Mad Hedge Biotech and Healthcare Letter
May 24, 2022
Fiat Lux
Featured Trade:
(FROM A BORING BIOTECH TO A TRAILBLAZING PIONEER)
(VRTX), (ABBV), (MRNA), (CRSP), (EDIT), (BEAM), (NTLA)
Posts
When will the turmoil in the stock market come to an end? Unfortunately, nobody can offer a definitive answer.
At this point, there’s still no end in sight to high inflation, climbing interest rates, and the continuing war in Ukraine.
Needless to say, all these issues are affecting the stock market. However, not all stocks are getting negatively affected by the turmoil.
There are still relatively safe bets to buy, with some crushing the market these days.
One of them is Vertex (VRTX).
Vertex stock soared by over 30% year-to-date by mid-April.
While it has given up some of that gain in the past weeks, this biotechnology and healthcare stock is comfortably outperforming the rest of the market, with its shares still up by around 15%.
One reason for Vertex’s good performance is its undisputed monopoly in the cystic fibrosis (CF) market. In fact, its closest potential competitor is AbbVie (ABBV), which recently announced disappointing results for its Phase 2 trials for a CF combo.
This means Vertex’s dominance in the CF space is set to go on for quite some time.
Here’s a bit of background. Vertex has 4 CF treatments.
Among these, the latest treatment, Trikafta, generates the lion’s share of the profits. It raked in $1.7 billion in the first quarter of 2022 alone, with the total revenue for the entire CF pipeline recording $2 billion.
Considering its approved indications and potential approvals, Trikafta is anticipated to treat 90% of the entire CF patient population.
Looking at its current performance and how strong its hold is in the CF market, it appears that Vertex’s prediction that it can sustain its dominance in this segment until at least the late 2030s will be proven right.
Moreover, it’s evident that Trikafta has yet to reach its peak revenue. However, Vertex isn’t depending on this particular treatment alone.
Rather, the company is working on developing a worthy competitor to this top-selling treatment.
That is, Vertex is working on a CF candidate that may potentially be even more effective than Trikafta.
So far, this new drug candidate not only has the capacity to beat Trikafta in terms of efficacy but also offers a more convenient option.
Trikafta is a twice-a-day oral drug that comes in the form of 3 tablets. Meanwhile, this potential competitor is a once-a-day alternative.
If everything goes according to plan, the Phase 3 trial for this Trikafta challenger could start by the end of 2022 or early 2023.
This means that the closest potential rival for the company’s top-selling treatment is its own candidate.
Apart from this, Vertex is working with Moderna (MRNA) to come up with an mRNA therapy for CF patients.
The goal is to offer an alternative option to patients who are not eligible for the current CF therapies.
Although this continued dominance in the CF sector is already a good enough reason to buy Vertex shares, they may be an even better one.
To date, Vertex has at least 6 programs queued in mid to late-stage clinical studies, all of which are projected to become multi-billion dollar revenue streams.
Outside its CF segment, Vertex could have another big winner in the form of gene-editing treatment CTX001.
This is a treatment for sickle cell disease and transfusion-dependent beta-thalassemia that the company has been working on with CRISPR Therapeutics (CRSP).
While CTX001 is promising, it won’t be entering the gene therapy market without any competition. It has to battle the likes of Editas (EDIT), Beam Therapeutics (BEAM), and Intellia (NTLA).
Nonetheless, CTX001, if approved, is a game-changer because it is developed as a one-time cure for genetic blood disorders.
So far, trial results have been positive, and the collaborating duo is expected to file for regulatory approval by the end of 2022 and possibly launch the product by the first half of 2023.
This gene-editing therapy is a significant milestone for Vertex, with CTX001 expected to become another blockbuster, raking in roughly $1 billion in annual sales for the company even after giving CRISPR its share of the profits.
Recently, Vertex added another $900 million to its collaboration with CRISPR to boost its share from 50% to 60%, indicating that it values CTX001 at roughly $10 billion.
