Vertex Pharmaceuticals Inc. (VRTX, Financial) recently announced a clinical trial for a potentially life-changing molecule for the most common inherited kidney disease for which no treatment is currently available.
On March 21, the company received the U.S. Food and Drug Administration's clearance for its VX-407 investigational new drug addressing autosomal dominant polycystic kidney disease (ADPKD).
That's only the latest news regarding this promising biotechnology company and investors might be surprised to learn that not only is it already profitable, but has very good margins.
About
Vertex has a specific focus on creating medical solutions for people with serious diseases. Patients with cystic fibrosis, severe sickle cell disease and transfusion-dependent beta thalassemia have improved lives thanks to its medications.
Founded in 1989 and headquartered in Boston, it also has a great reputation as one of the top places to work in the industry. It is on the list of Fortune's 100 Best Companies to Work For, along with 14 consecutive years on Science magazine's Top Employers list, as per its website.
Once known mostly as a single-pathology biotech, it has broadened its horizons with a diversified pipeline.
Pipeline
The company currently has four drugs approved for cystic fibrosix (Kalydeco, Orkambi, Symdeko/Symkevi and Trikafta/Kaftrio) and a gene-editing therapy for CSD TDT (CASGEVY) with quite long intellectual property protection.
Twenty years from the first effective filing date is the current legal term for a patent to expire, with little room to be extended if particular circumstances occur.
Collectively, the cystic fibrosis drugs are all protein modulators (the protein is called CFTR, which stands for cystic fibrosis transmembrane conductance regulator). Kalydeco (ivacaftor) has an expiration date in the U.S. and some areas of Europe in 2027, as does Symdeko/Symkevi (tezacaftor/ivacaftor and ivacaftor) in the U.S. The expiration year is the same in both the geographies for Orkambi (lumacaftor/ivacaftor) in 2030 and Trikafta/Kaftrio (elexacaftor/tezacaftor/ivacaftor and ivacaftor) in 2037.
All the drugs were approved between 2012 and 2020.
Casgevy (exagamglogene autotemcel or exa-cel for short) is the most recently approved medication, which occurred in 2023, for patients 12 years of age and older. IT has an expiration date in 2034 for Europe and the following year in the U.S.
Adding to all these CF molecules, the privileged position of the company is strengthened by the de facto exit of AbbVie (ABBV, Financial) as a potential competitor in the field.
Source: Vertex's conference call.
Will the future be as rewarding as the past and present?
While no one can predict what the future success of the business will be, some great treatments could enter the market as soon as mid-2024.
Vertex is testing molecules in several different areas, including nephrology (APOL1-Mediated Kidney Disease and ADPKD), endocrinology (Type 1 Diabetes and Alpha-1 Antitrypsin Deficiency), neurology (Myotonic Dystrophy type 1) and pain management. The company's vision is also quite bold as the plan is to have five market launches by 2028.
At the beginning of 2024, Vertex revealed encouraging data regarding VX-548. This non-opioid painkiller has the potential to be the next blockbuster. Technically it is a NaV1.8 inhibitor, targeting the treatment of moderate-to-severe acute pain. The compound can be a non-addictive alternative to the famous Vicodin or OxyContin, potentially alleviating the critical opioid crisis currently taking over in the U.S.
As per the company's filings, VX-548 has secured Breakthrough Therapy and Fast Track designation in the U.S. for acute pain, potentially meaning it will secure FDA approval by the end of the year, and hence a substantial revenue boost.
Financials
Vertex, though, is worth paying attention to not only for its shiny prospects, but also for its performance currently.
Financially, it is a sound business with great profitablity ratios and little debt. The absence of a dividend is well compensated by the widely-accepted policy of share buybacks. Indeed, the quarterly average over the last five years is 165 million shares repurchased, as per YCharts. This contributed to a stable number of diluted shares of around 260 million over the last three years, a remarkable achievement given the competition in the industry for the top managers and experts notably rewarded with restricted stock units and options and stock-based compensation.
A sound balance sheet with $10.40 billion in cash and cash equivalents, more than double the total liabilities that add up to just $5.10 billion, is also a valuable perk.
The chart below helps to visualize how the company makes its money. The blockbuster Trikafta/Kaftrio makes up the lion share of the revenue at over 90%. Investors should consider, however, the patent expiration date is down the road in 2037 for both the U.S. and Europe.
The company also has a noteworthy 87.20% gross margin and a net margin of 36.70%, which are comparable to tech powerhouses like Apple (AAPL, Financial) and Microsoft (MSFT, Financial).
Valuation
When it comes to valuing a company like this, it is prudent to appraise the legal framework in which it operates. It is unwise to speculate the patents will be granted an extension and that the clinical trials will succeed based on the most recent euphoric news. Regardless, Vertex appears to be in a solid position for at least the next decade.
Alternative possible future scenarios were considered in my analysis, in which investors could be more or less optimistic, which would give the stock different multiples. The starting point was free cash flow of $3.50 billion, which was the same in 2023 but lower than in 2022. The future growth rate was imputed as lower for years five to 10, assuming a saturated market, and ranged from 35% for the first years of the rosier scenario to 5% for the last years of the distressed one. A discounted cash flow analysis was then performed. Results were encouraging, with a potential for substantial price appreciation for the bullish scenario and not extreme overvaluation for the average one.
Further, the GF Value Line, which is based on historical ratios, past financial performance and analysts' future projections, indicates the stock is only modestly overvalued.
Conclusion
Investors may be nervous about the company's impressive past performance, with the stock advancing a compounded annual average of 20.20% for the last 10 years and 43.50% in the last year alone. This analysis has found Vertex has solid financials (high cash, low liabilities and impressive net margin) and a valid moat in the form of patent-protected intellectual property.
These parameters alone should only account for a part of the value attributed to Vertex Pharmaceuticals since the potential for its pipeline is tangible. The VX-548 pain-killer has the potential to efficaciously address the devastating opioid crisis with massive rewards coming along the way. All in all, it is a company worth paying attention to.
