Vertex Pharmaceuticals
Specialist in cystic fibrosis medication plans to raise growth potential with expanding portfolio
Dominant moat, strong pipeline: Specialist in cystic fibrosis medication plans to raise growth potential with expanding portfolio
Nasdaq-listed Vertex Pharmaceuticals is a global biotechnology company that innovates and creates transformative medicines for people with serious diseases. The company’s area of expertise lies in cystic fibrosis (CF), a rare life-threatening genetic disease, of which Vertex has multiple approved medicines along with several ongoing clinical and research programmes. Vertex derives all of its revenue from the CF segment as the rest of its research are only in the pipeline — either in Phase 2 or prior.
Its pipeline excluding CF consists of two parts: The first is investigational small molecule medicines in other serious diseases covering the areas of pain, protein deficiency and kidney diseases. The other is genetic and cell therapies for diseases such as sickle cell disease, beta thalassemia, muscular dystrophy and type-1 diabetes.
Meanwhile, Vertex’s CF portfolio consists of four main drug product groups: Trikafta & Kaftrio that contributes almost 60% of the company’s revenue; Symdeko & Symkevi that contributes 10% of the company’s revenue; Orkambi that contributes roughly 15% of Vertex’s turnover; and the rest of the revenue comes from Kalydeco. These four CF drug product groups are mainly differentiated by the target user, which is usually based on age groups. For instance, Trikafta is for those aged 12 and older, along with the type of mutation caused by CF.
Our case for Vertex is that it is a healthcare play with a dominant moat and a strong pipeline for growth — a medium-term healthcare growth play with a solid track record of financials from its portfolio of products. We also think Vertex’s business model and strategy is the right one to have in the biotechnology and pharmaceutical space. For companies that are in this space, it is important to specialise, and have a dominant presence and huge market share through the development of patents.
Vertex dominates the CF drug market space globally, as market intelligence indicates the market share for its products is almost 50% of the global CF drug market. The patents for Vertex’s products are also considerably long, where the expiry for its CF products ranged from five to 16 years for both the European region and the US — with its most valuable product group Trikafta & Kaftrio having the longest patents.
Companies that dominate, as in the case of Vertex, are able to allocate resources specifically to grow the value of the business by capitalising on pre-existing technology and further growing their footprints in their areas of specialisation. The barriers to entry for this space are also very high, given the arduous and lengthy process of research for drug approval, not to mention the significant risk of failure and financial cost to the company for venturing into a new space.
The global CF drug market is expected to grow at a CAGR of 16.8% for the next five years. These high growth figures are expected to be driven by the rising number of CF cases, continuous research for the development of better drugs and increasing demand for alternative treatments.
To be sure, Vertex is not the only game in town when it comes to treating CF. There are several treatment methods using various CF drugs and therapeutics, such as the CF modulator drugs provided by Vertex. Gene therapy has shown the potential of being a potential cure for CF, though with limited success. Vertex recognises this potential threat to the business as it would reduce the need for CF medication over the longer term and has stated that although its main focus will be on CF modulators for its portfolio of drugs, it will allocate resources for gene therapy by partnering with other biotechnology research institutions such as Crispr Therapeutics and
Moderna.
However, the progress of gene therapy is unlikely to be a threat to Vertex’s business over the near or medium term, as almost all programmes are still in the pre-clinical stage and it will take at least five to seven years before meaningful progress is achieved. Furthermore, we think Vertex’s diversification into other products, although expected not to contribute significantly to the company’s revenue compared to its CF portfolio, could potentially support and provide earnings visibility over the medium term. Vertex also has two CF-related research projects in its CF pipeline that are currently in the Phase 2 development stage, which should supplement and strengthen Vertex’s presence in the global CF drug market.
In the FY2020 ended December 2020, Vertex saw a 49% increase in revenues and 139% increase in operating income from the previous year, mainly driven by the uptake of Trikafta in the US and Kaftrio in Europe. Management has provided a healthy double-digit guidance for the company’s revenue growth for FY2021. Vertex’s cash, cash equivalents and marketable securities increased by almost 75% compared to the previous year, driven by its strong profitability, with operating margins for this period exceeding 45%, as shown in Chart 1.
Furthermore, over the next few quarters, VRTX is expected to maintain an operating margin of over 40% that should be supported by its expansion plans to target younger patients and more countries globally. We believe that for biotechnology companies, cash balances and reserves are very important as they are key to carry out additional and potential research and generate new ideas to lengthen the drug pipeline without diluting shareholder value through capital-raising exercises. Vertex is sitting on US$6.6 billion ($8.8 billion) of cash, which should be able to cover at least three years of R&D costs based on estimated figures. A current and quick ratio of over three times, a debt to equity of roughly 7% and interest cover of almost 50 times all show that the company is comfortably funded.
Analysts have given a 12-month target price of US$282.42, which is significantly above its current trading price of US$215.26. Our inhouse valuation of the company indicates that this company should be worth at least US$300 over the next two years. Vertex’s drug portfolio is at the apex of CF treatment and therapeutics, and the stock is a low-risk investment with good potential for strong value growth over the medium term.