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$VRTX is a DEEP VALUE Biotech Cash-Flow Machine

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Vertex Pharmaceuticals is a large-cap American biopharmaceutical company which uses rational drug design to develop treatments for several disorders. The stock has been long overlooked by retail investors but is no stranger to institutions — massive hedge funds such as Renaissance Technologies, Point72 and Man Group are all long with large positions. Currently, there are several catalysts for growth in the upcoming years for Vertex. VRTX is the single best biotech stock to buy right now.

Here is some analysis regarding Vertex’s operations, financials and future growth prospects…

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*1. TRIKAFTA*

*“Cystic fibrosis, a rare, progressive, life-threatening disease, results in the formation of thick mucus that builds up in the lungs, digestive tract, and other parts of the body. It leads to severe respiratory and digestive problems as well as other complications such as infections and diabetes. Cystic fibrosis is caused by a defective protein that results from mutations in the CFTR gene. While there are approximately 2,000 known mutations of the CFTR gene, the most common mutation is the F508del mutation. Trikafta is a combination of three drugs that target the defective CFTR protein. It helps the protein made by the CFTR gene mutation function more effectively. Currently available therapies that target the defective protein are treatment options for some patients with cystic fibrosis, but many patients have mutations that are ineligible for treatment. Trikafta is the first approved treatment that is effective for cystic fibrosis patients 12 years and older with at least one F508del mutation, which affects 90% of the population with cystic fibrosis or roughly 27,000 people in the United States” ­*– US Food and Drug Administration

Trikafta is the first FDA approved treatment for cystic fibrosis which is capable of treating 90% of patients with the disorder. Vertex currently has a firm **ECONOMIC MOAT** on medicinal treatment for cystic fibrosis as it is the only company with FDA approved drugs for treating the disorder. Trikafta accounts for 70% of Vertex’s revenues and has the potential to drive far more profit for the company with the massive expanding global cystic fibrosis therapeutics market. Grand View Research expects the global cystic fibrosis therapeutics market to grow at a rate of 16.7% CAGR until 2025. Vertex could see growth which far exceeds that of this market due to its ever-growing share in the market. Essentially, the global cystic fibrosis therapeutics market growth rate + Trikafta’s market share growth rate would equate to Vertex’s revenue growth rate with Trikafta. With the drug’s increasingly large presence abroad due to the new approval in Canada as well as across Europe in several countries (57% increase in product revenue in Europe from 2020-2021), Trikafta could become an absolute **CASH-FLOW MACHINE** for Vertex. At the cost of $311,000 for Trikafta, Vertex could mass up to $8.4B in annual revenue if it were to capture the entire US market share alone. While the drug brought in just over $3.8B in 2020, there is still lots of room for Trikafta in Vertex’s domestic market, not to mention the great potential to scale internationally which has already been initiated.

*[https://www.grandviewresearch.com/press-release/global-cystic-fibrosis-cf-therapeutics-market](https://www.grandviewresearch.com/press-release/global-cystic-fibrosis-cf-therapeutics-market)

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*2. GROWTH*

[Revenue Growth (2015-Current)](https://preview.redd.it/7hzv9l0zp7a71.png?width=2400&format=png&auto=webp&s=c3c66e5eff78af0aa63fd3988708e95c3c42148f)

Revenue YoY Growth: **33.10%** **LTM**

Diluted EPS YoY Growth: **81.55%** **LTM**

Cash from Operations YoY Growth: **63.03%** **LTM**

Past 5 years Annual Earnings Growth: **53.9%**

As Trikafta’s patent has 16 years until expiry (expiry in 2037), Vertex’s largest source of revenue is here to stay and will continue to grow with the increasingly large demand for such treatment. Any new advances in pipeline for Vertex would also drive tremendous growth for additional revenues. On average, analysts are forecasting earnings growth greater than 20% for the upcoming year, however, with the average earnings surprise of 11.65% from the last four quarters, I believe that earnings growth >30% is fair and to be expected.

Vertex’s **high return on equity** of 23.0% exceeds the industry average of 16.6% which demonstrates the company’s ability to successfully generate income and growth from equity financing – another positive and promising sign for future growth.

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*3. VALUATION*

[ Historical P/E, EV/EBITDA, EV/Sales of VRTX (2018-2021)](https://preview.redd.it/8dfkcshxp7a71.png?width=2400&format=png&auto=webp&s=d3faef4300ca5119d50829d3ecdcc53c42b18f5d)

VRTX has become increasingly cheap over the past few years. The stock has risen significantly in the same time that its P/E multiple has significantly decreased. The stock now trades at 18.81x earnings 15.96x forward earnings, representing a 1.59 PEG. This puts VRTX far below the Nasdaq biotechnology industry average of 30x earnings. VRTX is currently **EXTREMELY CHEAP** based on the most common valuation metrics.

Based on a discounted cash-flow analysis of VRTX, an **intrinsic value of $406.58** can be extrapolated which presents a >50% discount to its current share price of $197.74 (assumptions include a discount rate of 6.5% based on the calculation cost of equity).

This is all to say that VRTX has some serious **DEEP VALUE** and a return to industry average earnings multiples or simply maintaining a similar valuation based on earnings would provide drastic upside (>50%) based on future outlook.