Other critical treatments outside the CF space are VX548, an opioid alternative targeting acute pain, and VX800, a stem cell-derived therapy developed to treat Type 1 diabetes.
Vertex has been accused as a company scared of getting out of its comfort zone for quite some time.
With these new ventures, Vertex has become something of a pioneer—a strategy that is projected to open long-term and lucrative revenue streams for the company.
Overall, all these efforts paint an obvious picture. That is, Vertex is a well-balanced company with a main business that capably and reliably generates billions and is complemented by an exciting pipeline that holds the potential to replicate the success of its already established portfolio.
Mad Hedge Biotech and Healthcare Letter
April 14, 2022
Fiat Lux
Featured Trade:
(A BIOPHARMA STOCK BENT ON REDEMPTION)
(MRK), (BMY), (ABBV), (ORGN), (PFE), (VTRS), (MRNA), (BNTX), (CRSP), (VRTX), (BLUE), (BIIB)
It looks like we’re about to bear witness to a redemption journey.
Once upon a time, Merck (MRK) was a major player in the cardiovascular sector. Over the years, it has gradually diminished to a minor league name.
However, Merck has plans to reverse this fortune and reclaim its dominance in the cardio market. To date, it has eight new drug approvals and a slew of expanded labels queued in the next couple of years.
This decision is evident in Merck’s move to outbid Bristol Myers Squibb (BMY) in the auction for Acceleron Pharma, shelling out a whopping $11.5 billion to boost its cardio pipeline considerably.
While the deal may seem like a massive risk, Merck is confident that this deal holds the potential to open up the path to single-product peak sales reaching $10 billion by the mid-2030s.
In fact, there’s no need to wait for long to see some solid proof of Merck’s multibillion-dollar bet, as Acceleron already has a candidate set to be put on display by the end of 2022 or early 2023.
This Acceleron acquisition forms part of the “New Merck” touted when the company welcomed a new CEO and came on the heels of the success of the leadership that brought the mega-blockbuster cancer drug Keytruda.
It also signifies Merck’s conscious efforts to ease their heavily criticized over-dependence on Keytruda.
While the drug will lose patent protection after 2028, Keytruda still holds a significant portion of Merck’s sales. The treatment accounted for roughly 35% of the company’s total revenues last year.
The patent loss of a significant moneymaker is a typical problem for virtually every Big Pharma company, with AbbVie (ABBV) and Bristol Myers Squibb coming to mind as the most recent examples.
The go-to solution to this is pursuing mega-money mergers: AbbVie acquired Allergan for $63 billion while Bristol splurged on Celgene at $74 billion.
This quickly bolsters the existing pipelines and portfolios of the companies and assuages the fear of investors over impending revenue losses.
Instead of following this pattern, Merck did the opposite in 2021.
The company decided to downsize and established a spinoff segment: Organon (ORGN). The idea is to offload its biosimilars and other legacy products to focus on its core strengths.
This is reminiscent of Pfizer’s (PFE) move to spin out its Upjohn unit and merge it with Mylan to form Viatris (VTRS).
This move looks to have worked well for Merck and Organon as it allowed the parent company to focus on its blockbuster brands.
For instance, Bridion recorded a 28% year-over-year rise in 2021 to reach $1.53 billion in sales, while ProQuad reported a 14% increase to hit $2.14 billion.
Meanwhile, Gardasil rose to an impressive 44% to contribute $5.7 billion.
Even Merck’s Animal Health sector grew by 18% to record $5.6 billion.
There’s also Keytruda, which is projected to become the highest-selling drug at $24.3 billion by 2026.
These are only some of the blockbuster products in Merck’s portfolio expected to continue increasing revenues this 2022.
In addition, the company expects at least $5 billion from its COVID-19 antiviral drug Molnupiravir.
Looking at the trajectory and growth of the pipeline and existing programs, Merck estimates an additional 17% increase in its year-on-year revenue in 2022 to reach $56.1 billion to $57.6 billion.
