The Sick Economist's Blog, page 6

HEALTHCARE & BIOTECH STOCKS: A VACCINE AGAINST INFLATION?

 

A healthy allocation to Big Pharma stocks and early stage Biotech stocks should ward off the ills of inflation for most portfolios. 

 

It’s here. Like a circle of acned teenagers in a horror movie, summoning a demon through magical incantations they don’t respect and don’t understand, the Fed’s incessant money printing (at least $3.8 Trillion in just one year) has finally torn open the gates of inflation hell. After all kinds of soothing assurances that massive money printing simply couldn’t cause inflation to flail out of control (“We know what we’re doing….) this week the FED was forced to announce that annualized inflation has now hit 6.2%, the worst in at least three decades. 

And this is just the inflation that shows up under CPI, the FED’s very questionable method for measuring inflation. Many average citizens have pointed out that rents have increased anywhere between 10 and 40% in major urban areas.  Reliable, independent economic observers believe inflation could go much higher from here. We have definitely hit the point in the horror movie where the reckless teens finally realize what they have done, and the demon is now threatening their very existence. 

There isn’t much that an individual investor can do about the Federal Government’s decision to debase the world’s reserve currency, and it’s seeming determination to keep spending no matter what. However, we know from thousands of years of economic history, that in times of inflation, many workers get very poor, but a few select investors get very rich. How can we make sure that you are in the second group? 

Some assets will do better in a long term inflationary environment than others. What will do terrible is wages. History shows, again and again, that wages just can’t keep up with runaway inflation. We believe that the right mix of healthcare assets will actually thrive in an inflationary environment. Specifically, we prefer a “barbell” approach, dividing assets into two distinct, separated categories, and avoiding most of the assets that fall somewhere in between. We believe that a “barbell” shaped portfolio, consisting of large cap, dividend producing Big Pharma stocks on one end, and early stage, pre-revenue biotech on the other end, will help you defeat the demon of inflation. 

Why Big Pharma?

There are a few simple reasons why Big Pharma has a great chance of weathering the inflationary storm. First and foremost, they have done it before. In fact, they have done it many times. 

One strange phenomena that we are facing is a lack of experience as we confront the oncoming inflation crisis. The last time we saw this kind of broad, poorly controlled inflation was the early 80’s. That’s 40 years ago! How many financial professionals are out there who still remember, in detail, everything that happened 40 years ago?

There may not be that many people, but there are plenty of big organizations who have survived many of these kinds of crises. If you think 40 years feels like a long time gone in the fast paced world of big business, how about 140 years? Many big pharma concerns have thrived for that long, or even longer!  They have survived multiple world wars, depressions, inflation, deflation, reflation…..you get the idea.  Companies like Pfizer ($PFE), Eli Lilly ($LLY) and Johnson & Johnson ($JNJ) have slain many economic demons over the decades. Reason suggests they won’t have any trouble this time, either. 

So we can clearly see that Big Pharma has done just fine in past inflationary environments. Why might that be? There are a few clear-cut reasons. 

The first reason is that, despite a lack of bricks & mortar, Big Pharma is really in the real estate business. Everyone knows that real estate traditionally does well in inflationary environments. Big Pharma is actually in real estate, too. Except their real estate is intellectual real estate. They own property just like other real estate funds, except that their property is intellectual property. 

Intellectual property has a surprising amount in common with property property. Specifically, both physical property and intellectual property represent a fixed investment. If I buy an apartment building for $10M, then my cost was $10M. As time goes by and inflation rages, I can raise my rents right along with inflation. However, my fixed investment remains the same. Essentially inflation makes my fixed costs less and less, while greatly increasing my revenues year after year. The same is mostly true for the intellectual property that Big Pharma owns. 

For example, let’s say Big Pharma Corp, invests $5 billion dollars to develop a certain cancer drug. That’s a lot of money, even for Big Pharma Corp. However, once they have graduated from the “sowing” phase, and move into the “reaping” phase, their hard costs are mostly locked in (the cost of a drug is mostly in developing it; once it goes to market, it typically costs pennies to manufacture). Typically drugs have twenty years of patent exclusivity when they can charge whatever the market will bear. So, each year Big Pharma Corp sets a new price for it’s cancer drug, just like a landlord can increase her rents each year. If inflation settles in at 7%, that would mean that the price of the drug could double every ten years. At the end of the patent exclusivity period, Big Pharma Corp could easily be charging 4 times the drug’s initial price. This is why many large pharmaceutical firms have earned the title of “dividend aristocrat.”   Due to this pricing structure, it’s been easy for large cap pharma companies to meet or beat inflation every year with their divided raises, for decades on end. 

The other reason why Big Pharma will inevitably mint money, even in a new age of inflation, is their strong and deep connections to the US Congress. As the saying goes, “it’s not what you know, but who you know.”  Current efforts at containing the profitability of Big Pharma are instructive. As I write this post, efforts at pharmaceutical price reform are going in circles, and clauses that would have triggered material harm to Big Pharma’s bottom line seem to be fading away. In a worst case scenario, senators are discussing passing legislation that would limit pharmaceutical price hikes to the rate of inflation.  That means that, if inflation is at 5%, Big Pharma can raise prices 5%. If inflation is at 15%, then Big Pharma can raise prices 15%. In the worst case scenario, Big Pharma is legally guaranteed that they can keep up with inflation. 

I challenge you to find another industry with better inflation protection! 

Why Early Stage Biotech?

So we can see above that the biggest reason to recommend Big Pharma stocks in the face of stiff inflation is that Big Pharma’s revenue increases are virtually guaranteed. So why on earth would I favor a group of small stocks with no revenue at all? 

Simply put, early stage, pre-revenue, biotech companies derive their stock market value from what analysts, pundits and investors, guess the revenue potential will be. If there is no revenue yet, then the value of the company is based on what people guess the potential is. If inflation comes in at a 10% annual clip, then those “revenue guesses” can simply be adjusted up by 10%. It’s all imaginary money anyhow! 

Let’s go back to the example above, whereby Big Pharma Corp invests $5 billion to launch a new cancer drug. It’s very likely that a large portion of that $5 billion dollar investment actually came in the form of a buyout deal. Big Pharma rarely innovates anything these days; typically Big Pharma just swallows small pharma companies whole. They then bring the former small pharma’s innovations to market. 

Now let’s say that a theoretical “Small Pharma Corp” is developing a novel method of attacking cancer. They have produced promising data, and filed some patents, but they haven’t sold a single drop of the stuff, yet. Believe it or not, today’s stock market is filled with embryonic publicly traded companies just like Small Pharma Corp. You are thinking about investing, so you look up the company’s ticker, and see that this tiny company with no revenue is currently valued at $2 billion dollars. $2 Billion, with nine zeros!

How did anyone come to this crazy valuation? Well, there are two prevailing methods. The first method is, analysts are going to look at the data that Small Pharma Corp is producing, and compare “what could be” to the current, real world revenues of comparable (or mostly comparable) cancer drugs. Many cancer drugs on the market today easily produce $1 Billion in revenue each year. Based on that fact, valuing Small Pharma Corp, with it’s promising data from early clinical studies, at $2 Billion is not a stretch at all. Early stage biotech companies are inflation fighters because their stock market valuation is tied to the “going price” of drugs that are currently on the market. If those “going prices” skyrocket due to general inflation, then so will the fair estimate of the value of the biotech. 

The second way that small, pre-revenue companies wind up with big valuations is simply to compare them to other companies that have recently been bought out. Remember our example with Big Pharma Corp, whereby a large part of it’s $5 billion investment in it’s new cancer drug was actually the acquisition price of a smaller biotech? This happens dozens of times each year. Large pharmaceutical corporations are acquisition machines. In an inflationary environment, these acquisition prices will simply go up with the general rate of inflation. If inflation comes in at 5%, then Big Pharma Corp will need to pay 5% more. If inflation comes in at 15%, then Big Pharma Corp will need to pay 15% more to acquire the small biotech and it’s promising intellectual property. If, in our example, Small Pharma Corp, has several comparable rivals that have been acquired for $2 billion, then it would be reasonable to think that they have a similar market value. If inflation takes off, and those comparable rivals get purchased for $2.5 billion, then Small Pharma Corp’s value just went up. That is how we beat inflation. 

What are some examples of small, pre-revenue biotech companies that could do well in a long term inflationary environment? Caribou biosciences ($CRBU), Morphic Holdings ($MORF)  and Kronos Bio ($KRON) are all examples. 

 

History shows that inflation can be tough to shove back in the cage once the beast has broken loose. Many wage earners will suffer, and those who hold the wrong assets could see their wealth fade away. However, if you focus your holdings on companies that can raise prices at or beyond the rate of inflation, your portfolio should remain the picture of health. 