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*4. BALANCE SHEET*

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[ Vertex Pharmaceuticals Inc. Balance Sheet (2021-03-31)](https://preview.redd.it/k4xe9391q7a71.jpg?width=2928&format=pjpg&auto=webp&s=593d17e2db8127251b49b9872368da61aad3ea98)

Quick Ratio: **4.20**

Current Ratio: **4.40**

Debt/Equity: **0.00**

LT Debt/Equity: **0.06**

Vertex Pharmaceuticals’ balance sheet is **extremely strong** with minimal debt relative to cash and current assets. The company has also made it clear that they are looking to use their large cash reserve for the acquisition of both drugs and of other pharmaceutical/biotech companies. There is virtually no risk debt-wise for Vertex – a rise in interest rates would not pose troubles to the company at all. Vertex’s current financial health is certainly the best in the biotech industry.

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*5. RESEARCH & DEVELOPMENT*

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Vertex is in the process of developing several breakthrough therapies for serious diseases and has shown promising success with many of their clinical trials. FDA approval for any of these products would be highly significant for Vertex and extremely rewarding for shareholders. In the event that Vertex is successful in their cell therapy for type-1 diabetes, they could potentially **cure type-1 diabetes** and thus would consequently capture a large share of T1D market that is expected to grow to $24B by 2029*. Vertex is continuing to advance in the development of molecular, cellular and genetic therapies aimed at treating many serious diseases. Overall, Vertex is in the process of developing revolutionary treatments that could significantly disrupt the biotech industry. Below is the stated progress on Vertex’s R&D from the latest 10k…

*[https://www.businesswire.com/news/home/20210419005489/en/Global-Type-1-Diabetes-Drug-Forecast-and-Market-Analysis-Report-2021-Market-Will-Grow-to-24-Billion-by-2029—Opportunity-Remains-for-Beta-Cell-Regenerative-Therapies—ResearchAndMarkets.com](https://www.businesswire.com/news/home/20210419005489/en/Global-Type-1-Diabetes-Drug-Forecast-and-Market-Analysis-Report-2021-Market-Will-Grow-to-24-Billion-by-2029—Opportunity-Remains-for-Beta-Cell-Regenerative-Therapies—ResearchAndMarkets.com)

*Beta Thalassemia and Sickle Cell Disease*

In December, we and our collaborator, CRISPR, announced positive interim data from 10 people with TDT or SCD treated with CTX001 and that 20 people with severe hemoglobinopathies have been dosed with CTX001 in the ongoing Phase 1/2 clinical trials. Enrollment and dosing are ongoing, and completion of enrollment in both clinical trials is expected in 2021.

*Alpha-1 Antitrypsin Deficiency*

Enrollment is ongoing in a Phase 2 proof-of-concept clinical trial for the corrector VX-864. We expect data from this clinical trial in the first half of 2021.

We discontinued development of VX-814, our first corrector, based on the safety and pharmacokinetic profile of VX-814 observed in a Phase 2 clinical trial.

*APOL1-Mediated Kidney Diseases*

Enrollment is ongoing in a Phase 2 proof-of-concept clinical trial designed to evaluate the reduction of proteinuria in people with APOL1-mediated FSGS after treatment with VX-147. We expect data from this clinical trial in 2021.

*Type 1 Diabetes*

We are developing a cell therapy designed to replace insulin-producing islet cells in patients with T1D. We are pursuing two programs for the transplant of these functional islets into patients: transplantation of islet cells alone, using immunosuppression to protect the implanted cells, and implantation of the islet cells inside a novel immunoprotective device. In January 2021, the FDA cleared our IND for VX-880, the islet cells alone program. We expect to initiate a Phase 1/2 clinical trial evaluating this program in the first half of 2021. This clinical trial will involve an infusion of fully differentiated, functional islet cells, and chronic administration of concomitant immunosuppressive therapy, to protect the islet cells from immune rejection. 

*Investment in External Innovation*

– We entered into a collaboration with Skyhawk Therapeutics, Inc., or Skyhawk, for the discovery and development of novel small molecules that modulate RNA splicing for the treatment of serious diseases. 

– We entered into a new collaboration with Moderna, Inc., or Moderna, aimed at the discovery and development of lipid nanoparticles and mRNAs that can deliver gene-editing therapies to lung cells for the treatment of CF. 

– We entered into a collaboration with Affinia Therapeutics, Inc., or Affinia, to gain access to a novel library of AAV capsids to support on our ongoing research and development efforts in genetic therapies, including DMD, DM1 and CF.

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*6. OTHER POSITIVE SIGNS*

· $1.5B share repurchase program (June 2021-December 2022)

· High net income margin: **49.00%**

· Large hedge fund ownership

· Average analyst price target **>$260**

· Buy-Strong Buy consensus across Wall Street

· No underperform or sell targets

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**TDLR:**

Vertex Pharmaceuticals presents remarkable upside for growth with their current products which are continuing to gain market share in an ever-growing therapeutics market, as well as with several breakthrough therapies which have shown to have promising results in recent clinical trials. Such high growth prospects paired with an undervalued company with solid financials makes for a great investment especially at the cheap price it is currently trading at.

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I am long shares (around 15% of my total portfolio) but LEAPS would also be a great way to play VRTX

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**NOT FINANCIAL ADVICE**

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11 Comments

  1. The last time I bet on a company successfully curing a disease (muscular dystrophy), the stock tanked 60% over 5 months despite the best clinical test results in history for treating the disease. I’ll pass.

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