Despite the move to establish a spinoff unit, the Acceleron deal hints at the possibility that Merck might be shifting to an open checkbook strategy.
Considering how relentlessly it pursued the deal, there’s a chance that the company would be at the bargaining table for a while in search of ways to protect itself against the pending Keytruda patent loss.
Some contenders for a potentially splashy offer from Merck are Moderna (MRNA) and BioNTech (BNTX), which could bolster the bigger company’s mRNA pipeline.
It can also splurge on gene therapy experts by targeting CRISPR Therapeutics (CRSP) and even Vertex (VRTX).
However, given bluebird bio’s (BLUE) flailing performance as of late, this small biotech could very well be a contender for a bargain deal.
Speaking of discounted stocks, Biogen (BIIB) is also reportedly under consideration simply because of its deeply discounted price following its disastrous Alzheimer’s disease program.
Whatever move it makes, one thing is sure: Merck, with its $208 billion market capitalization, is in a healthy and stable place financially.
More importantly, it has an excellent product portfolio and an exciting pipeline.
It has shown remarkable growth in the past years and impressive efforts to secure a great future, making it a solid stock to buy and hold for a long time.
Mad Hedge Biotech and Healthcare Letter
April 5, 2022
Fiat Lux
Featured Trade:
(A BRIGHT SPOT IN A GLOOMY SECTOR)
(VRTX), (MRNA), (ABBV), (CRSP)
In an economy continuously plagued with a rising interest rate, it’s not unheard of for risk-averse investors to steer clear of businesses with high debt loads.
After all, those kinds of companies could be the most affected as climbing interest rates inevitably lead to lower profits.
The silver lining is that there’s no need to sacrifice putting money in growth stocks altogether.
You can simply load up on ultra-conservative businesses to ensure that you don’t come off the losing end in the battle of an ever-increasing interest rate.
In the biotechnology and healthcare sector, there are a handful of promising fast-growing businesses that are not saddled with tons of debt. One of them is Vertex Pharmaceuticals (VRTX).
A continuously growing business, Vertex recorded $7.5 billion in sales in 2021, showing off a 22% increase from 2020.
Its cystic fibrosis (CF) program is a major player in its growth, particularly Trikafta/Kaftrio. On its own, this blockbuster treatment contributed $5.7 billion to Vertex’s top line in 2021.
As it expands and goes after more growth opportunities, Vertex consistently ensures that it is backed by a solid balance sheet. In total, its short- and long-term liabilities amount to roughly $3.3 billion.
With a cash balance of $6.8 billion, the company has more than enough to clear that off.
In the past 12 months, Vertex has generated roughly $2.6 billion in cash from its daily operating activities.
This biotechnology company has been in such excellent shape that it managed to buy back shares with $1.4 billion last year. That’s practically three times the $539 million it allocated to repurchasing efforts in 2020.
Meanwhile, investors who feel they missed the boat on Moderna (MRNA) now have a second shot at investing in another high-growth biotechnology company.
Plus, it still has a Moderna connection and already has a strong track record of dominating a lucrative market.
Vertex and Moderna, which saw their stock price catapult to a record-breaking 800% in the past two years, are working on an mRNA-based therapy for CF patients.
Now, you might be wondering why Vertex is pursuing this program, considering its dominance in the CF market.
In fact, the closest rival would be AbbVie (ABBV). However, Phase 2 trial results for this candidate are due in two to three years. That means Vertex will likely remain the top name in the CF space for a while. Nevertheless, Vertex appears determined to keep its lead.
So, why bother with a new program instead of bolstering the existing Trikafta pipeline?
Well, right now, Vertex has virtually covered 90% of the CF market—and this is where Moderna comes in.
What the two are trying to do is to completely cover the market and target the remaining 10% not qualified to take the existing Vertex CF treatment.
As of the last update, the remaining demographic is at 25,000 patients. This would translate to another $4 billion in commercial sales.
If they succeed, the two would have created the biggest competitor to Trikafta. That means Vertex’s most formidable rival would be Vertex as well.
