABT) back in 2013, AbbVie has increased its revenue by roughly 2.5 times.
In just a few years post-spin-off, its profits have grown from $18.8 billion to an impressive $46 billion in the last fiscal year.
A huge chunk of AbbVie’s growth is attributed to its blockbuster drug Humira, which is the number one selling drug in 2020 with a whopping $19.8 billion in net revenue.
That’s why it comes as no surprise that the drug’s impending loss of patent exclusivity in the US in 2023 is a major pain point for AbbVie investors.
However, it looks like AbbVie has positioned itself well into a future without Humira.
Although Humira does lead AbbVie’s immunology portfolio, the company’s other products in this lineup are also promising.
Up-and-coming drugs Skyrizi and Rinvoq both reported doubled annual sales from 2019 to 2020, with the two expected to bring in $15 billion by 2025.
Actually, Rinvoq is slated as the successor to Humira and is groomed as a “key growth driver” through 2026.
Putting money where its mouth is, AbbVie has performed notably in the first quarter of 2021 with a 50% increase from its 2020 net revenue to hit over $12.94 billion.
Its net profit also saw a double-digit bump of 18% to reach $3.55 billion.
Despite off-patent woes, Humira still enjoyed a 3.5% uptick in sales to rake in $4.9 billion for the quarter.
Meanwhile, AbbVie’s aesthetic product line showed off an impressive 35% jump during the period, adding over $1.1 billion to revenue.
Reflecting the good news this quarter, AbbVie boosted its profitability guidance for 2021.
From an adjusted per-share net profit in the range of $12.32 to $12.52, the company now estimates it to be somewhere between $12.37 and $12.57.
Diversification has also been explored, with AbbVie veering from immunology and venturing into other segments like oncology, eye care, neuroscience, and even aesthetics.
One way AbbVie has been filling the Humira revenue gap is via acquisitions.
In 2015, the company acquired Pharmacyclics. This deal added a blockbuster drug, Imbruvica, in AbbVie’s lineup.
In 2020, Imbruvica generated roughly $4.7 billion in sales.
With an estimated compound annual growth rate of 26.5%, Imbruvica is projected to reach approximately $31.8 billion in sales through 2025.
On top of that, AbbVie has filed a slew of patents to restrict generic competition against Imbruvica until at least 2035.
Another major acquisition is Allergan, which added roughly 120 new products under AbbVie’s banner following the deal’s completion in May 2020.
Collectively, these products brought in $16 billion in sales in 2019 for Allergan—a noteworthy performance that translated to AbbVie’s 2020 revenue, which grew from $33 billion in 2019 to $45.8 billion a year later.
Perhaps the most notable addition from the Allergan acquisition is Botox.
In 2019, this drug raked in roughly $2.7 billion in sales. Similar to Imbruvica’s potential, Botox also presents a powerful growth runway.
In fact, this Allergan blockbuster is estimated to generate more than $13.4 billion in revenue by 2026.
Apart from the additional 120 products it injected into AbbVie’s portfolio, Allergan also queued 60 more development programs, which could generate at least $2 billion in sales by 2023.
AbbVie is one of the more innovative and newer biopharmaceutical companies to take the biotechnology and healthcare market by storm. Given the company’s strong pipeline programs, it’s definitely poised for more robust growth.
Spun off from Abbott Labs in 2013, this company currently sits at a massive market capitalization of roughly $205 billion.
If its portfolio, pipeline programs, acquisitions, and recent first-quarter earnings reports can tell us anything, it’s that AbbVie still has a lot of room to grow. Hence, it’s good to buy the dip.
Mad Hedge Biotech & Healthcare Letter
May 11, 2021
Fiat Lux
FEATURED TRADE:
(A FALLEN BIOTECH OUTPERFORMING THE MARKET)
(VRTX), (ABBV), (CRSP), (BLUE)
Despite the exceptional performance of a handful of biotechnology companies, many healthcare stocks have languished over the course of the last 12 months due to the extra costs and added uncertainty brought by the COVID-19 pandemic.
Amid its continuous success for almost a decade, with shares climbing by over 800% from 2012 to mid-2020 and outpacing the S&P 500 nearly four times over, Vertex Pharmaceuticals (VRTX) stock was not spared during this turbulent period.