 

DISCLOSURE: The Sick Economist owns shares of Eli Lilly and Caribou Biosciences. 

 

            

 

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BEHIND THE PRICE TAG: AN EXPLAINER

By Dabin Im, Pharmaceutical Analyst 

 

Have you ever wondered why one vial of insulin costs over $300, but the insulin vial next to it costs $73? What could possibly justify the quadrupled price? After all, insulin is still insulin, and it all works the same way. Well, it’s a little more complicated than you may think. First off, the “brand-name” medication is generally much more expensive. Since it is the first of its kind, it gets a patent that usually lasts for 20 years. Generic medications are the “replicas”, but to be approved, they must be of the same quality, strength, and purity as the brand-name medications. Therefore, they are just as effective. It’s just like comparing a Gucci belt and a belt from Target. They both work to hold up clothing, but the Gucci logo stands out and has a Gucci reputation due to the brand history. 

In addition to brand vs. generic, another big factor that increases medication prices is convenience. For example, diltiazem is a medication usually taken three to four times daily to lower blood pressure. It also comes in a “sustained-release (SR)” form, which means that the drug is released slowly for a longer period. Therefore, diltiazem SR can be taken just one to two times daily, making it more convenient for the patient. However, this convenience comes with a higher price tag. Each tablet of the regular, generic diltiazem costs $0.22, while each SR tablet costs $2.50 on average. The health insurer has to determine if this “convenience” is worth the drastic price difference. It’s like choosing between $1 local diner coffee and $5 Starbucks coffee. They’re both still coffee with the same amount of caffeine, but Starbucks has the convenient drive-through option.

Honestly, health plans do not have any reason to pay more for patients to have the same effect. Therefore, they will only cover the more expensive medication under very specific conditions. For example, you must have had tried a cheaper generic medication first. If you did not see any improvements or experienced serious side effects, then you may move onto the more expensive medication. But you must get approval from your doctor to do so, which is known as a prior authorization. 

If you have health insurance, your drug cost is determined by a formulary, which is a list of medications. It consists of the rates at which medications are covered for specific conditions. There are five different tiers to a formulary. Tier 1 has the most coverage and the lowest out-of-pocket costs for patients, whereas tier 5 is the most expensive. Therefore, tier 1 usually includes generic drugs, and tier 5 includes new, non-preferred specialty drugs for complex chronic conditions, such as cancer and HIV. Each health plan has its own formulary, which is why you and your friend may pay a different price for the same medication at a pharmacy. 

The real question is, how do health plans determine which medications go into tiers 1 through 5? There is a lot of controversy regarding how PBMs (pharmacy benefit managers) get rebates from the drug manufacturers. Pharma companies pay rebates to PBMs as an incentive to get their drugs on the PBMs’ formulary. Some may call it bribery, but PBMs claim to pass on these “earnings” to patients. Tier 1 placement on the formulary will inevitably lead to more usage of the drug, meaning more profit for that manufacturer. For example, let’s say that Pfizer and Moderna have new medications that are very similar in safety and efficacy indicated for the same condition. In a hypothetical scenario, Pfizer could pay PBMs to place its medication instead of Moderna’s on the formulary. Pfizer will even offer a bulk discount like they do at Costco because there’s a lot of patients that need it. Pfizer’s sales will increase, and PBMs will get rebates from Pfizer, leading to a win-win business situation. Unfortunately, there’s a lack of transparency in drug prices because these transactions are considered proprietary information and kept confidential. 

Besides rebates, there are certain conditions that the PBMs and insurance companies refuse to cover. Most of these conditions are either too expensive to treat or may not necessarily lead to better health. Health plans also do not cover any cosmetic procedures and medications unless medically necessary. But what about the medications that have cosmetic implications but can also help prevent serious medical conditions? A prime example is weight loss treatment. 

Obesity is the second leading preventable cause of death in the U.S. with cigarette smoking as the first. An important difference between these two is the trend of prevalence. Smoking decreased by 66% from 1965 and 2018, while obesity increased from 30.5% in 2000 to 42.4% in 2018. The annual medical cost of obesity is estimated to be $147 billion. Unfortunately, obesity is a big risk factor for diseases such as heart disease, stroke, and type 2 diabetes. So it is no surprise that diseases related to obesity cost $190.2 billion in America, which is 21% of total annual healthcare spending. People need to focus on the root of the problem by tackling obesity rather than treating diseases caused by it. For example, heart disease and stroke cost $1 billion in the U.S. daily. Unless you really disinfect a wound, putting a Band-Aid on it won’t help heal an infection. 

One of the main problems is that obesity is such an opaque term. Even though there are BMI cutoffs, two people with the same BMI may be in drastically different shape. Other factors that need to be taken into consideration are muscle density, genetics, sleep, diet, and exercise. Some insurance companies help pay for gym memberships and even provide discounts on healthy food. These incentives promote healthy lifestyles, but are they really enough? The answer leans towards no because most people value convenience. They want the easy way out, and you can’t really blame them. If exercising for a total of 100 hours has the same effect on weight loss as just one pill or one shot, then most people would choose to get the medication. 

FDA has approved five medications for chronic weight management in adults. The medication with the highest average reduction in body weight is Eli Lilly’s Wegovy, which was approved by the FDA on June 4, 2021. Unlike other medications that must be injected or taken orally 1-3 times a day, Wegovy can be injected every week, making it extremely convenient. However, it does not come with the most convenient price tag. Before insurance, it costs around $1627 , per month. Unfortunately most health plans, including Medicare, do not cover weight loss medications. Therefore, people have to pay for them on their own, but not many people have $1627 to spare every month. One of the main reasons why people gain weight is because unhealthy processed food is cheaper than fresh healthy food. With cost being a major barrier, people have no choice but to repeat this ironic cycle of eating processed food to save money and paying high medical costs due declining health.

So what’s the fine  line between not covering weight loss medications due to their cosmetic implications and investing in them to prevent further complications? There is a lot of work that goes behind polishing a formulary. Trying to make an objective formulary for people from diverse socioeconomic backgrounds is very challenging. Some people are not willing to spend an extra dollar for convenience, but others are willing to spend an extra $1000. Factors, such as risk vs benefit, are hard to put a price on. That’s why health plans have a Pharmacy & Therapeutics (P&T) committee, where they implement value-based pricing and analyze cost-effectiveness. 

For most Americans, the process behind pharmaceutical pricing remains shrouded in mystery. But as they say, “knowledge is power.”  If you seek to educate yourself about formularies, pharmacy benefits managers, and insurance, you will soon become a powerful shopper. There is a “method to the madness.”  The sooner you understand the method, the sooner you can reduce the madness.

 

 

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HOW DO INTEREST RATES INFLUENCE M&A?: AN EXPLAINER

By the Florida Atlantic University Investment Association 

(Daniel Hric, Matthew Kerr, Adam Lewis, Milan Hric)

 

M&A, or Mergers & Acquisitions, is a division of investment banking that focuses on transactions between businesses, along with advising clients on obtaining or merging with other companies, and acquiring other companies by the investment bank itself. M&A deals can range anywhere from a few million to tens of billions of dollars. Because of the magnitude of the deals, banks as well as other institutions often prefer to borrow funds, especially if it becomes cheap to do so because of low interest rates. 

Firms engage in M&A activity for a variety of reasons, including diversification, synergy, bankruptcy avoidance, and often the self-interest of the bidder. There are three general types of mergers; a vertical merger, where two firms in different phases of the production process come together to produce a common good or service- a horizontal merger, where two previously competing firms combine while functioning in the same industry; finally, a conglomerate merger, where two companies in unrelated industries integrate.

 While M&A activity is still rebounding from the coronavirus pandemic, over 10,000 M&A deals were closed in the first four months of 2021- The beginning half of 2021 saw record global deal values (more than $1tn per quarter per the last twelve months) The largest deal during this time was Canadian National Railway’s $30 billion acquisition of KCS. 

Several factors influence the way firms finance their takeovers. After 2008, changes in fiscal policy have resulted in interest rates that are considerably lower than in previous decades. Mergers and acquisitions are able to be financed in multiple ways, including cash, debt, shares, and loan notes. How interest rates influence the type of payment vehicle used ultimately affects the corporate financing decisions made by companies- and understanding the borrowing cost involved is of massive importance during the M&A process. 

OPM (Other People’s Money) 

Interest rates, set by the Federal Reserve, are one of the major indicators of the state of the economy. While interest rates can be defined as the price of borrowing money, they also are a factor in the supply and demand of credit. If the interest rates are low, firms and banks are incentivized to borrow and invest money, promoting a more dynamic economy. The interest rate is a figure by which the Federal Reserve lends money out to the banks, and banks then lend the money out later to the consumer with a slight profit margin. Implementing plans such as a leveraged buyout, where management takes the company private using outside financing- and other forms of corporate restructurings that require a large amount of debt- the interest rate has to be one of the most paramount considerations for those involved in M&A. If these rates become low, it typically becomes more profitable to engage in takeovers. Additionally, companies that otherwise would seem unattractive to acquire could potentially now make a profitable deal M&A firms and banks might pursue. This means there are a larger pool of suitable companies to acquire, and therefore more activity in the M&A market.

