Is Vertex Stock Undervalued?

VRTX shares have risen nearly 125% over the past 5 years, and the stock doesn’t show any signs of slowing down. It’s delivered nearly 50% gains over the last 52 weeks, and around 21% year-to-date.

Vertex just released its 1st quarter of 2023 earnings reports, and the pharma company beat estimates again. With a monopoly on the CF treatment market and new drugs that will target pain management, sickle cell disease, and Type 1 diabetes, the company has a bright outlook.

But there are some concerns, with bears arguing that future breakthroughs are already priced in, and the stock is due to top out soon. And, as with all pharma companies, there’s the concern that future drugs won’t pass clinical trials, causing a loss of time and money.

After all of the recent growth, is it possible that Vertex stock is undervalued?

Vertex and Cystic Fibrosis

The Boston-based biotech company was founded in 1989 and has grown into a global force in the pharmaceutical industry. With a market capitalization of over $90 billion, Vertex is primed to take its place with the major players in the industry.

That’s largely due to the company’s monopoly on Cystic Fibrosis treatments. CF is a genetic condition that attacks the respiratory and digestive systems. The disease can significantly shorten the lifespan of the nearly 80,000 CF patients worldwide.

Vertex developed the only FDA-approved drug, Trikafta, that has proven effective in combating CF. With Trikafta, also known as Kaftrio, life expectancy for CF patients goes from 30 years to 70.

Since its approval in 2019, Trikafta has been the company’s leading moneymaker. An even more potent CF drug, Vanzacaftor, is expected to complete trials by the end of the year.

The company just announced Trikafta’s approval for US patients aged 2-5. Another Vertex drug, Kalydeco, recently received FDA approval and can treat CF in babies as young as one month old. These developments only expand Vertex’s customer base and cement the company’s CF drug monopoly.

Beyond Cystic Fibrosis

Vertex isn’t just a CF treatment company. The company has used its increased cash flow to fund R&D for treatments for a number of diseases and conditions. Exa-cel, a drug developed in partnership with CRISPR Therapeutics, takes advantage of that company’s gene-editing technology to create a treatment for blood disorders like sickle cell disease.

An acute pain drug, currently known as VX-548, is scheduled to complete trials as soon as the end of the year. This non-opioid medication is designed to mitigate pain without the addiction issues opioids cause. The much-anticipated drug has been given a breakthrough designation by the FDA in order to fast-track it to the market.

With potential treatments for Type 1 diabetes and other life-long conditions already in stages of development, it’s easy to see why so many investors are bullish on VRTX.

Fourth Quarter Ups and Downs

Product revenue of $2.37 billion was a 13% year-over-year (YOY) increase from the same quarter in 2022. This was highly attributable to revenues from Trikafta’s increased adoption in the US and overseas.

Combined expenses, including R&D, were also higher YOY, as the company invested more money in the development of its many new products. Combined GAAP expenses were $1.3 billion, compared to $818 million the previous year.

As a result of the increased expenses, net income was down 8% YOY to around $700 billion. But the company still has plenty of cash with $11.5 billion on hand, up from $10.9 billion last quarter.

A P/S value over 9 and a P/E ratio over 27 will cause many investors to do a double-take. Despite these indications that Vertex may be overvalued, the company’s CF monopoly and future products more than justify the stock’s price.

Competition and Pricing Concerns

AbbVie, a competing pharma company, recently announced that their CF drug didn’t pass phase-2 trials. AbbVie’s abandonment of their drug was a massive positive for Vertex, meaning that Vertex will continue to hold its unchallenged share of the CF market.

This monopoly is the main reason the company has come under fire. Trikafta is estimated to cost its patients around $325,000 a year. This exorbitant cost puts the drug out of reach for many underprivileged patients and has caused issues with expansion into poorer countries.

Activist groups have called for the company to reduce its prices, or for governments to issue alternatives to the expensive medication. Vertex faced similar criticism in the UK over the cost of its Orkambi drug, another treatment for CF. Vertex has defended the cost of its products by citing the enormous R&D expenses it took to produce these drugs.

As it stands, Vertex is the only game in town. And given that the company has another, more effective CF treatment on the way this year, that’s not likely to change. Add in the new drugs that are on the way, and Vertex is virtually unchallenged.

Future Outlook

Vertex is a biotech company at the forefront of CF treatments, and it’s been able to leverage its success to fund R&D breakthroughs that could be worth billions more down the road.

Looking ahead, the company is holding with its previous financial estimates for 2023. Vertex expects between $9.55 and $9.7 billion in CF product revenue for the year. That includes Trikafta revenue for the newly expanded 2-5 age group in the US.

Currently trading at $348, it’s remarkable to say that the stock looks undervalued. Given a 5-year discounted cash flow forecast analysis, fair value stands at an incredible $431 per share.

High ratios and product pricing may be concerns, but they’re not major concerns. There aren’t many obstacles to stop Vertex from continuing its amazing ascent.

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