Vertex Pharmaceutical (VRTX, Financial), which was purchased by the Tweedy, Browne Value Fund in mid-November 2021, is a biotechnology company that specializes in rare diseases/orphan drugs. The company’s current strength is in the treatment of cystic fibrosis, where its therapies are the gold standard of care globally. Analysts expect that Vertex will be able to maintain its dominant position in the treatment of this disease, which afflicts 83,000 people worldwide, largely due to the effectiveness of its therapies, the fact that patent expirations for its drugs are a long way off into the future (2030-2037), and the lack of effective competition. This affords Vertex pricing power for its drugs, as there are currently no good alternative therapies. Assuming the company receives complete international and pediatric approvals, Vertex’s portfolio of approved drugs would be eligible to treat 90% of the people who have this disease. Vertex’s therapies are also not one and done drugs, but rather start in early childhood and continue throughout the patient’s lifetime. The company’s strong cash flow, in our view, should support the company’s development of even better next generation drugs to treat cystic fibrosis as well as diversify its drug pipeline to treat other rare diseases. However, many of these treatments are on the horizon or are in their incipient stages of development.
In the quarter just prior to the Fund’s initial purchase of Vertex, knowledgeable insiders, including the company’s CEO and its lead independent director, purchased millions of dollars of the company’s stock at prices higher than we paid for the Fund’s shares. The company itself also repurchased approximately $642 million worth of its shares in the 3rd quarter at or around the same prices paid by the CEO and lead director ($195 per share). We estimate the company’s underlying intrinsic value to be in the range of $240 to $250 per share, and we believe that estimate is well supported by current, here-and-now cash flow, operating income and earnings per share. Morningstar and Goldman Sachs have valued the company at substantially higher prices than our estimate of $240 - $250 per share. The Fund’s weighted average cost in the stock is $187. At initial purchase, the company was trading at approximately 14 times current earnings, and 9.9 times enterprise value to earnings before interest and taxes.
From Tweedy Browne (Trades, Portfolio)'s fourth-quarter 2021 commentary.