Leveraged buyout is one of the most common investment strategies commonly used in M&A. This strategy relies on raising the majority of the required capital through financing, and then using the proceeds from the invested company to cover the debt payments. Similarly how a person might take out a mortgage on a house, rent it out, and then use the rent proceeds to cover the mortgage payments and eventually pay off the entire mortgage. Now, with the consistently low and stable interest rates in the last decade, many firms were able to confidently set up their debt obligation payments almost equal to the proceeds from the company in the effort to pay off its debt obligations sooner. However, the risk of this strategy is that if the rally of low and stable interest rates was to end, many firms, ranging from investment banks to many Fortune 500 companies, might be unable to meet the required debt payments and go into default. Since the post-pandemic inflation rate was approximately 5%, while Fed’s inflation target is 2%, Fed might attempt to lower the inflation rate by raising interest rates. This can have negative or even destructive effects on many firms that have financed large M&A deals. 

The interest rate itself moves for a variety of reasons, including supply and demand of credit, (as mentioned earlier) inflation, and governmental monetary policy. Inflation is an important factor to consider; particularly in the realm of M&A, because a higher inflation rate typically results in higher interest rate levels because lenders want compensation for the money that they will be paid over time- if inflation is high, the money they receive from interest payments becomes less and less valuable. Although FED interest rates and the M&A activity are correlated, one is not an ultimate defining factor of the other. Sometimes M&A activity decreases even though interest rates decrease as well, as can be seen in the years 2000 to 2003; the interest rates fell from %6.24 to %1.13, a decrease of about 82%. In the same time M&A activity in North America fell from 2.4 trillion to only 800 billion, a decrease of 70%. Under usual conditions a decrease in the interest rates incentivizes M&A activity, but sudden changes may have the reverse effect as investors are worried about instability. 

Similarly in the years of 2004 to 2007 there has been an increase of interest rates by 70%, and M&A activity rose by 70% as well. This is the case because much more than just the interest rate affects M&A; events such as the stock market crash of 2002, credit crunch, and national disasters all affect the M&A activity. Although lower interest rates are a factor that supports the M&A activity, all other possible influences have to be taken into account. 

Inflation and interest rates- along with the fiscal policies mentioned previously all correlate together, particularly in the M&A market. During periods of high inflation,banking firms often focused more on expanding market share through innovative services and products to counter inflation- as was the case during the hyper-inflationary period in Zimbabwe, for example. The M&A activity in Zimbabwe actually increased rapidly during this time; 

Banks responded by rebranding themselves to attract a retreating deposit base. Twelve commercial banks were established from 1991-2000.  Despite this, two commercial banks failed 1998-1999; and by 2000 inflation caused changes and consolidation in the banking sector. Generally, the strategies used by firms in hyper-inflationary environments tend to be as follows; firms use more venture and corporate funding at the start up phase; list on an exchange to have access to additional capital; won’t pay dividends to shareholders; and use surplus funds to synthesize the firm’s operations through M&A. After 2001, however, the Reserve Bank of Zimbabwe’s seemingly random stance on fiscal policy caused inflation to become so high multiple banks collapsed, with five commercial banks failing in 2004-2005. Finally, the 2008 global financial crisis nearly caused the complete disintegration of the banking system in the state. 

Leveraged Buyouts: Current Risks 

As mentioned previously, it is possible for M&A deals to not succeed or achieve the objectives originally laid out during the initial process. Over the years, some deals have come under public scrutiny; particularly where a leveraged buyout is involved. During an LBO, a group of investors purchases all of the equity of the company, and the firm is delisted from the markets. What was once a conservatively managed company with ample cash flow, becomes a heavily indebted company that can barely make it’s quarterly interest payments. If the economy falls into recession, and company revenues fall, or if interest rates go up, and quarterly debt payments rise, the once stable, cash flowing company can easily go belly up.

The current LBO boom has occurred over the last twenty years, when interest rates only went down. This made LBO’s more and more profitable each passing year. But what if interest rates go up? What if interest rates go up suddenly? This once seemingly remote possibility is now very real, as inflation is currently at it’s highest rate in 30 years. Tens of thousands of brand name companies, representing millions of jobs and trillions in invested capital, have been calibrated to depend on interest rates that hover around 2%. How is the sustainable if inflation is at 5% and rising?

Only time will tell…..

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REGENERON PHARMACEUTICALS: COVID, AND BEYOND…

By Owen Marino, Biotech Analyst

 

“They gave me Regeneron, and it was unbelievable. I felt good immediately,” remarked President Donald Trump in the days following his diagnosis with COVID-19 in October 2020. What exactly is this fabled “Regeneron”, and is it the premier health solution in the immediate future?

 

While touted as a sort of magic elixir by the 45th president of the United States, Regeneron is not in fact a drug for COVID-19, but the name of a company that has spent the last decade developing multiple different antibody treatments for a number of unique conditions. Regeneron Pharmaceuticals ($REGN) is an American biotech company founded in 1988, and it has made headlines repeatedly throughout the COVID-19 pandemic for some of its emergency-approved experimental treatments – namely as Donald Trump’s favorite treatment on his way to recovery from the virus. In addition, Regeneron has been working lately on pioneering gene-discovery projects that may have a number of important future implications for conditions such as obesity and diabetes. Is all the hype around Regeneron justified? What are some important things investors need to know about this company before they decide to get on board?

Regeneron, as its name suggests, started as a company focused on studying small proteins such as neurotropic and cytokine receptors and their regenerative capabilities. The company has developed a number of successful treatments for conditions such as metastatic colorectal cancer and Muckle-Wells syndrome, which is specifically caused by mutations in the  CIAS1/NLRP3 gene. Big-money collaborations the past few years with industry-giant Sanofi as well as the United States BARDA have massively increased funding for Regeneron to develop some of their latest immuno-oncology treatments as well as its experimental COVID-19 developments that have been making headlines the past few months. 

The company locked up a multimillion dollar deal with Sanofi in 2015 with $640 million funding upfront that could generate up to $2 billion in revenue upon the development of REGN2810, a treatment for patients with advanced tumor malignancies. The agreement with the US Biomedical Advanced Research and Development Authority, (BARDA) in 2017, which has turned out to have extremely important consequences in the current environment, gave Regeneron mass amounts of funding for antibody treatments, which was supplemented again by an additional $450 million in 2020 specifically for monoclonal antibody developments for the treatment of COVID-19. This was completed with the intention of the company producing between 70,000-300,000 treatment doses and over 1,000,000 prevention doses of its experimental COVID-19 “antibody cocktail”, coming to a head when sitting president Donald Trump was diagnosed with COVID-19 in October 2020, and was given the experimental treatment under a compassionate use designation at Walter Reed medical center, after which Trump highly endorsed the treatment on social media. The treatment was then given FDA emergency-use authorization in November 2020. Since then, a number of notable patients have received the treatment including Texas governor Greg Abbott who tested positive for COVID-19 in August 2021, and controversial Regeneron antibody clinics have been opening in many places across the country. 

The clinics, which are being advertised as treatment centers where people showing symptoms of COVID-19 go to receive similar remedies to President Trump, are said to help symptoms “diminish within 24 to 48 hours”. Public health experts are worried not only about the actual efficacy of these treatments, which seem to work only with certain people, but the problem of focusing on recovery treatments for when people contract COVID-19 instead of focusing on antit transmission efforts such as vaccination campaigns so that people simply don’t get it in the first place.

The company’s financial performance has seen massive revenue increases in the past decade as the company continues to receive more and more funding for increasingly ambitious endeavors. Revenue has increased by over 7 times from 2012 to 2020, and has seen an average growth of 15.6% annually since 2015, the year of the Sanofi collaboration announcement.  

In other news, the company has announced a new partnership with AstraZeneca to develop medicines for the treatment of obesity, specifically through addressing genetic mutations, altering the expression of the GPR75 gene which is linked to metabolism and obesity. The drug would be administered orally as opposed to as an injection, increasing ease of treatment and therefore the potential customer base for patients. This is significant because it makes Regeneron’s entrance into the field of small molecule treatments, where all of its other developments have been biologic treatments. 

Valuation Considerations 

Currently, REGN is trading at a $660 share price, with shares having increased in value by 43% over the last 6 months. What are the company’s prospects for the foreseeable future? Could one of the companies with the most hype potential throughout the pandemic still be undervalued? 