Needless to say, Vertex’s continuous dominance in the CF space guarantees blockbuster levels of profits in the years to come.
Vertex has been busy expanding into additional therapeutics segments despite its resounding success in the CF space.
Another potential blockbuster is CTX001, a one-time gene-editing treatment targeting blood disorders beta-thalassemia and sickle disease, developed in collaboration with CRISPR Therapeutics (CRSP). This is by far the most exciting venture of the company, with the partners expected to file for regulatory approval by the end of 2022.
Aside from these, Vertex’s pipeline is filled with promising candidates. One is VX-147, which is a groundbreaking therapy for severe genetic kidney diseases. There’s also autoimmune treatment VX-880.
VX-548 is another exciting candidate. While this drug is aimed to be an acute pain treatment, a key characteristic is the absence of drug addictiveness.
This is a breakthrough effort because it might just be the answer to the ongoing opioid crisis.
Given the unique mechanism of VX-548, this alternative aims to deliver treatment with low addictive effects.
There are roughly 75,000 deaths reported annually caused by overdose on opioid drugs in the United States alone. This could translate to $4 billion in the addressable market.
Although these candidates are not as advanced as Vertex’s CF program, they demonstrate that the company can go beyond its well-established niche and bolsters investor confidence.
With the rising inflation and economic turbulence, it’s advisable to prioritize companies with steady cash flow and promising growth prospects
Despite the rough couple of years for the broader market, Vertex easily meets these expectations and appears to be one of the positive stories in the healthcare and biotechnology sector.
Mad Hedge Biotech and Healthcare Letter
March 15, 2022
Fiat Lux
Featured Trade:
(AN UNDER-APPRECIATED STOCK WITH A BOATLOAD OF CASH)
(BMY), (CRSP), (VRTX), (BLUE), (GILD), (NVS)
Warren Buffett is nothing but a dyed-in-the-wool type of investor. A key strategy in his success is to target companies with notably solid fundamental businesses but with shares trading at a bargain or at least a discount in relation to their intrinsic value.
Needless to say, this value-oriented tactic has worked well for roughly six decades, with Berkshire’s stock delivering total returns of 6,450% on its capital.
Taking a cue from the Oracle of Omaha’s playbook, let’s take a look at one of the cheapest biotechnology and healthcare stocks in Berkshire’s portfolio to date and see how it has been performing.
At a hair below eight times its forward earnings, Bristol Myers Squibb (BMY) comes out as Berkshire’s third-cheapest stock holding overall.
This pharmaceutical giant, which has a market capitalization of $144 billion, is the sixth-biggest in the list of what is informally called the “Big 8” US pharma firms.
However, BMY’s stock had fallen by -2% in the past 12 months after experiencing some genuine momentum in 2021 when it reached $69 in August. The share price fell to $54 in December. It has since recovered and is now at $65.
A primary reason for investors snubbing this pharmaceutical giant is the impending loss of market exclusivity of three of its best-selling treatments, Revlimid, Opdivo, and Eliquis.
Although it’s reasonable to be anxious over these patent expirations, BMY has developed a great plan to not simply offset the future decline in sales but also to sustain the momentum of its top line all the way until 2030.
Basically, BMY has lined up multiple new drug launches spaced in the following years, with a number of these candidates expected to become potential blockbusters.
Another key part of the company’s growth strategy is acquisitions.
One of the significant moves BMY executed in recent years is its whopping $74 billion acquisition of Celgene in 2019, which is expected to bolster its immunology and oncology sectors. This was immediately followed by a $13 billion buyout of MyoKardia in 2020, which would expand its cardiovascular roster.
Celgene's deal granted BMY a valuable collection of pipeline assets, which the company has been leveraging in preparation for the patent cliffs.
Aside from the added $15 billion in annual revenue stream from Revlimid, which BMY used to boost its cash flow and pay off some debts, the company also inherited Reblozyl.
Since the acquisition, Reblozyl has gained approval for beta-thalassemia and anemia patients.
