Vertex Pharmaceuticals (VRTX) is the leader in treating cystic fibrosis (CF), a hereditary disease that mainly affects the lungs. CF usually manifests quite early in life and can shorten life expectancy materially, observes Douglas Gerlach, growth stock expert and editor of Investor Advisory Service.
The U.S. medical system reimburses pediatric medicines especially generously, and Vertex’s treatments are extremely expensive. The list price for its newest drug is more than $300k per year. Reimbursement rates are generally lower in other developed countries but always tend to be high by local standards.
The value, meanwhile, can be life-changing for CF patients when their genetic profile responds to treatment. The company has made steady progress developing new treatments to reach wider groups of CF patients. Vertex’s first approved CF drug was Kalydeco in 2012.
The company has added additional drugs to the backbone molecule in Kalydeco, creating combination therapies Orkambi (approved in 2015), Symdeko (2018), and Trikafta (2019). Reimbursement has come quickly in most developed markets.
The company’s CF revenue could be as much as $7 billion in 2021. Not bad for a rare disease that the company first started treating less than ten years ago. Vertex estimates there are 83,000 potential patients in developed markets and that its therapies currently reach about half of them. Reaching more patients will become increasingly difficult over time.
Growth got a huge boost last year from 2019’s approval of Trikafta, but incremental revenue opportunities in 2021 are not as exciting. The company anticipates Trikafta’s label being expanded to 6-11 year old children in mid-2021. The current label is for patients ages 12+.
That expansion, along with gaining access to a few late-adopting developed countries, should drive revenue growth in the low double-digits.
Continuing the growth trajectory will depend on the development pipeline, which boasts a wide variety of interesting opportunities. The company has aggressively reinvested its cash flow in a variety of high-risk, highreward ventures.
Besides next-generation CF molecules it also has a longstanding partnership with Moderna, known for developing one of the early COVID-19 vaccines, to create mRNA-based CF therapies. In 2019, Vertex added a preclinical asset for correcting type 1 diabetes by acquiring Semma Therapeutics for $950 million.
The same year, it also paid $678 million for Exonics Therapeutics, acquiring a platform aimed at Duchenne muscular dystrophy. Cell therapies targeting beta thalassemia and sickle cell disease have shown some early promise.
These programs are the result of a collaboration with CRISP Therapeutics AG, a Swiss company. There have been some disappointments along the way.
In October, the company discontinued a trial for a drug targeting alpha-1 antitrypsin deficiency. Shares dropped about 20% on the news. A second asset for the same disease should produce early data this year.
It is always hard to put a value on a drug company’s pipeline, and the nature of Vertex’s disparate, early-stage assets makes valuing its potential especially difficult.
The CF franchise, including development-stage CF assets, would seem to largely justify the company’s almost $60 billion market cap. However, valuing the stock is not as simple as estimating future cashflows from CF and applying a discount rate, as cashflows will be reinvested in projects that could totally flop.
Vertex clearly views itself as an emerging pharmaceutical giant. When companies come up with novel ways to spend shareholder capital, risks increase. Vertex did finally start repurchasing some shares recently, to the tune of $500 million in 2020 with an additional $500 million authorization announced late last year.
The historical P/E range was very high when VRTX was a launch-stage company. We consider a more modest range of 15-24 to be reasonable for the future.
We model 12% compound EPS growth, which would generate EPS of $18.13 in five years. That figure, combined with a high P/E of 24, generates a high price of $435. For a low price, we apply a low P/E of 15 to EPS of $10.29. This yields a low price of $154. On that basis, the upside/downside ratio is 3.6 to 1.