Regeneron currently has a market capitalization of around $67.72 billion, good for 15% of the entire biotechnology sector and one of the biggest individual market capitalizations of any biotechnology company. Recent valuations suggest that the company has room to continue to dominate in comparison to its peers because of its advantages in financial worth. 

While Price-to-sales is a good measure for evaluating a company’s valuation based on front-end sales, it often fails to account for a few important factors. First, pure sales can translate to earnings for a company very differently for different companies and industries. Customer service and transportation industries which involve a lot of person-to-person interaction are very dynamic and are often more subject to high sales turnover than big energy or waste corporations. However, this does not necessarily mean that these companies are not profitable. In addition, company size can play a huge but misleading role in sales ratio measurements. Big, well established companies that are in periods of long-term growth often have much lower P/S and P/E ratios than smaller firms that have had recent strings of success. However, this difference in margins does not tell the whole story about a company’s success or growth potential. Bigger companies have many established products and a wide customer base, which comes with more expenses in things such as equipment and advertising. Their domination of market share will lead them to make more total revenue overall, even if they generate less dollars-per-sale comparatively.

Rather, interested investors may consider the relation of sales to earnings, and how a company translates the former to the latter in the most efficient way possible. While using P/S and P/E measurements in isolation can be misleading due to the factors mentioned above, investors can take this one step further and compare P/S-to-P/E ratios within a given industry to get a more complete picture of a sector’s market competition. Currently, Regeneron is regarded as the top stock in its industry using this measure, with a P/S-per-P/E of 0.42. This means that the company’s P/S is more closely correlated with P/E than its competitors, suggesting that it is making the most effective sales gains and use of its resources, which is supported by the numerous funding deals it has made this past year. 

Just this week, phase 2 trials for the company’s Wet-Age Macular Degeneration drug aflibercept were announced as successful. The drug is also currently being tested in two separate phase 3 trials for diabetic macular edema (DME), which are expected to be released in about a year. Regeneron has certainly had a string of positive announcements, and continuing to capitalize on the lingering effects of the pandemic has the potential to create even bigger returns for the company. 

Popular website wallstreetzen.com currently rates REGN at 2.74% undervalued based on recent DCF models, and many of the aspects discussed here give support to the notion that the company is currently trading below its fair value.  As a leader in a very volatile and unpredictable industry, Regeneron remains a risky stock to bet the farm on. The company appears to be on an upwards swing that people should take advantage of, but investors should be wary about putting too much into any one company in the volatile biotech industry. 

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ONCOLOGY M&A: GREENLIGHT FOR PROFIT?

By Owen Marino, Biotech Analyst

 

Mergers and acquisitions continue to be huge factors in the world of biotech. These days, the industry is trending towards being separated into two different groups – small, clinical-stage companies that do the research and develop novel products, and the rich, established companies that simply buy the rights to these promising products and don’t actually do any of the R&D on their own. Prospective mergers and acquisitions are always a tough thing for a company to evaluate given all the uncertainties of projecting future cash flows after joining with a new company and the exact value of the unique synergies that will be created, requiring analysts to make a number of quantitative assumptions. Companies usually pay a premium for acquisitions, which means a marked up price some percentage above the valuation of what the company is actually worth on the open market. In response to big biotech and pharma shifting attention away from COVID-19 efforts, many have looked to address their oncology efforts as totally effective cancer treatments continue to be lacking in the medical world. A recent article on xtalks.com highlights four of the biggest mergers in the field of cancer research that have taken place this year. By looking at the potential of these new products being developed, the prior success of the companies that purchased their assets, as well as potential synergies we can find, we can grade the mergers as green, yellow, or red, based on the returns they should bring for each of the respective parties.

Agilent technologies buys Resolution biosciences liquid biopsy platform for $695 million

Agilent is a California based pharma giant that has mainly focused on the manufacture and distribution of pharma paraphernalia such as analytical equipment and lab supplies. Now, the company is looking to grow cancer diagnosis capabilities and step into the sphere of oncology. Specifically, the company’s recent acquisition of clinical-stage firm Resolution Biosciences will focus heavily on the pipeline for the latter’s ctDx liquid biopsy assay, a test for lung cancer.

Entering the precision medicines field will let Agilent experience greater market consolidation helped by technological developments from Resolution, as well as doing this through brand-new advancements, specifically using Next Generation Sequencing (NGS). Agilent will pay $550 million in cash upfront, with the possibility of an additional $145 million for meeting “future performance milestones”, such as drug approval; heavily incentivizing the deal helps protect investors should some portion of the merged company’s developments fail.

The combination of resources offers a lot of potential synergies, and this acquisition is coming at just the right time. The move is estimated to grow the company’s total addressable market by $3 billion in 2025, and by $6 billion by 2030, for a 10.3% gain. 

Just as important to curing diseases is the ability to easily and reliably detect when a person has one. In vitro diagnostics, or IVDs, do this through hi-tech scans of blood tissue in the body. With the other products Agilent already has in development for curing diseases, entering precision oncology, specifically NGS, complements exactly what they are trying to do.

So far, Agilent’s price has risen by 12.4% in the months since the acquisition. Additionally, it had a $315 million, or 19.4%, revenue increase from its Genomics operations alone. Revenue forecasts for the Resolution division are expected to be $50 million and $55 million in the next 2 years, up from $30 million this past year, with all signs pointing toward healthy, continued growth for the merged companies. 

Hologic Inc. buys Biotheranostics inc. for $230 million

The acute focus of this deal is on treatments for women’s cancer – the key products Hologic will continue to develop from Biotheranostics being the San Diego-based company’s CancerTypeID and Breast Cancer Index (BCI) tools. This deal looked good on paper due to the lack of PCR-based gene-expression tests in the field and corresponding high growth potential, and early returns are backing this idea up. For the fiscal quarter Q3 ending in June, Hologic saw revenues increase by 42%, even as demand for the company’s SARS-Cov-2 testing assays, one of the company’s central products, declined as a result of the receding pandemic at the time. Molecular diagnostics, which this particular acquisition played a major role in, accounted for the biggest increase of 25%, to a total of $665.5 million in that category. The catalyst largely responsible for this revenue push came this past May, when expanded Medical Local Coverage Determinations under the US Social Security Act gave its Breast Cancer Index test much more Medicare funding eligibility than it had previously had. Not only was this a huge boost to the company’s Q3 numbers, but this news makes it expectable that the trend will continue. Hologic saw the second largest gains in the 360Dx index during the month of July, to the tune of a 12 point increase. This merger is a major green light for investors who want to put their money in a safe company on the rise right now.

Amgen buys Five Prime therapeutics for $1.9 billion

This acquisition specifically targets Amgen CEO Robert Bradaway’s expansion initiatives into China and East Asia, where Amgen will receive royalty sales on products distributed in this region. While the deal has potential, investors should stay away for a few reasons. The acquisition was made with Amgen paying a 78% premium, the percentage of the price paid over the established enterprise value of a company. While paying an excess of goodwill is often necessary for a large-scale deal with so much revenue potential in order to account for high future cash flows, it is fairly high even by industry standards. In the massive December 2020 deal where AstraZenaca bought 85% of Alexion in a cash-stock deal, the former paid a premium of only 45%. In addition, Five Prime Therapeutics has had a number of major failures, including a failed phase II pancreatic cancer drug in collaboration with Bristol Myers-Squibb and the resignation of its CEO in 2019, making this even more risky for investors. This deal is a big boom-or-bust, and bemarituzumab has shown some promising results early on, delivering “meaningful clinical improvements” in daily life during phase II. However, there is still much to lose from an investor’s standpoint and buyers would be better off watching this one from the sidelines.

Takeda Pharmaceuticals buys T-cell assets from Maverick Therapeutics for $525 million

This deal is highlighted by 3 of Maverick’s chief developmental products, including the COBRA platform that uses T-cell activation immunology methods to treat cancer, and comes as part of an agreement made in 2017 where Takeda could purchase Maverick after five years, an option they chose to exercise after four. Takeda announced upon initiation of the deal that all Maverick scientists will join the Takeda team, continuing to work in their previous roles in the former company.

While the deal looks promising, it is a bit risky for a number of reasons. First, all of the involved products are so early into trials if they are even in trials at all, which obviously leaves a lot to chance. Cobra is a completely novel type of therapy, leading the charge in T cell innovation, and being the innovator of an alternate treatment method carries the risk of being the first to make a number of mistakes. While results announced last year show regression in EGFR and B7H3 tumors in mice, TAK-186 (formerly known as MVC-186 under Maverick) is only in phase I/II of clinical testing, and TAK-280 has not even begun trials. 

There are a number of research and development synergies available, with the entire team coming to the acquirer from Maverick, but investors have to wonder – just how much more marginal revenue can this partnership generate? The teams have already been working in collaboration for about 5 years – has enough progress been made to justify an investment over 5 times bigger than the one in 2017?

