Vertex Pharmaceuticals Inc. (VRTX) specializes in discovering and manufacturing drugs for cystic fibrosis, an inherited disease with an average lifespan of around 44 years. Vertex’s position in the market is truly monopolistic. The company holds exclusive licenses to several hundred patents in the U.S., many of them protecting the company for at least a couple of decades from future competition.
Vertex’s current cystic fibrosis drugs like Trikafta and Kaftrio receive continuous medical approval in Europe and Asia, allowing the company to steadily expand its competitive advantages in this very rare biotech space. With the company enjoying the growing adoption of Trikafta and Kaftrio while waiting for the likely approval of CTX001, Vertex features robust growth catalysts ahead.
Note that Trikafta normally costs around $300,000 per annum. However, Vertex has closed reimbursable agreements with more than 25 countries to make the drug affordable for as many patients as possible.
Hence, with an increasing patient base and increased adoption, the company enjoys robust revenue growth. At the same time, due to its high pricing, it also features fantastic margins, leading to sky-high profitability levels.
Despite Vertex’s numerous qualities, the stock has lagged the overall market, currently trading near its 52-week low levels. In my view, the company’s growing financials, solid capital returns, and attractive valuation comprise a compelling investment case. Hence, I am bullish on the stock. (See Analysts’ Top Stocks on TipRanks)
Q3 Results – Another Great Quarter
In Vertex’s Q3 results, the company posted revenue growth of 29% year-over-year to $1.98 billion, beating the analyst consensus by $120 million.
Note that despite the company’s lagging stock, which may suggest a potential slow down in growth, Q3 was the most substantial revenue beat in the last five quarters percentage-wise, which should ease investor fears. EPS came in at $3.56, 35% higher versus the comparable period last year, with net income margins nearly touching a jaw-dropping 43%.
The company ended the quarter with a net cash position of $6.09 billion, as excess continues to pile up despite its strong capital returns. Specifically, during Q3, Vertex repurchased around $660 million of its common stock, the most it has ever bought back during a quarter. Assuming this could be a run-rate indicator, $2.6 billion in annual buybacks translates to around 5.6% of Vertex’s market cap.
Hence, the company’s tangible capital returns are very strong considering the ongoing growth it experiences and investments in its future pipeline.
Finally, Vertex’s current monopoly status in the cystic fibrosis market should allow it to keep costs low due to the lack of any competitors in the space. The continuous decline in COGS, R&D, and SG&A costs over the past six years proves this, and hence, in my opinion, Vertex’s profitability should keep growing rapidly.
The Valuation
Vertex is currently trading at around 14.5 times its Fiscal Year 2021 EPS, or around 13.9 times its expected Fiscal Year 2022 EPS. In my view, this is an extremely attractive valuation multiple considering the company’s growth pace, deep moat, robust drug pipeline, and active, growing capital returns which increase investors’ margin of safety.
In the current environment of excessive valuations, Vertex should not be overlooked amid solid upside ahead.
Wall Street’s Take
Turning to Wall Street, Vertex Pharmaceuticals has a Moderate Buy consensus rating based on six Buys, five Holds, and two Sells assigned in the past three months.
At $229.45, the average Vertex Pharmaceuticals price target implies 22.8% upside potential.
Disclosure: At the time of publication, Nikolaos Sismanis did not have a position in any of the securities mentioned in this article.
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