Vertex: Like a fine wine, this stock seems to get better over time (NASDAQ:VRTX)

introduction

I love biotech companies, as many of them come with broad business models that allow for consistent earnings growth, buybacks, and capital gains.

These wide-moat characteristics are often based on patents owned by biotech giants.

• Average patent term is 20 years, which often provides companies with the ability to exploit a specific market niche with very limited competition.
• Developing new drugs is very expensive. According to the National Institutes of Health, the average cost of developing a new drug ranges between $300 million and $2 billion. This makes it very difficult for participants to compete without having the financial resources and experience.

Pharmaceutical companies tend to profit from it Intangible assetsIt is a source of economic moat, in the form of intellectual property, but it may also reap the rewards of investment in innovation. Not only do many of these companies benefit From long-term patents on existing drugs, R&D efforts to launch new drugs can help offset margin pressures on existing drugs when patents expire and generic versions enter the market. – Van Eyck

The problem is that once these patents expire, the moat advantages quickly disappear. Hence, once you lose exclusivity, your status becomes fair game for everyone.

Earlier this year, the Healthcare Technology Report wrote that the top 20 biopharma companies collectively face a $180 billion patent cliff through 2028!

One example cited in the article is Humira, the blockbuster drug from AbbVie Inc. (ABBV), a company I own. After losing its patent, sales fell by 35%, which was partially offset by strategic pricing and rebates.

Fortunately, but not unexpectedly, AbbVie quickly recovered from this shock, as it has a strong product base and a promising pipeline.

This is the place Vertex Pharmaceuticals Incorporated (Nasdaq: Vertex) Comes, a giant $122 billion market that I began covering last year.

My last article was written on February 28, when I chose the title “Vertex: One of my favorite biotech stocks of all time has more room to run.”

Since then, shares have risen another 10%, beating the S&P 500 by about six points.

This brings the ten-year performance to 545%, more than 300 points above the impressive return of the S&P 500.

In this article, I’ll revisit my thesis and explain what to do with risk/reward after this non-dividend paying stock adds another $20 billion to its market cap.

So lets get to it!

Innovation-based growth

Vertex is a complex company, working on a number of impressive drugs that have the potential to fuel high growth for many years to come.

For starters, the company has established itself as a leader in cystic fibrosis (“CF”) treatments, pain management, and other areas.

In the first quarter, the company generated revenue of $2.69 billion, representing approximately 14% growth over last year’s first-quarter revenue of $2.37 billion.

Moreover, the company’s late-stage pipeline is full of promising drugs that could make a big difference in the lives of many people.

For example, according to the company, Vanzacaftor is a potential game-changer for cystic fibrosis patients.

So far, early data suggest the drug can significantly improve lung function and sweat chloride levels, which could set a new standard in treating cystic fibrosis.

This was confirmed in a press release issued by the company in February (emphasis added):

Head to head against TRIKAFTA, at the first major secondary endpoint, Vanza Triple was superior in reducing SwCl levels in SKYLINE 102 and SKYLINE 103.. In the second and third key secondary endpoints, pooled across SKYLINE 102 and SKYLINE 103, Tri-Vanza was superior in the proportion of patients with CF < 60 mmol/L (diagnostic threshold for cystic fibrosis) and < 30 mmol/L (transporter level). ) compared to TRIKAFTA. - The top of the head

Furthermore, susetrigine, a pain medication, and enaxaplin, a kidney disease medication, are in late-stage development, with the potential to significantly impact medical needs that have yet to be met.

For me, susetrigine is great, because it’s a non-opioid pain reliever.

As some know, prescription opioids have become a silent killer, costing more lives than heroin in recent years (data through 2022 – released April 2024).

According to Vertex, this medication offers a combination of effectiveness and safety, which puts it in a great spot for use in a wide range of conditions, from moderate to severe pain.

So far, the data is very promising:

Both trials met their primary endpoints, and suzetrigine demonstrated a favorable safety profile with no serious adverse events reported. Vertex has begun a rolling application process and aims to complete by the second quarter of 2024.

Once launched, Vertex aims for an institutional-focused launch, as these institutions account for approximately 50% of acute pain prescriptions.

I believe this drug could significantly reduce opioid addiction in the United States.