In addition, investors may want to keep in mind that Takeda has been shown to be somewhat volatile, with an average -1.2-10.5% growth CAGR, with some of this due to past mergers. Investors should hold out for the release of some new information before deciding to take Takeda on.

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CARIBOU BIOSCIENCES: SMALL COMPANY, BIG AMBITIONS

By John Kehoe, Equity Analyst

 

Gene editing technology is extremely popular right now within the biotech industry. The gene editing market is expected to reach a value of $9.2 billion by 2026 and can potentially be used to treat numerous types of diseases within humans by editing their DNA. There are currently efforts to combine the discoveries and research made within the gene-editing field in order to develop genome-edited, off-the-shelf immune cell therapies for the treatment of cancer. The oncology industry is the most valuable market in all of medicine and is currently valued at $136.7 billion, so companies that are leading the way in innovative treatments for cancer have huge potential value for investors. One of these companies is Caribou Biosciences ($CRBU), who are trying to use genome editing to develop sophisticated cell therapies to treat a variety of malignancies. This company came into existence in 2011, and after ten years of research and growth they have yet to develop a product that has been sold commercially. In fact, their most advanced cell therapy is only in phase 1 of its clinical trials. Despite this lack of revenue, in July of 2021 Caribou Biosciences was able to raise $304 million in an initial public offering, which is one of the most lucrative IPOs in the gene-editing industry’s history. This ten-year-old company could be the most successful gene editing stock in its industry if its product pipeline yields saleable products. 

Genesis of a Gene Editing Company 

Caribou Biosciences has been founded and built by some of the most notable names in the gene editing industry. The most noteworthy of these names is Jennifer Doudna. Doudna was awarded the Nobel Prize in Chemistry in 2020 for her discoveries and work with CRISPR genome editing. She is credited by many as the co-inventor of CRISPR. After cementing her name in this field, Doudna co-founded Caribou Biosciences along with its current CEO Rachel Haurwitz, and Doudna still serves on its scientific advisory board. Having a reputable and capable board of directors and upper management group is the cornerstone for any successful biotech company. Caribou Biosciences has been established and operated by household names in the medical industry. This type of prestige has been enough to help net Caribou Biosciences partnerships with larger companies, which is usually a difficult task for clinical stage companies. In February of 2021, Caribou Biosciences announced a collaboration and licensing agreement with AbbVie Inc. ($ABBV) which provides Caribou with $40 million upfront in cash and equity investments and the potential to receive $300 million in development, regulatory, and launch milestones. Creating partnerships with industry giants is another step that is often seen on a company’s path towards blockbuster status. Their successful IPO along with their lucrative partnerships has ensured Caribou’s funding for the foreseeable future. A clinical stage company with credibility and stature is rare to come by, but Caribou Biosciences has convinced both its industry partners and its investors that it is capable of dominating its portion of the industry.

With this funding and expertise, Caribou Biosciences is attempting to enter the oncology industry through the use of cell therapies. Their research and development are still in its early stages but has shown signs of promise. Much of Caribou’s focus is centered around CAR-T cell therapies, which is, “a way to get immune cells called T cells (a type of white blood cell) to fight cancer by changing them in the lab so they can find and destroy cancer cells”.  Their most advanced CAR-T cell therapy, CB-010, is constructed to fight B-cell non-Hodgkin’s Lymphoma. This treatment has recently been dosed in its first patient of its phase 1 study, and there should be more detailed data in 2022. Both CB-011 and CB-012 are also in the early stages of development and they each attack different forms of multiple myeloma and leukemia. In the past, CAR-T cell therapies have been extremely personalized and expensive. The process of receiving CAR-T cell therapy includes drawing blood from the patient and collecting their T cells as well as developing each CAR that is made for a specific cancer’s antigen. Caribou is attempting to develop their products so they can be off-the-shelf therapies for the treatment of both hematologic malignancies and solid tumors. This is the equivalent of selling  pre-made suits as opposed to having to tailor an individual suit for each client who walks in the door. 

All three of these experimental treatments are ​​allogeneic CAR-T therapies, meaning they are made from donor cells rather than a patient’s own cells. These CAR-T therapies are used for the treatment of blood cancer, but Caribou is also trying to develop a CAR-NK therapy that can target cancer in tumors. If they can find success in the mass production of these expensive treatments their stock value could skyrocket. 

Competition 

Like with all biotech ventures, Caribou Biosciences is not alone in its search for an off-the-shelf CAR-T and CAR-NK therapy. Caribou Biosciences is one of many companies that is trying to revolutionize these therapies. The level of competition from companies such as Allogene ($ALLO), Bluebird Bio ($BLUE), and CRISPR Therapeutics ($CRSP) is likely the largest threat to the success of Caribou Biosciences.  If one of their competitors receives approval for these genome edited cell therapies before Caribou, their likelihood of success decreases. It is crucial for Caribou to break into this market early and develop relationships with other companies for the commercialization of their product. While the competition is stiff, few companies have any competitive advantage over Caribou Biosciences. They are one of the oldest CRISPR companies and have an incredible team that is working on their products. Competition can be scary when investing in a company that is so dependent on the success of a few products, but Caribou Biosciences is one of the favorites in this competition given the time table of their operations.  

 

Caribou’s stock has only been public for a few short weeks, but it could be a very powerful investment for one’s portfolio. In the short period of time that they have been publicly traded their share price has continued to rise. For both a short- and long-term investment, Caribou Biosciences is a worthwhile endeavor barring any signs of disapproval from the FDA. They could be a shining star within the CRISPR genome editing community, and there are few companies that are better set up for success in this industry than Caribou Biosciences. 

 

Disclosure: The Sick Economist Owns Shares in $CRBU 

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BAUSCH HEALTH: VALUE IS IN THE EYE OF THE BEHOLDER

By Dabin Im, Pharmaceutical Analyst

 

Bausch Health is a multi-national pharmaceutical company headquartered in Quebec, Canada. Despite its notorious past, Bausch Health has quite the exciting news. It will now be splitting up into two different companies, Bausch + Lomb and Bausch Pharma, which will be separately traded. That way, Bausch + Lomb can focus solely on its eye-care products, while Bausch Pharma can focus on its diversification, with products in gastroenterology, neurology, aesthetics, and dermatology. Spin-offs can be risky because that means the company must be independent and strong enough on its own. However, spin-offs can also be extremely successful. For example, AbbVie was a spin-off from Abbott Laboratories, a medical device company. Even though it only occurred less than 10 years ago, in 2013, AbbVie became the third largest pharmaceutical company in the world by revenue.  

In Bausch + Lomb’s case, it is extremely robust as it accounts for 41% of Bausch Health’s 2020 revenue of $8 billion. Bausch + Lomb specializes in eye care, but it is strong enough to be its own company because its products completely dominate the eye industry. It makes different types of contact lenses suitable for various target populations, such as those with nearsightedness/ farsightedness, astigmatism (distorted vision), cataracts (blurred vision), and presbyopia (difficulty focusing on nearby objects).  It also makes multi-purpose solutions, specialty lens care products, allergy relief eye drops, prescription products, and even eye vitamins and surgical products. For this company, products for treatment and prevention are not enough. It also partakes in diagnostics through its ocular allergy diagnostic system (OADS). It is a three-minute test that can tell which specific substance the patient is allergic to within 10 to 15 minutes.  

Bausch + Lomb is expected to be start operating separately by 3Q 2021. Since it’s going to be a spin-off, it must be intentional with its future growth and pipeline. Bausch + Lomb’s pipeline looks extremely original, with products being developed to treat inflammation, allergies, pain, and even open-angle glaucoma and ocular hypertension. It is not only developing treatments for conditions that require prescriptions, but also implementing technology in its eye care. It currently has a contract with Lochan & Co to develop a cloud-based software called eyeTELLIGENCE. Through AI technology, this software can detect eye diseases and help ophthalmologists make the most optimal clinical decisions. 

Sometimes, it’s not so much about waiting for the next new thing but fixing what is already there. Should people not let the past define this company and just focus on its future potential? Bausch Health does have quite the notorious origin. It was previously known as Valeant Pharmaceuticals, which reached its peak in August 2015 with its stock price at $262.52 per share. Six years later, on August 2nd, 2021, Bausch Health’s price plummeted to $29.80 per share. The company’s vision and management as Valeant Pharmaceuticals was completely different from what it is now as Bausch Health. Valeant Pharmaceuticals reached its peak by digging themselves a huge hole of debt. It acquired many smaller pharmaceutical companies and sold their products for a much more expensive price. It was unethical how much they were marking up the drug prices. For example, they acquired companies that developed Wilson’s disease treatments, Cuprimine and Syprine. These medications had been around for several decades and were sold for $500 a month until Valeant marked it up to $24,000 for a one-month supply. It was hopeless for patients that needed these medications to survive. Valeant Pharmaceuticals was also sued for insider trading (an illegal practice of trading based on confidential information). In one way or another, Valeant’s business practice had to eventually come to an end, and it did so by re-branding as Bausch Health. Its past is coming back full circle because one of Valeant’s acquisitions back in 2013 was Bausch + Lomb. 

