Investing in the pharmaceutical industry carries substantial risks because of the uncertainty surrounding it. Investors have to deal with both regulatory and economic uncertainty and closely monitor the progress of clinical trials to identify inflection points. However, there are handsome rewards associated with successful pharmaceutical companies as well, which is why growth investors tend to keep a close eye on this area.
Vertex Pharmaceuticals Inc. (VRTX, Financial) has made steady progress in recent years, both from a financial and market performance perspective. On the back of a more than 30% gain in the last 12 months, the stock seems well-positioned to deliver attractive returns in the coming years.
The business
Vertex is a Boston-based biotech company focused on the development and commercialization of therapies for treating cystic fibrosis. The company has already received the Food and Drug Administration's approval for four main drugs, Kalydeco, Orkambi, Symdeko and Trikafta, which currently enjoy monopolistic power in the market.
The company is now expanding its footprint beyond cystic fibrosis to areas such as sickle cell disease and variants of kidney diseases. Vertex’s drug pipeline comprises several mid- and late-stage clinical trials aimed at fighting these diseases in addition to type 1 diabetes and neuropathic pain.
The large addressable market opportunity for cystic fibrosis drugs
As the leading drugmaker treating cystic fibrosis, Vertex has a long runway for growth. According to data from the Cystic Fibrosis Foundation, there were 83,000 patients across the U.S., Europe, Australia and Canada affected by the disease in 2021. That number is estimated to have eclipsed 88,000 today. Close to 57,000 of these patients are currently treated with Vertex’s CF drugs, and an additional 20,000 patients can be treated with currently approved drugs marketed by the company.
The company is aiming to onboard these patients to a treatment plan centered around its drugs. VX-522, a cystic fibrosis drug currently in Phase 1 clinical trials, is expected to expand Vertex’s addressable market by another 5,000 patients if it can obtain regulatory approval. VX-522 has received the Fast Track Designation from the FDA.
Vertex is also targeting a global launch of Trikafta/Kaftario in patients between two and five years of age later this year, which is likely to expand its target market further.
With the advancement of these drugs, cystic fibrosis patients are expected to live longer, with the median age of survival currently at 65 years. The longer life expectancy of these patients creates an opportunity for Vertex to gain a consistent cash flow stream from the commercialization of its drugs.
The pipeline strength
When investing in a biotech company, investors should pay close attention to the strength of its pipeline as future earnings depend largely on the success of these drugs. Vertex’s most important pipeline drug candidate is its gene-editing exa-cel drug, which is being developed in partnership with CRISPR Therapeutics AG (CRSP, Financial). This drug is aimed at treating two diseases: beta thalassemia and sickle cell disease. The company is currently awaiting a regulatory decision on exa-cel after filing for approval in several key markets, including the U.S. and the U.K. Based on the promising clinical trial results, some analysts expect it to begin commercialization as early as 2024. According to Vertex’s regulatory filings, exa-cel holds the potential for a one-time, functional cure for the two blood diseases.
The company has made progress with its clinical trials for VX-548 in treating acute pain. Millions of Americans suffer from some form of acute pain every year, and Vertex has identified an opportunity to develop a treatment to help patients manage it better. The drug has already entered Phase III clinical trials, and the FDA has granted it both a Fast Track Designation and Breakthrough Therapy Designation, allowing the company to commercialize the drug in the near term if the trilas deliver the desired results.
Vertex recently projected five drug launches in the next five years to drive earnings growth. Although this is an ambitious target given the complex regulatory environment surrounding the approval of new drugs, the company seems to be headed in the right direction to achieving this objective, which is evident from the strength of its pipeline.
Takeaway
Vertex Pharmaceuticals is making steady progress with its pipeline drugs while continuing to benefit from the strong market position of its cystic fibrosis treatments. The company’s drugs will enjoy patent protection for several more years, which gives its ample time to bring other drugs to the market.
With many treatments on the brink of obtaining regulatory approval, Vertex seems attractively valued at a forward price-earnings ratio of 24.
