Vertex: Is Vertex Pharmaceuticals A Buy After Recently Hitting 52-Week Lows?
There is a subset of the value investing strategy called GARP-investing, which stands for “growth at a reasonable price”. One of the favorite stocks amongst the cohort of investors/analysts who look for reasonably valued growth names in recent years has been Vertex Pharmaceuticals (VRTX).
Over the last decade VRTX has grown its earnings-per-share from -$3.77/share in 2011 to $10.32/share in 2020. Since posting positive earnings in 2011 ($0.14/share), over the last 9 years, VRTZ has generated an earnings-per-share growth CAGR of 61.25%. And, the consensus analyst estimate for VRTX’s bottom-line growth in the coming years is positive as well, with expectations of 10% earnings growth in 2021, 9% in 2022, and 11% in 2023. And yet, even with these double digit growth figures in mind, Vertex shares trade for just 16.5x 2021 earnings estimates, meaning that VRTX shares trade with a premium that is well below the broader market’s.
The stock has made headlines in recent weeks due to disappointing drug trial results which inspired a double digit sell-off, pushing VRTX down to new 52-week lows. And with that in mind, we wanted to take a look at the recent reports published by Nobias 4 and 5-star rated analysts to see whether or not the strong bullish sentiment that followed this stock earlier in the year was still in place today.
Vertex is a company that focuses on treating rare diseases and is currently the world’s leader in cystic fibrosis (CF) treatment. Todd Campbell, a Nobias 5-star rated analyst, recently published an article on Nasdaq.com which showed the company’s dominance in the CF market.
Campbell wrote, “Vertex Pharmaceuticals is the market share leader in cystic fibrosis treatment; nearly 50% of patients currently being treated for the disease are receiving one of its medications.” He continued saying, “In 2020, Trikafta accounted for 63% of Vertex Pharmaceuticals' $6.2 billion in product revenue, and in the first quarter of 2021, it represented 70% of the company's $1.7 billion in sales.”
To some, this reliance on a single drug is a notable risk; however, Campbell noted that Vertex recently received approval to treat CF patients from the age of 5-12 with Trikafta, therefore opening up an even larger opportunity for the company. He said, “Of the 83,000 cystic fibrosis patients in the U.S., Europe, Australia, and Canada, an estimated 30,000 are untreated, but could be amenable to Trikafta, according to the company.”
According to Campbell, Vertex is also looking to expand the international footprint of its primary drug, seeking “expanded approvals and reimbursement agreements” for Trikafta outside of its current market, which includes the United States and only 12 other countries.
Adria Cimino, a Nobias 4-star rated analyst, recently published an article at The Motley Fool, which also highlighted Vertex’s strong presence in the CF space. She noted that Trikafta “could be an important revenue driver in the coming years because it has the potential to treat more than 90% of all CF patients. Revenue will grow progressively from today as Vertex wins approvals in different countries and age groups.”
Like Campbell, Cimino highlighted Trikafta’s strong sales and cash flows; however, she also touched upon the lack of diversification within Vertex’s product portfolio and revenue stream, saying, “This is all very positive, but investors are concerned about what will happen when increases in CF sales start to slow. At a certain point, Vertex will have reached most potential patients. CF is a rare disease, so once Vertex serves all of today's market, the number of new patients over time will be limited.”
She notes that Vertex’s current pipeline is focused on two particular areas. One of which is “treatments for rare lung and liver disorder alpha-1 antitrypsin deficiency (AATD).” However, it’s important to note that the company has had two major setbacks in this area of its pipeline.
Cimino said, “AATD has spurred Vertex's share-price woes over the past year. The company ended development of one candidate last fall and a second candidate this month, which was the reason for the recent share decline. Vertex said it would bring other AATD candidates into trials next year.”
VRTX shares fell more than 10% on June 11th when news broke that the company abandoned development of candidate VX-864 for AATD. SInce then, they’ve continued to trend lower and trade for $187.70, which is just off of its recent 52-week lows. VRTX has fallen roughly 38.5% from its 52-week high of $306.08 that it set in the summer of 2020. And to some, this share price weakness represents a very strong buying opportunity.
In her piece, Cimino points out that famed growth investor, Cathie Wood of Ark Invest, recently increased her VRTX holdings. Cimino highlighted VRTX’s most recent leg down and said, “That's when Wood moved to increase her Vertex holdings. The stock is among the top 10 holdings in the ARK Genomic Revolution ETF (ARKG).”