With still a lot of debt to pay off and limited budget set aside for research and development, Bausch Health may not be a stable option for most investors. It is also losing a patent in 2028 for one of its irritable bowel syndrome medications that accounts for 24% of its sales. Although it has come a long way, from its peak debt of $30 billion in 2016 to now $23.7 billion, there is still a long road to recovery left ahead. Bausch Health currently has very low valuations, trading for 1.5x its sales and 15x free cash flow. Its stock price has been recovering since its lowest of $9.02 in 2017 to now $25.04 (August 4, 2021).

Judging from Bausch Health’s stock price, you may think it’s not a big company. But keep in mind that the stock price represents many different factors. For example, Shopify is currently selling at $1500 per share, and Pfizer is trading at $45 per share. But that does not mean Shopify is over 33x bigger than Pfizer. In fact, in 2020, Pfizer’s revenue was $42 billion whereas Shopify’s was $2.93 billion. So what are these stock prices based on? Well, to make things simple, the stock market really cares about future value projections. When looking ahead, some industry sectors are simply more appealing than others. The Internet software sector is trading at 14.85x its price/sales (hint: Shopify). On the other hand, the price to sales ratio for the pharmaceutical sector is 4.91. But even when we compare apples to apples, Bausch Health is still very undervalued with its price to sales ratio at 1.5x. That means for every dollar it makes in sales, its stock price is worth $1.50. Although it may seem like a Black Friday deal, it can be a double-edged sword. The low valuation implies that the future might not look so bright. 

Is it time to give Bausch another chance? It is still paying for its past mistakes with $500 million of its cash going straight to repaying debt in the first half of 2021. But in the second quarter of 2021, its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) was $826 million. Therefore, it is still inherently profitable. Overall, this spin-off is one to watch out for. Its spin-off, Bausch + Lomb, may bring exciting returns. Eye care will always be needed and continues to grow due to its cosmetic and health implications. It also won’t have to worry as much about the debt that its parent company is climbing out of. Bausch + Lomb has already proven itself with its current products in high demand, steady profits, and an exciting pipeline with new partnerships. This spin-off will provide a fresh start for Bausch + Lomb to unleash its full potential within the eye industry.

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THE PROMISE AND PERIL OF BIOMARKERS

By Aidan Asbill, Biotech Analyst

 

Biogen shocked the world when it got FDA approval for the Alzheimer’s drug, aducanumab. However, just months later Biogen’s drug would be heavily criticized for not clearly demonstrating clinical benefit. With so much criticism about ineffectiveness, how was Biogen able to gain FDA approval? The answer is biomarkers, more specifically amyloid plaque measured with PET scans which served as a key part of the FDA’s reason for authorizing approval of aducanumab. During trial data, the drug was able to show substantial reductions in amyloid plaque, which is present in higher amounts in some patients with Alzheimer’s disease. A hypothesis among researchers is that if you can get rid of these amyloid plaques, you can keep the brain cells from deteriorating and stop the cognitive decline. However, this link has never been conclusively proven. 

For this reason, the FDA thought it was reasonable that the drug would slow or possibly even reverse the progression of Alzheimer’s disease in patients. This caused an outrage in the scientific community with some people going as far as to say they would not prescribe the drug due to ambiguous at best benefits. The FDA staff’s own review of the Biogen data had previously concluded that it is not clear that there is any linkage between reduction in plaque and improvement in patient cognition. To make matters worse the FDA does not require that patients undergo plaque measurements before receiving aducanumab, which seems like a huge oversight with prescribers unable to see the plaque reduction themselves. With that being said, to further understand the FDA’s controversial approval let’s first look at biomarkers and how they can make or break biotech companies.

Biomarkers Use in Biotech

Biomarkers have been commonplace in the medical field for many decades now. By definition, a  biomarker is a measurable indicator of the severity or presence of a disease or in layman terms anything that can be used to identify a disease in patients, independently of symptoms. A biomarker is supposed to be an objective assessment of a patient, regardless of how an individual feels, functions, or survives. Examples of biomarkers can vary from simple blood pressure tests to complex genetic tests of blood and tissues. However, when it comes to the biotech world, the biomarkers become very complex as they seek to tackle chronic disease. When it comes to these chronic diseases, treatment may require patients to take medications for years and accurate diagnosis is particularly important. Oftentimes these medications come with strong side effects that are expected during the treatment. For this reason, biomarkers are becoming more integral because they can diagnose chronic diseases before they cause irreversible damage to patients. 

New and effective biomarkers have been invaluable to the scientific world particularly in the 1980s with the outbreak of HIV. Researchers quickly came up with an HIV antibody blood test in just two years that was crucial in stopping the spread of AIDS. Without this simple test, HIV-infected donors could have infected the blood supply causing a bigger global outbreak. The test also let people know they were HIV positive before they had symptoms and was crucial in treating patients early when effective treatments arrived. Biomarkers have been an important tool in the scientific world as early as the 1950s when scientists identified cardiac troponin an enzyme released by cells in the heart. Later in the 1990s, scientists were able to develop a lab test to measure it and create an extremely accurate biomarker for cardiologists to determine if a patient had experienced a heart attack. However, while well-established biomarkers are a crucial process in determining symptoms and treatment options in patients, it takes many years even decades for scientists to discover the relationship between biomarkers and clinical outcomes. To make matters worse, advancements in technology have allowed scientists to create and find more biomarkers than ever before. With so many relatively new biomarkers in play, many companies have drawn conclusions without adequate data to make life-altering decisions for their patients.

With many companies using biomarkers to draw quick conclusions, in 1997 the National Institute of Health pleaded for guidelines and legislation development that would regulate the ethical dimensions of biomarker studies. When used properly biomarkers serve as critical signs of a disease, but in recent years companies have used biomarkers as almost a guarantee of a diagnosis of a disease. For example, a blood test showing high levels of PSA has been one of the most consistent signs of the presence of cancer in the body. However, elevated levels of PSA alone aren’t enough to quantify a patient having cancer, they may just have an infection causing these levels. Misunderstandings about PSA may have caused many unnecessary surgeries, and a lot of needless suffering. 

Abuse of biomarkers has caused a slippery slope in the biotech industry, with many biomarkers being used as surrogate endpoints to assess clinical outcomes. When used as outcomes in clinical trials, biomarkers have oftentimes been considered to be surrogate endpoints, but it can be very difficult to prove the relationship between these biomarkers and real world clinical outcomes. These clinical endpoints may not actually be part of the pathophysiological pathway that results in that endpoint, or in other words, they may be identifying the symptoms rather than the root cause. This is especially true concerning progressive diseases that desperately need a treatment that cures the disease, rather than just alleviates symptoms until the disease turns fatal.

Biomarkers in Alzheimer’s

Diseases such as Alzheimer’s often begin with very few symptoms to detect the disease. Biomarkers in the Alzheimer’s space have been very important to detect elevated rates of beta-amyloid plaques in the patient, which researchers think is the cause of Alzheimer’s. In these cases, where patients are symptom-free, these biomarkers can be crucial in identifying and treating high-risk individuals and giving them reliable treatment before their symptoms worsen. 

Biogen’s new treatment was approved based on the strength of biomarker improvement. However, now the drug has been met with constant criticism with 11 FDA members quitting in protest, even while Alzheimer’s advocates have rejoiced. The controversy has stemmed from Biogen’s drug aducanumab being unable to clearly demonstrate  meaningful improvements in cognition after 9 months of treatment. The drug works by treating and reducing amyloid plaque, which Biogen has hypothesized may be the cause of Alzheimer’s disease. However, a 2019 study found that only 64% of patients with Alzheimer’s have elevated positive amyloid PET results, which has served as the basis for the drug. This begs the question, are these amyloid plaques the cause of the disease, or merely a symptom?  While this treatment may help alleviate symptoms, it remains to be seen if the drug will actually cure Alzheimer’s disease, like originally advertised.