In fact, shares of the company fell by roughly 25% in mid-October following their decision to cancel the development of VX-814.
This once-promising drug, which was initially expected to treat a genetic disorder affecting the liver and kidney, showed disappointing results in its trials last year.
Despite falling out of favor with investors, I think this $55.66 billion-by-market-capitalization biotechnology company holds a strong track record and remains a compelling buy—a fact proven by its first quarter earnings report.
Vertex recorded $1.72 billion in revenue for the first quarter of 2021, showing off a 14% year-over-year jump and topping the projected estimate from analysts of $1.66 billion.
The company also reported a notable improvement on its bottom line, with an adjusted net income of $781 million or $2.98 per share.
In comparison, Vertex recorded $674 million in earnings or $2.56 per share during the same period in 2020.
This embattled biotechnology company marked the end of the first quarter with a total of $6.9 billion in cash, cash equivalents, and marketable securities, exhibiting a $265 million increase from the end of 2020.
Although Vertex anticipates a slowdown in its revenue growth this year, it still projects a full-year sale in the range of $6.7 billion and $6.9 billion.
To see if this is realistic, let’s take a look at the company’s current drug portfolio.
The core of Vertex’s business is its cystic fibrosis (CF) lineup. Without treatment, this disease could lead to the early death of patients.
At the moment, Vertex has four approved CF drugs out in the market: Kalydeco, Orkambi, Symdeko, and Trikafta.
With the extent of patient profiles that these four drugs cover, Vertex has virtually cornered the CF market and established a monopoly.
To date, roughly 50% of cystic patients in the US, Australia, Canada, and Europe are treated using Vertex drugs.
Among the four, Trikafta appears to have the potential to become a blockbuster.
Trikafta is forecasted to take the lion’s share in the CF market in the next few years, with its revenue rising from $3.8 billion to $8.9 billion by 2026. This would translate to a growth in Vertex’s CF program from $6.2 billion to $9.6 billion.
While skeptics might assume that the growth projection is too high, it’s important to remember the trajectory of the Trikafta-Kaftrio drug.
The revenue of this combo grew from $420 million in 2019 to a whopping $3.86 billion in 2020.
Given that CF has become a lucrative market, it no longer comes as a surprise that competitors are starting to swarm the space.
Vertex’s biggest rival in the space so far is AbbVie (ABBV), which has been working on triple combinations of its own drugs.
Apart from its CF programs, Vertex’s pipelines also serve as catalysts for its growth.
Although VX-814 failed and caused the company’s shares to fall in 2020, Vertex has another candidate, VX-864, which has been showing more promising results as of late.
You might be wondering why Vertex insists on working on this drug despite the backlash it suffered last year. This is primarily rooted in the potential of the product.
VX-864, if successful, could be the next CF-like moneymaker for Vertex. By 2026, sales for this drug are estimated to reach $640 million and will peak by 2030 at $1.1 billion.
On top of these, Vertex has collaborated with CRISPR Therapeutics (CRSP) to develop gene therapy for sickle cell disease. So far, the treatment has received a fast-track designation from the FDA.
If approved, their drug, CTX-001, will directly compete with bluebird bio’s (BLUE) LentiGlobin.
The current pricing for bluebird’s therapy is $1.2 million.
To date, there are roughly 250,000 patients suffering from sickle cell disease in the US and Europe. Among them, 25% are diagnosed to be in the severe stages. This is the market that CTX-001 aims to target.
Using the pricing of LentiGlobin as the basis, CTX-001 has the potential to reach $1.6 billion in sales in 2026 and peak at $2 billion in 2029.
If the two companies succeed in this, then CTX-001 is another blockbuster drug added to Vertex’s portfolio.
Overall, Vertex is a good long-term investment stock. It has a proven track record and a healthy pipeline filled with promising candidates. I say you should take advantage and buy the dips.
Mad Hedge Biotech & Healthcare Letter
April 27, 2021
Fiat Lux
FEATURED TRADE:
(THE FUTURE OF MEDICINE)
(CRSP), (VRTX), (EDIT), (NTLA), (PFE), (NVS), (GILD), (RHHBY),
(BMRN), (QURE), (SGMO), (CLLS), (ALLO), (BEAM)