Cinimo then went on to say that “Vertex's shares are trading at about 17 times forward earnings estimates. That's the lowest since at least January 2020.” And in her view, “We can expect strong CF revenue from Vertex for several years. Vertex even predicts its CF leadership will last through the late 2030s. The billions in dollars of revenue will fund pipeline programs, and we can add to that Vertex's $6.9 billion in cash. This amount of cash even offers Vertex the possibility to buy a close-to-market candidate at any point.” She concluded her piece in bullish fashion, writing, “Vertex may not deliver big gains this month or even this year.
But investors who favor buying and holding are likely to reap rewards further down the road, so they may be very happy about their decision to follow Cathie Wood.” And, Cimino and Wood aren’t the only two notable investors/analysts who continue to be bullish on VRTX.
In a recent article titled “Move Over, AMC and Dogecoin -- This Stock Could Be a Much Bigger Long-Term Winner” Nobias 5-star rated analyst, Kieth Speights, discusses why, even after the disappointing AATD news, he believes that Vertex can still be a big winner for investors. Regarding Vertex’s portfolio, Speights doesn’t appear to be concerned about the reliance on the CF market. Hsays, “There are currently four approved drugs in the U.S. and Europe that treat the underlying cause of rare genetic disease cystic fibrosis (CF), and Vertex markets all of them. Its newest CF drug, Trikafta/Kaftrio, is its biggest winner yet. The drug is just beginning to pick up momentum in Europe.”
He goes on to note that Vertex does have competition in the CF space; however, the experimental drugs being developed by peers are only in phase-2 tight now and in his view, “Vertex seems likely to dominate the CF market, at least through the next decade.”
Speights says that VRTX continues to innovate in the CF space, attempting to develop treatments which can help the roughly 10% of CF patients that its current portfolio cannot yet help. In the rare disease space, he notes that Vertex “is also developing experimental therapies for other rare diseases, including alpha-1 antitrypsin deficiency, APOL1-mediated kidney diseases, beta-thalassemia, Duchenne muscular dystrophy, and sickle cell disease.” And finally, he says that the company “isn't limiting itself to just rare diseases.” According to Speights, Vertex is also working on treatments for “acute pain following certain types of surgues” and those drugs are currently in phase-2 trials. He goes on to say, “The important thing to note is that Vertex doesn't need all of these programs to be successful. If only one or two of them pan out, this biotech stock should deliver tremendous returns.”
However, with all of this bullish sentiment in mind, it’s important to consider the downside risks as well. Zhiyuan Sun, a Nobias 4-star rated analyst, recently published a bearish piece on Nasdaq.com, which highlights investor concerns about VRTX’s forward growth prospects. Sun highlighted the company’s recent AATD failures and then said, “That leaves just CTX001, a gene therapy for treating hereditary blood disorders, as its leading pipeline candidate. However, Vertex is developing the transfusion therapy jointly with CRISPR Therapeutics (NASDAQ: CRSP). In addition to profit-sharing agreements, Vertex already paid the latter $900 million up front to jointly develop the technology. So even after approval, it has a long way to go to break even.” He goes on to highlight Trikafta’s “staggering cost of $311,000 per year” pointing out that at this level, the company is likely going to have a hard time expanding outside of development markets (which it already has strong exposure to).
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Sun wrote, “There are only about 83,000 CF patients in developed countries. Nearly half of them are already taking Vertex medications. It's safe to say that the company has hit a brick wall in terms of generating prescription volume due to its pricing.” He also noted the recent slowdown of both sales and earnings, showing that VRTX produced sales growth of 14% and net income growth of 16% during the first quarter of this year, which is much lower than the 77% revenue growth and 128% earnings growth that the company generated on a year-over-year basis just one year ago.
Sun concluded his piece saying, “Without the launch of new pipeline candidates, it can't sustain those valuation levels. I think there is more struggle to come for its shares. It's best to avoid biotech for the time being.” Overall, Sun appears to be in a stark minority when looking at the 4 and 5-star rated Nobias analysts, however.
During the last 2 months, our algorithm has tracked 27 reports published by such highly ranked individuals and 26 of them came with “Buy” ratings attached. Since the June 11th news regarding the poor AATD trial results, we’ve seen 7 blue chip analysts (4 and 5-star rated) update their price targets for VRTX shares. These targets ranged from $200-$285 with an average of $256.29. Being that VRTX shares currently trade for $187.70, this average price target implies upside potential of approximately 36.5%.
Disclosure: Nicholas Ward had no VRTX position as of writing this article on 6/22/2021 but may initiate exposure during the next 72-hours. . Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.