In the wake of this controversy, other biotech companies with alternative Alzheimer’s treatment have had their stocks skyrocket, with investors eager to find an Alzheimer’s cure. Since Biogen’s approval, competitors Annovis bio rose nearly 70% from $70 a share to $120 and Cassava sciences doubled going from $70 a share to $140. However, this quickly changed when clinical data from Annovis Bio came out with results that weren’t statistically significant. Annovis bio is down 70% and caused a mass sell-off in the Alzheimer’s sector with Cassava sciences down 50% and Alector down 40%. Annovis drug posiphen was targeting proteins in the brain that make up the nerve cells that communicate with one another. The company hypothesized that this would improve cognitive function and had promising results with their Alzheimer’s disease assessment scale. However, it seems like at the moment the hypothesis may be wrong with the company unable to present compelling results for Alzheimer’s treatment. On the other hand, Cassava Sciences was able to be the first Alzheimer’s treatment to show improvement after 9 months. Clinical trials of Cassava’s drug simufilam showed an improvement of 66% according to their ADAS- Cog scores and an overall 22% improvement in patients showing less decline compared to patients who didn’t have the treatment. While Cassava Sciences may be a shining light of hope for Alzheimer’s treatment it may also be more speculation based on tests that may or may not actually treat the underlying cause. Some researchers have even raised doubts about the true benefit of the drug and that the reported benefits may be overblown.

 

Biomarkers have served as great tools to help find and treat chronic diseases before they destroy patients’ health. However, it’s very challenging for scientists to understand the relationships between biomarkers and clinical outcomes. This is especially difficult in clinical trials which oftentimes utilize new and untested methods to treat deadly diseases. This may serve as a cautionary tale to investors who are often biased towards good news and positive date. With that being said this data can be easily misleading and does not always correlate to lucrative and effective treatments. The world of biotech can be very volatile and unforgiving, but ultimately it will be up to investors to do their own researcher to differentiate fact versus speculation.

 

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GALAPAGOS NV: VALUE PLAY, OR VALUE TRAP?

By John Kehoe, Equity Analyst

 

Success within the biotech industry is extremely difficult. It is exceedingly rare for companies to mimic the path of Pfizer ($PFE) or Moderna ($MRNA) where they find massive profit and stability through independent research and sales. In order to achieve success, many companies remain independent but license and partner with large pharmaceutical companies. Another popular avenue to success is selling an entire business, after developing some valuable intellectual property, to companies that are more suited to finish the development and commercialization of the product. There is a lot of buying and selling within this industry, so identifying the companies that are most likely to be sold for a high price can be an important process for potential investors. It is never easy to pinpoint companies that are going to be consumed by larger entities, but there are some key indicators that can foreshadow a merger. Galapagos NV ($GLPG) is a pharmaceutical company that has been on many investors’ radar as a takeover target for quite some time. The recent poor performances of its FDA trials has caused its share price to decrease more than 70% over the past year. Despite these failures, some are saying that Galapagos could still be a worthwhile investment due to the possibility of a merger with a large pharmaceutical company. 

What Went Wrong? 

After seeing great success throughout 2019 and the beginning of 2020, Galapagos NV has left many of its investors feeling distraught in the past year. In 2019, Galapagos formed a $5.1 billion, 10 year agreement with Gilead Sciences Inc ($GILD) which gave Gilead full access to Galapagos’s product pipeline. This seemed to be an indication of inevitable success for Galapagos as most biotechs that can forge partnerships with pharmaceutical giants are rewarded with immediate benefits. It has been two years since this blockbuster deal and Galapagos has been unable to capitalize on its massive funds and new resources. This poor performance is partially a result of the long awaited decision by the FDA concerning the approval of filgotinib, a Rheumatoid Arthritis treatment that Galapagos was developing with partner Gilead Sciences Inc. This drug was the cornerstone of Galapogos’s product pipeline as it was trying to tap into the Rheumatoid Arthritis Drugs Market which is projected to reach $36.11 billion by 2027. Sadly, the FDA failed to approve this drug in the United States and cited issues with potential testicular toxicity as the reasoning for this failure. This decision has caused Gilead to lose the race to enter the drug market as the third JAK inhibitor approved by the FDA for moderate-to-severe Rheumatoid Arthritis, which serves as a major blow to these two companies’ relationship. Gilead has since dropped the U.S program that deals with the development and testing of this drug. On the bright side of things, filgotinib was approved for use in the European Union and Japan, but Gilead has left Galapagos in charge of the commercialization of this drug. The commercialization of drugs and medicine is an extremely difficult task for smaller biotech companies and this will be an uphill battle for Galapagos. These failures have continued to pile up after another drug, ziritaxestat, has been unable to pass through its phase 3 clinical testing. Ziritaxestat was meant to treat Idiopathic Pulmonary Fibrosis and infiltrate another drug market that has sales potential north of $1 billion per year. Galapagos still has another idiopathic pulmonary fibrosis drug in its pipeline, but this decision allows other companies to break into this market first. Galapagos and Gilead will continue to tread forward in their attempts to broaden their product pipelines, but so far this blockbuster relationship has only provided disappointments.

Ripe for Acquisition?

After almost two years of disappointing clinical trials, Galapagos would need some major breakthroughs to see their share price increase. If they are unable to make progress in their clinical testing, one of their only other options would be a complete merger with a larger company. It doesn’t seem very likely that Gilead would be interested in purchasing Galapagos given their current ten year agreement and Gilead’s shift towards oncology based medicine. Therefore, Galapagos must look towards new relationships and hope that a larger company sees value in their intellectual property and current resources. Their current management team has faith that their product pipeline contains value that is “not reflected in the share price”. In most cases, takeover targets in the biotech industry are companies that are performing very well and have caught the eye of other companies through their large profits. In order for an underperforming company to be considered a takeover target, they usually have obtained promising results through their clinical trials that can help justify their poor financial situation. Galapagos fails to fall under either one of these categories. They are currently trading below cash, which means that its market cap is currently less than its cash on the balance sheet. This is usually an indication that a company’s growth prospects are poor. Needless to say, Galapagos is not currently considered an attractive investment due to their industry successes and massive profits. They have also failed to develop any intellectual property that is proven to be valuable after numerous failures with the FDA. Galapagos does have an enormous amount of cash and still has more products that are undergoing clinical testing. There is a small potential for a breakthrough and eventual growth, but as time goes on, this opportunity for growth is dwindling. 

 

Galapagos has quickly morphed from a stock market sensation into a horror story. Its famous successes of the past and its previous partnerships have helped prolong its relevance and lure in investors. As of right now, this is an extremely risky investment, especially if it is reliant on a merger with another company. Oftentimes when a company’s share price plummets investors will claim that it is now undervalued and will rebound in the near future. Many people may be tempted to buy shares of Galapagos while its price is low, but there is little evidence to support this investment. There is not much value in Galapagos right now, for both small investors and large pharmaceutical companies. There is a small glimmer of hope that Galapagos will be able to capitalize on the European and Japanese market with filgotinib or that a European giant will decide to purchase Galapagos to maximize the sales of filgotinib in the European market. Galapagos still has enough cash to continue its research and development, but with numerous drugs failing to receive FDA approval, it is unlikely that they will strike gold. 

 

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GILEAD SCIENCES…..A TITAN REBORN?

By Aidan Asbill, Biotech Analyst 

 

The California-based drug company dominated the healthcare sector with its highly effective and lucrative array of treatments for life-altering diseases. However, Gilead would become a victim of it’s own success, with the company essentially curing Hepatitis C (HCV). Gilead had astonishing sales of $19 billion in 2015 from their HCV treatments alone, but just 3 years later this would fall to $3.7 billion in 2018. These sales have continued to decrease as the company made only $2.1 billion in HCV sales in 2020. Gilead’s HIV franchise is also at risk: two of its drugs, Truvada and Atripla, which brought in the company $3.4 billion in annual revenue, are losing their patent protection. All of this has resulted in Gilead’s stock dropping 41% from its all-time highs in 2015. With revenue growth continuing to dwindle, Gilead would need a completely different approach. In 2017, the company would do just that with its substantial $12 billion acquisition of Kite Pharma, a cancer therapy treatment company. In 2019, Gilead continued to make big changes as the company announced its new CEO, Daniel O’Day. O’Day would prove invaluable as he had previously been the CEO of Roche, the second-largest biopharma company in the world. Under O’Day, the company continued to aggressively expand its cancer pipeline spending a remarkable $27 billion in acquisitions last year alone. The company’s aggressive acquisition strategy has intrigued both wall street and investors alike. However, let’s first look at Gilead’s historical rise to a biopharmaceutical giant before the company’s fall from grace.

