VERTEX PHARMACEUTICALS: CYSTIC FIBROSIS & BEYOND

By Dabin Im, Pharmaceutical Analyst

When you think of Vertex Pharmaceuticals, ($VRTX)  the first thing that probably comes to mind is cystic fibrosis (CF). CF is a rare disease where there is a mutation in a gene called CFTR. This prevents water from flowing in and out of the cells, which is a big problem because our bodies have to secrete fluids, such as sweat and mucus. Because these fluids cannot leave the body, tubes and passages get clogged. CF leads to severe damage in the lungs and other organs, such as the intestines and pancreas. Also, CF patients have stiff and hard mucus in their lungs, which becomes a breeding ground for bacteria and leads to many different lung infections. 

Vertex created four life-changing medications that help fix the true underlying problem of CF. Other treatments do not treat CF and just help ease the symptoms and complications. To discover the medications that were once thought of as impossible, scientists threw little molecules at proteins with the CFTR gene mutation. After persistent trial and error, these small molecules became bound to the defective protein and fixed it. 

The difference between the four CF medications that Vertex has is that they are different molecules that work for different people. These medications are currently Vertex’s only source of revenue. Even though Vertex definitely found its bread and butter, that does not mean that Vertex is a one trick pony. In fact, it currently has 18 pipeline medications, intended to treat eight conditions, in its pre-clinical and clinical development stages. 

Future Potential (Pipeline)

 You may think that Vertex already happily reached its highest point, hence the name vertex, with cystic fibrosis. Not so fast. Vertex is continuously trying to grow and expand its triangle, with over 70% of operating expenses spent on research and development of new drugs. 

One of its most promising pipeline medications right now is CTX001, which is in phase 1/2. This medication is intended to treat sickle cell disease and beta thalassemia. These two conditions are very similar in that they are both affect red blood cells and their ability to deliver oxygen throughout the body. The difference between the two is in the ‘hemoglobin’. Hemoglobin is the protein in the red blood cell responsible for carrying oxygen. In sickle cell disease, the gene mutation makes defective hemoglobin, so it changes the cell shape and cannot function correctly. In beta thalassemia, the gene mutation leads to a decreased production of hemoglobin and, therefore, a lack of red blood cells.

Vertex is collaborating with CRISPR Therapeutics ($CRSP), a biotech company that specializes in gene editing. There are two different types of hemoglobin: fetal hemoglobin made in the womb and adult hemoglobin made a few weeks after birth. With this medication, they are trying to trick the body into keep making fetal hemoglobin because these gene mutations are in the adult hemoglobin. There is no functional difference between fetal and adult hemoglobin. In fact, fetal hemoglobin binds to oxygen more firmly than adult hemoglobin does. Through gene editing, this medication is being tested to be used as a one shot cure.  

Five promising medications are currently in phase 2 clinical trials. Although FDA approval will not happen overnight, they are definitely worth the wait because they target specific populations with very high demand.  

Obstacles 

Vertex is not a regular biotech company. With a market cap of $48.76 billion, Vertex is huge for a biotech company. Vertex completely took over treatment for a condition and does not have any competitors that provide the same value. However, this could be a double-edged sword. When companies do not have any streams of revenue (e.g., from an approved medication), the stock price is based on the hypothetical value that the company can bring in the future. However, once they do have streams of income, it is hard to determine how much impact the next milestone will have. Vertex has proven itself, so it is hard to crunch the numbers and predict what it would take for its stock price to double or even triple. Therefore, Vertex is facing a middle age crisis. 

The same achievement will not have the same impact on a large company as a small company. For example, Pfizer (NYSE: PFE) and Moderna (NASDAQ: MRNA) both successfully got their COVID-19 vaccines approved and sold billions of doses. Pfizer is one of the biggest pharmaceutical companies in the world, whereas Moderna was relatively a small biotech company prior to approval. Over the past year, there was much anticipation leading up to their approvals, and after they finally got FDA approved, they reaped the profits. Moderna’s stock surged 320%, from its 52-week low at $54.21 to its 52-week high of $227.71. On the other hand, Pfizer’s stock went up 44%, from its 52-week low at $29.94 to its 52-week high at $43.08. Pfizer collaborated with a relatively small biotech company at the time, BioNTech SE (NASDAQ: BNTX). Although they worked together to launch the same product, BNTX’s stock price surged 407% from its 52-week low at $49.83 to its 52-week high at $252.78. When a new medication is approved, the return on investment will not be as big for companies that are already well established.

Opportunities for growth 

The good news is that Vertex still has plenty of more room to grow. Vertex’s medications has the potential to treat up to 90% of all CF patients. The rest has to be treated with gene therapy, which is also being researched by Vertex. However, only half of CF patients are being treated by Vertex’s medications due to the following reasons, mostly in other countries: lack of reimbursement, awaiting approval and younger ages not being yet approved. In a perfect world, all patients with CF would be treated with Vertex’s medications because they help fix the root of CF. If this were the case, then Vertex’s revenue would nearly double. 

You may think, “Wouldn’t other companies try to sell cheaper generic versions of Vertex’s medications? Then wouldn’t its revenue drop?” While that is true, it is not in the near future. Vertex’s triple threat main medication, Trikafta, has a patent that expires in 2037. The rest of the medications’ patents expire in 2027 (Kalydeco and Symdeko/Symkevi) and in 2030 (Orkambi). Vertex has quite a bit of time until investors should start worrying. 

Addressing the Dips 

Over the past year, the stock price of Vertex Pharmaceuticals (NASDAQ: VRTX) has dropped 39%, reaching its 52 week high at $306.08 on July 20, 2020 and reaching its 52 week low at $185.64 on June 17, 2021. The catalysts for these dips were dropping two pipeline medications. 

However, it’s important to keep in mind that Vertex still has 18 other pipeline medications. On average, only 0.02% of medications go all the way from the lab to the market. In addition, about 10% of drugs that enter clinical trials get approved by the FDA. To expect all of Vertex’s pipeline medications to get FDA approved is on the borderline of wishful thinking and just silly. 

Balance Sheet

At the end of the day, a company has to have strong finances for its medications to be out on the market successfully, regardless of the value it brings to patients. With that being said, Vertex’s balance sheet is amazing. In fact, Vertex could even pay off its debt of $931 million with its $6 billion in cash today if it wanted to. With a five-year average revenue growth of 43.15%, its revenue is expected to increase even more by 10.73% in 2022. Its Price to Earnings (PE) ratio is currently at 17.91. In general, profitable biotech companies have a PE ratio range from 25 to 40. Because Vertex’s PE ratio is below that average, it means that its stock is undervalued in comparison to how much it earns. From its gross profit margin of 88.14% and operating margin of 51.26%, it is safe to say that Vertex is very profitable. Out of the $100 dollars that Vertex makes in revenue, $88.14 is left after subtracting the direct costs (e.g., direct labor and materials) associated with making the product. When the variable operating expenses (e.g., employee salaries, marketing, and facility costs) are also subtracted, then $51.24 is what Vertex gets to keep. 

A Profitable Opportunity? 

Because Vertex Pharmaceuticals focuses on treating rare diseases, it will take time to develop new medications. There is a reason why these markets are unsaturated. It is that much harder to develop treatments. But once it is out on the market, it can save people’s lives. Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” Right now, buying Vertex Pharmaceuticals (NASDAQ: VRTX) would be buying a wonderful company at a wonderful price.