Vertex Pharmaceuticals Inc. (VRTX, Financial) is a leader in the global cystic fibrosis therapeutics market. In addition, the company has an extensive portfolio of experimental medicines aimed at treating common diseases such as type 1 diabetes, sickle cell anemia and APOL1-mediated kidney disease (AMKD).
Investment thesis
On Dec. 8, the Food and Drug Administration approved Casgevy (exagamglogene autotemcel), a gene therapy to treat sickle cell disease, which affects about 100,000 Americans. According to Reuters, Casgevy will be priced at about $2.2 million, which is $900 million less than bluebird bio's (BLUE, Financial) Lyfgenia.
Casgevy is a one-time therapy and the first FDA-approved therapy utilizing CRISPR/Cas9 gene editing technology. As a result, this approval has opened up access for physicians to an effective and innovative medicine that can significantly improve patients' quality of life. Also, unlike bluebird bio's product, it does not have a black box, which is the most severe type of regulatory warning that indicates significant risks associated with drug use.
Source: bluebird bio's Lyfgenia — Food and Drug Administration
According to our model, we forecast peak sales of Casgevyto to be around $6.2 billion by 2030, making it one of the company's best-selling drugs and also having a significant positive impact on Vertex's revenue growth rate.
In addition to Casgevy's approval, one of the company's key experimental drugs is VX-548, which is being developed as a treatment for acute pain and which, if approved by regulators, could significantly reduce the number of patients abusing opioids. VX-548 is a selective NaV1.8 inhibitor that demonstrated high efficacy in a Phase 2 clinical trial, and the company has now completed a Phase 3 pivotal trial in abdominoplasty and is continuing to conduct two others.
In our assessment, based in part on ClinicalTrials.gov data, we expect data from all three studies to be published early in the second quarter of 2024 and, more importantly, highly likely to meet primary and secondary endpoints. As a result, this will not only positively impact Vertex's share price, but also reduce its financial dependence on sales of its cystic fibrosis medications.
Meanwhile, Vertex Pharmaceuticals' management increased its full-year 2023 revenue guidance from a range of $9.7 billion to $9.8 billion to $9.85 billion. We believe the key factors behind this include continued solid demand for the company's cystic fibrosis treatments and the expected weakening of the U.S. dollar relative to other foreign currencies.
At the same time, AbbVie (ABBV, Financial) could become the company's key competitor in the next five years. However, in the second quarter, it completely suspended clinical trials evaluating the efficacy and safety profile of ABBV-119 and, as a result, we expect Vertex to continue to be the sole leader in the cystic fibrosis drugs market.
Moreover, the several label expansions for Trikafta (elexacaftor/tezacaftor/ivacaftor) and the geographic expansion of the company's other drugs favorably impacted its operating income margin, which amounted to 43.93% for the three months ended Sept. 30. This financial metric significantly outperforms health care peers AbbVie, Johnson & Johnson (JNJ, Financial), Bristol-Myers Squibb (BMY, Financial) and Takeda Pharmaceutical (TAK, Financial).
Author's elaboration, based on GuruFocus and Seeking Alpha data.
We initiate our coverage of Vertex Pharmaceuticals with an outperform rating for the next 12 months.
The financial position of Vertex Pharmaceuticals and its prospects
The company's revenue for the third quarter of 2023 was $2.48 billion, exceeding our expectations by about $10 million and, more importantly, up 6.4% year over year.
Moreover, Vertex Pharmaceuticals' actual revenue beat analysts' consensus estimates in eight of the last 10 quarters, which may reflect Mr. Market's conservative assessment of the prospects of its FDA-approved medications and product candidates targeting type 1 diabetes, acute pain, alpha-1 antitrypsin deficiency (AATD) and Duchenne muscular dystrophy (DMD).
Author's elaboration, based on GuruFocus and Seeking Alpha data.
A key contributor to the company's year-over-year revenue growth is Trikafta/Kaftrio, which is a medicine approved by regulatory authorities for the treatment of patients with cystic fibrosis as young as two years old.
Author's elaboration, based on Vertex Pharmaceuticals press releases.
The mechanism of action of the Vertex Pharmaceuticals product is based on increasing the activity of the cystic fibrosis transmembrane conductance regulator (CFTR) protein. Ultimately, this helps facilitate the delivery of CFTR proteins to the cell surface of patients and their subsequent incorporation into the cell membrane.
Trikafta/Kaftrio sales were about $2.27 billion in the third quarter of 2023, up 13.1% from the prior year.
Author's elaboration, based on quarterly securities reports.
Key factors driving its sales growth are Vertex's leading position in the global CF therapeutics market and the company's management's desire to switch patients from its other medications, as exclusivity for some of them expires in the next five years.
Source: Vertex Pharmaceuticals' 10-K
The biopharmaceutical company is expected to release fourth-quarter financial results on Feb. 1, 2024. According to Seeking Alpha, Vertex's revenue for the quarter is anticipated to be in the range of $2.43 billion to $2.67 billion, up slightly from analysts' expectations for the previous quarter.
In contrast, according to our model, its total revenue will be slightly above the median of this range and reach $2.54 million due to continued solid demand for its cystic fibrosis franchise.
Created by author.
We expect Vertex's operating income margin to reach 45.1% in 2023. At the same time, this financial indicator will increase to 46.6% by 2024, mainly due to a decrease in the cost of raw materials necessary for the production of its products, increased sales of its cystic fibrosis drugs, the beginning of the commercialization of Casgevy and the FDA approval of exa-cel for the treatment of beta thalassemia.
Source: Vertex Pharmaceuticals
The company's third-quarter non-GAAP earnings per share were $4.08, beating analysts' consensus estimates by 11 cents and, more importantly, up 1.7% year over year. At the same time, Vertex Pharmaceuticals beat analysts' consensus estimates in 10 of the last 11 quarters.
Seeking Alpha
According to Seeking Alpha, the company's fourth-quarter earnings per share are expected to range from $3.69 to $4.43. In contrast, we expect its earnings to be within this range and reach $4.10, up 9% year over year.
Author's elaboration, based on GuruFocus and Seeking Alpha data.
Vertex's trailing 12-month non-GAAP price-earnings ratio is 23.69, which is 32.78% below the sector average and 17.23% below the average over the past five years. Moreover, the forward non-GAAP price-earnings ratio is 23.20. Some of the main reasons why the company consistently trades at higher multiples relative to most major pharmaceutical companies are its rapidly expanding pipeline of experimental drugs, lack of competition in the global CF therapeutics market and low total debt.
Author's elaboration, based on GuruFocus and Seeking Alpha data.
Conclusion
The negative impact of President Biden's Inflation Reduction Act on the pharmaceutical industry, the possible delay of the FDA's decision to approve exa-cel for the treatment of beta thalassemia by three months and lower sales of Casgevy relative to analysts' expectations are key risks that financial market participants should take into account.
Meanwhile, Vertex's high operating income margin, growing revenue, relatively high rate of expansion of its portfolio of product candidates and medications, low total debt/Ebitda ratio and total cash and short-term investments that exceed $11.9 billion are some of the key investment theses that make the company an attractive asset for long-term investors.
Author's elaboration, based on GuruFocus and Seeking Alpha data.
We initiate our coverage of Vertex Pharmaceuticals with an outperform rating for the next 12 months.