Remember, this discharge segment represents approximately 35% of the approximately 1.1 billion calendar days of acute pain treatment in the United States each year. The average length of a prescription in this setting is about two weeks. Treatment in this setting typically includes opioids, where the duration of the prescription is shorter, 4 to 5 days, due to the side effect profile, addiction concerns, and state, IDN, and hospital prescription limits. – VRTX 1Q24 Earnings Call

Better yet, given this drug’s properties and huge market, it has the potential to become a blockbuster drug that has an enormous positive impact on the quality of life of many people, with 80 million patients in the United States being prescribed medications to treat pain – every single year.

This includes 1 billion calendar days of treatment – ​​85% of which are outside the hospital setting.

Beyond cystic fibrosis and pain, the company is also expanding into kidney health.

On April 10, the company announced the acquisition of Alpine Immune Sciences for $4.9 billion in cash.

The deal gives Vertex the rights to Povetacicept, a drug in mid-stage development that treats IgA nephropathy.

Povetacicept works by targeting types of proteins called BAFF and APRIL, which together contribute to the development of autoimmune diseases and multiple antibodies.

IgAN, which occurs when clumps of antibodies deposit in the kidneys, affects about 130,000 people in the United States, according to the companies. – Reuters

Furthermore, the company launched CASGEVY, a novel gene therapy for sickle cell anemia and beta thalassemia.

According to the company, it has made significant progress in securing reimbursement agreements with payers and has begun enrolling patients for treatment.

Using the data in the chart below, we see that this drug is expected to represent a potential multi-billion dollar opportunity for the company.

Last but not least, the company is focusing on type 1 diabetes with VX-880, an olfactory cell-derived, fully characterized islet cell therapy.

This treatment is mainly targeted at patients with type 1 diabetes and poor awareness of hypoglycemia.

According to the company, after a positive review of the data, the VX-880 study was resumed, and all parts of the 17-patient global study have been fully enrolled.

This summer, the company will present new results.

With all that said, here’s a complete overview of the company’s product line and approved products:

So, what does this mean for shareholders?

Risk/Reward (Valuation)

Thanks to strong performance in existing products, the company stuck to its guidance, which expects annual revenue in the range of $10.55 to $10.75 billion. The midpoint of this range is 8% above the 2023 result.

Using the FactSet data in the chart below, analysts expect this year’s EPS growth to reach 12%, compared to last year’s growth of 2%. In 2025 and 2026, EPS growth is expected to reach 8% and 12%, respectively.

This bodes well for shareholders.

Using a five-year normalized P/E ratio of 28x, we get a fair price target for the stock of $566, 20% above the current price.

It’s also expected to end the year with roughly $14 billion in net cash (more cash than total debt), thanks to $4.3 billion in free cash flow (about 3.5% of its market capitalization).

While the lack of earnings may keep some investors from buying the stock, I think we’re dealing with a healthcare giant that still has plenty of room to run.

He stays away

I have no doubt that Vertex’s strong pipeline and strategic focus on innovation positions it for significant long-term gains.

With promising drugs for cystic fibrosis, pain management, kidney health and type 1 diabetes, Vertex is well positioned to maintain high growth rates over the long term.

Fundamentally, the company’s strong portfolio and promising pipeline make it a compelling investment, as reflected in its strong revenue and EPS growth outlook.

With a fair share price target of $566, I think Vertex still has plenty of room to grow, making it a biotech giant to watch.

Pros and Cons

Positives:

• Strong pipeline: Vertex has a very promising pipeline of key drugs for cystic fibrosis, (chronic) pain, kidney health, and type 1 diabetes.
• Market leadership: The company is a leader in cystic fibrosis therapies, which funds innovation/diversification.
• Revenue growth: Vertex’s current portfolio is capable of increasing revenue and earnings growth.
• evaluation: With a fair stock price target of $566, there is significant upside potential from current levels.

cons:

• No profits: Although this is not a deal breaker, the fact that VRTX does not pay a dividend may prevent some people from investing.
• Patent cliff risk: Like other biopharmaceutical companies, Vertex faces the risk of patents expiring. However, the company’s patents are still young, protecting investors for more than a decade (assuming no new products are launched).
• Market volatility: Like most stocks, VRTX is subject to general market volatility, which could hurt its share price in the medium term.