Gilead’s path to a Biopharmaceutical Giant

Gilead Sciences was originally founded under the name Oligogen in 1987. The company’s primary therapeutic focus was on antiviral medicines, a field that greatly interested founder Michael Riordan after he caught dengue fever.  In 1991, the company began to research the compounds that would make their blockbuster drug tenofovir. The next year, the company would IPO, raising $86.25 million in the process which would bring crucial funds for the years to come. In 1996, the company launched Vistide, which was a treatment of cytomegalovirus in patients with AIDS. A few years later, Gilead would make their first huge acquisition of Nexstar Pharmaceuticals, which had annual sales of $130 million, nearly 3 times that of Gilead’s. Later that year, Roche got FDA approval for Tamiflu, a treatment for patients suffering from influenza. The drug was originally created by Gilead and would be licensed by Roche to bring in massive revenues for both companies in the years to come. In 2001, Gilead’s blockbuster drug Tenofovir achieved FDA approval for the treatment of HIV. The next year, the company acquired Triangle Pharmaceuticals for around $464 million which led to the company acquiring the drug Emtricitabine a treatment for HIV that was very promising. Later that same year, Gilead got FDA approval for Hespera for the treatment of hepatitis B and Emtrivia for the treatment of HIV. These two drugs would become vital for Gilead, as they served as a great starting point for all their big future drugs to come. Around 2004, with the Avian Flu pandemic scare, the company’s revenue from Tamiflu skyrocketed nearly four times to $44 million. By 2005, sales of Tamiflu continued to skyrocket resulting in revenue of $161 million from the drug and the stock price doubling. In 2006, things continued to progress quickly for the company with their drug Atripla, a once-a-day single tablet regimen for HIV gaining FDA approval. Atripla was unique because it worked by combining Bristol-Myers Squibb drug Sustiva, and Gilead’s own product Truvada, to make one super drug. With many products reaching the market, the company would see tremendous growth in these years. In just 5 years, the company would nearly quadruple its annual revenue from $2 billion in 2005 to $7.9 Billion in 2010. However, this was just the beginning as Gilead was about to make a breakthrough that solidify their scientific reputation forever. 

 A Victim of Success

In 2011, Gilead made a massive acquisition spending $11 billion to acquire Pharmasset to get the smaller biotech’s hepatitis C program. Forbes magazine would later rank this one of the best pharma acquisitions ever. In 2013, the FDA would approve Gilead’s all-star drug Sovaldi for the treatment of hepatitis C. However, this was just the beginning as the FDA would soon approve Harvoni, the first hepatitis C treatment that provides a long-term remedy in a single tablet. The drug combined Sovaldi with an NS5A inhibitor and essentially cured Hepatitis C, with 94% to 99% of cases being resolved after treatment. This had absolutely massive revenue implications; as at the time Hepatitis C affected 3.2 million Americans and killed more people each year than HIV/AIDS in the US. After just a couple of years of Gilead’s treatments on the market, this number decreased to 2.4 million people with hepatitis C in the US in 2016. During these years, Gilead would post astronomical revenue numbers of $11 billion in 2013, $24.8 billion in 2014, and $32 billion in 2015. With Gilead touted for curing hepatitis C, the company had finally become a biopharmaceutical giant. However, Gilead would become a victim of becoming too successful, with revenue quickly declining as patients were cured of hepatitis C. By 2016, Investors begin to question if the company’s hepatitis C business had peaked. With sales dropping quickly, Gilead would need to make a big move in order to reinforce investor sentiment which was quickly fading away. In 2017, the company made a huge purchase: $11.9 billion for Kite Pharma. This deal would add Kite Pharma’s promising CAR-T therapy pipelines to bolster Gilead’s oncology division. However, with the company’s blockbuster drugs losing market share and patent protection soon expiring, the stock would suffer greatly during this period. Since 2016, despite the company-wide array of products, revenue growth questions pushed the stock down 12% from its 2016 stock price. In order to restore market sentiment, the company would need to completely reinvent itself.

Gilead’s Cancer Comeback

Since its creation, Gilead has focused on antiviral drugs for HIV and hepatitis, but the company hasn’t found near as much success in cancer research. This is quickly changing with the company aggressively positioning itself as an oncology powerhouse. While sales of the company’s top drugs continue to stagnate, this has created immense pressure for Gilead’s cancer division to come through. Under CEO Daniel O’Day, the company has spent billions to acquire every promising cancer company they can find. In 2020, Gilead acquired equity in 7 different cancer companies, including complete acquisitions of Forty Seven for $4.9 billion and Immunomedics for $21 billion. These huge acquisitions have slowly made Gilead’s oncology pipeline one of the most alluring in the biopharmaceutical world. With 19 candidates in its oncology pipeline, including 4 phase 3 trials and 4 more phase 2 trials, the company has potentially multiple billion-dollar treatments in its pipeline. Since 2011, investors have been skeptical of Gilead’s big $11 billion bet on Kite Pharma, which has yet to provide a revenue growth story from its CAR-T treatments. In March this year, the FDA approved Yescarta for the third indication, which is the most common form of lymphoma. However, just a month earlier direct competitor Bristol Meyers Squibb drug Breyanzi got FDA approval for their own CAR-T therapy for large B-cell lymphoma. Despite Breyanzi’s approval, Yescarta is still the market leader in the CAR-T drug space with sales of $160 million in the first quarter. With that being said, Bristol-Myers Squibb and Gilead are both in a race to get FDA approval for second-line large B-cell lymphoma which the winner becoming the clear market leader in the space. Breyanzi was able to report top-line results a bit earlier than Yescarta, but both companies have reported very compelling data. Yescarta showed a 60% improvement in patients, which blew away the previous 33% improvement predictions. While it’s unclear who will win the race, if approved for second-line large B-cell lymphoma, Yescarta could become the highest revenue-generating gene therapy product on the market. Yescarta treatments are reported to cost $373,000 per treatment regimen with 8,000 eligible patients for their current third-line indication which is nearly $3 billion in potential revenue. However, a potential 14,000 new patients would be eligible if Yescarta can secure FDA approval for the second line which would be over $5 billion in additional revenue. Gilead’s acquisition of Immunomedics may also be a revenue growth machine. Trodelvy, a treatment for breast cancer, has a giant addressable market. In April, the drug was able to snag FDA approval for triple-negative breast cancer. If the treatment is able to get FDA approval for more indications it can address a breast cancer market of $88 billion annually. Some analysts have forecast sales as high as $4.7 billion in peak annually. With countless other candidates in Gilead’s vast oncology pipeline, the company is positioned for a very bright future.

Gilead’s Tomorrow

Its unlikely Gilead will reach its 2015 revenues of $32.6 Billion anytime soon, but the company has a promising future with its oncology pipeline that could grow the top line. The stock also has an extremely strong dividend of 4.12% making it in the top 25% of all dividends payers in the US market. Over the last few years, Gilead has lost much of its investor sentiment with declining revenues and the inability to expand its products. This has led to an interesting valuation of the company which had reached a low near $60 with a valuation of forward 10x PE during 2020. This was down from the forward 15x PE ratio at its peak in 2015. The decline was mostly due to a lack of sales in the company’s flagship HIV and hepatitis treatments. However, since then investors have begun to see the strength in the company’s pipeline increasing the stock price to the current $68 and valuation 12.5x PE. Still down 16% from 2020 highs when the company was getting a lot of traction for its potential covid-19 treatments. The company has been hard at work seeking new revenue sources, investing over $5 billion of its revenue into research and development each year. Gilead also hasn’t abandoned its roots in its HIV department, with Bitarvy becoming the number 1 prescribed HIV drug in the country, with 50% of HIV patients being treated with the drug. The drug was able to increase its sales to $7.3 billion in 2020, up from $4.7 billion in 2019 and just $1.2 billion in 2018. On top of this, Gilead should maintain market dominance for a long time with Biktarvy being patent protected until at least 2023. Like many other pharmaceutical companies, Gilead enjoys high-profit margins and generates a lot of cash which should allow the company continue to make acquisitions. The company still has many hurdles to overcome with Truvada and Atripla losing their patent rights. Gilead will also have to continue to get ahead of the competition. If the Yescarta CAR-T treatment is unable to get more FDA approvals, the company’s cell therapy pipeline may take years to recover. The company is also placing a lot of faith in Trodelvy breast cancer treatment, with their gigantic $21 billion dollar acquisition of Immunomedics. The drug, however, still will need many more indications approved by the FDA in order to reach revenue numbers high enough to pay off such a huge investment. 

Under Daniel O’Day’s expertise, Gilead has successfully transitioned much of its resources into becoming a cancer company. With a gigantic pipeline of 19 candidates in their oncology department, the company is on the cusp of huge future revenue numbers and earnings. With decreasing sales in recent years, the company is putting all its hopes on its cancer department to fix its revenue problems. However, it may take many years for this bet to pay off and come to fruition. In today’s, high growth and short-term market, investors may not flock to Gilead. Still, for long-term investors, the company’s amazing 4.05% dividend and vast oncology department look very appealing. Ultimately it will be up to investors if they trust in Gilead’s team to deliver on its transition to a cancer company or if the company will become a forgotten relic of the past.

 

Disclosure: The Sick Economist owns shares in $GILD 

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