While this is not as groundbreaking as the gene therapies offered by CRISPR Therapeutics (CRSP), Vertex (VRTX), and even bluebird bio (BLUE), this treatment can still reach peak sales of $2 to $4 billion annually.
Another Celgene candidate poised to become an additional revenue stream for BMY is Inrebic, a JAK2 inhibitor created for myelofibrosis and polycythemia vera. This is projected to rake in $400 million in peak sales.
Zeposia, a treatment for autoimmune conditions, has already gained approval for multiple sclerosis and is queued for clinical trials for Crohn’s disease and ulcerative colitis.
If it receives the green light for all three, this is another $3 billion opportunity for BMY.
The inherited assets from Celgene are Breyanzi, a CAR-T therapy approved for large B-cell lymphoma, and Abecma, which is also an approved treatment for multiple myeloma.
These last two treatments are potential blockbusters as well.
Breyanzi’s list price is $410,000, with the therapy estimated to reach $3 billion in peak sales. Meanwhile, Abecma is listed at $491,500 and is projected to peak at $1 billion.
By 2029, BMY expects to develop new revenue streams worth $25 billion from its current portfolio and growing assets.
Looking at the above assets, BMY’s strategy becomes evident.
When BMY acquired Celgene for an exorbitant amount three years ago, the bigger company’s management team showed just how prepared they were to take the hit in the form of substantial debts in exchange for massive steps forward.
Adding to its expansion efforts, BMY has recently completed a deal with Century Therapeutics.
This marks BMY’s major foray into the promising cell therapy space.
While BMY has not concentrated on this sector before, it already has promising candidates in the form of its Celgene assets, Breyanzi and Abecma.
So far, Century and BMY have agreed to develop four different CAR-T cancer therapies on top of expanding the indications for Breyanzi and Abecma.
At the moment, the big pharma names focusing on this sector include Gilead Sciences (GILD) and Novartis (NVS).
This means BMY has a fighting chance to dominate in this market following its strategic collaboration with Century.
If all goes according to plan, BMY’s work with this cell therapy company might even turn out to be as lucrative as its deal with Celgene acquisition.
Overall, BMY has proven itself to be a reliable money-making titan in the biotechnology and healthcare industry.
BMY is a growth machine that consistently comes up with ingenious plans to grow over the years.
From $20.8 billion in 2017, its profits skyrocketed to an impressive $46.4 billion in 2021, indicating a remarkable 123% increase.
Moreover, the company anticipates that its free cash flow will surpass $50 billion by 2024, implying that it’s not worried over the impending loss of patent exclusivities and flexing its ability to generate a boatload of cash to complete even more collaborations and acquisitions.
Mad Hedge Biotech and Healthcare Letter
March 10, 2022
Fiat Lux
Featured Trade:
(COULD THIS BE THE NEXT BIOTECH BUYOUT CANDIDATE?)
(BLUE), (AZN), (ABBV), (BMY), (VRTX), (CRSP)
What is the common denominator of giant drugmakers AstraZeneca (AZN), AbbVie (ABBV), and Bristol Myers Squibb (BMY)?
Aside from being three of the biggest healthcare companies across the globe, all three have also completed high-profile acquisitions amid the pandemic.
AstraZeneca acquired Alexion Pharmaceuticals for $39 billion in December 2020.
Meanwhile, AbbVie wrapped up its whopping $63 billion acquisition of Allergan in May 2020.
As for BMY, this biopharma titan followed its jaw-dropping $74 billion acquisition of Celgene with a $13 billion merger with MyoKordia.
Since then, these deals have bolstered the lineups and deepened the pipelines of all three drugmakers, helping them secure their dominance in the healthcare space.
As for the acquirees, they also benefited from the transactions, particularly those struggling to get through tough situations prior to getting bought out.
With that in mind, it looks like the biotechnology and healthcare sector has another potential high-profile acquisition candidate: Bluebird Bio (BLUE).
Bluebird Bio has recently fallen from investors’ grace following multiple setbacks.
The biotechnology company, once considered a trail-blazer in the gene therapy space, now finds itself without a CFO and left behind by competitors.
Its peers, who were initially eons away in terms of pipeline development, have figured out ways to work around Bluebird’s patents and even managed to outpace the company in launching new gene therapies to market.
Given all these factors, it is no surprise that investing in Bluebird bio has become synonymous with a recycler searching for value in random scraps and parts.
Over the last three years, Bluebird Bio’s shares have plummeted by more than 90%. From a $1.39 billion market capitalization, it is now at roughly $330 million.
That is a horrible performance based on any metric.
Bluebird bio has faced several headwinds that caused its stocks to fall apart.
One problem is the delay in the company’s Biologics License Application in the US for its transfusion-dependent beta-thalassemia treatment, LentiGlobin.
Bluebird Bio initially planned to complete this rare blood disorder therapy’s application by the second half of 2020. However, the company failed to submit some information requested by the FDA.
Another LentiGlobin-related issue is the temporary pause on the clinical trial for sickle cell disease treatment. Eventually, the suspension was lifted, but not before investors scurried away from the stock, following back-to-back concerns over the same treatment.
Other aggravating factors include Bluebird’s move to exit the European market following disagreements over the pricing of some of its gene therapies.
These issues saw Bluebird’s market cap sink, positioning it lower than rival gene-editing companies today.
Needless to say, this deeply discounted value could attract a bigger and expanding biopharma seeking to dip its toes in the gene-editing space.
While Bluebird might be struggling these days, it remains a promising company thanks to its candidates.
This becomes even more exciting since the company announced its plans to concentrate on severe genetic diseases. Although this is a small niche, there’s massive potential in this market.
A strong candidate in its roster is Zynteglo, which gained regulatory approval in 2019 and has yet to reach blockbuster status.
Patients with beta-thalassaemia normally have no other choice but to get blood transfusions regularly. Zynteglo drastically challenges this standard by offering a one-time curative treatment. In fact, saying that this is a life-changing breakthrough is an understatement.
Another potential blockbuster is Skysona, a treatment for a pediatric neurodegenerative disorder called cerebral adrenoleukodystrophy. This neurological disease is extremely rare, affecting only 50 patients in the US annually.
As for its pipeline, Bluebird has three major candidates nearing FDA approval in the US. This means 2022 and 2023 will be critical years for the company.
The first product is Lenti-D, which is similar to Skysona. If things go according to plan, then this treatment might receive the green light by August 2022.
Another product is Beti-cel, which was initially launched as Zynteglo. When this successfully penetrates the US market, this first-ever gene therapy option for beta-thalassemia will rake in roughly $1.87 billion by 2024.
Considering the potential of this market, Beti-cel inevitably finds itself facing off strong competitors in the space.
Thus far, the strongest is Vertex Pharmaceuticals (VRTX), which recently announced an additional $900 million investment in its collaboration with CRISPR Therapeutics (CRSP).
The third candidate is Lovo-cel, which is a sickle cell disease treatment.
This could be a major product for Bluebird, given the over 100,000 patients in the US alone that the company can target.
The goal is to finish the validation process by 2022 and submit Lovo-cel for approval by the first quarter of 2023.
Outside its pipeline candidates and approved products, Bluebird's manageable debt is another thing that makes it attractive for a potential buyout.
After all, cash is king, especially when it comes to biotechnology companies.
At the moment, Bluebird still holds roughly $442 million in the bank, and $46 million of this is restricted.
This indicates unrestricted liquid assets of approximately $396 million—an amount higher than its current market cap.
Consequently, this will allow Bluebird to comfortably weather at least the rest of the year until 2023.
It possesses a relatively solid secure position to hold itself together until its pending candidates start raking in revenues on their own.
Admittedly, Bluebird Bio has had several challenging years. There will still be uncertainties ahead, but it’s undeniable just how promising the company is at this point.
Overall, this stock is worth serious consideration, particularly for companies looking to get a head start in the gene-editing sector.
