Vertex Could Fly High on Cystic Fibrosis Projects
Jordo is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Vertex Pharmaceuticals (NASDAQ: VRTX) has a variety of major drug research projects, spanning diseases like hepatitis C, rheumatoid arthritis, and cystic fibrosis. However, it has lately undergone substantial competition on these fronts, and it is under pressure to develop other therapies for these conditions to propel revenue.
Based on its fundamental valuation, I think Vertex makes an attractive buy over an 18-month period, though with some level of risk. It is likely that its pending drug trials will succeed; if they do not, then share prices could plunge over night. Vertex has a beta of only around 0.5, so such a risk might not be as great as it seems based on the stocks tendency to track market fluctuations. That said, these indicators and valuation metrics obviously measure past performance and share fluctuation. One needs to be future-focused in biotech as in any other sector, and I believe that Vertex will present short-term results to support a buy recommendation.
Vertex's share price shot up on May 7, after the company overstated the benefits of drug trial information on a cystic fibrosis therapy. It has a forward P/E of 23, which is higher than the S&P US BMI Health Care benchmark forward P/E of 13. In comparison, Spectrum Pharmaceuticals (SPPI) has a forward P/E of 8.5, for instance, while Valeant Pharmaceuticals (VRX) has a forward P/E of 11. In the context of pharmaceuticals, a lower P/E not only indicates that shares are “cheaper” but also that the company is delivering more earnings on products that are already returning a profit. Though Vertex, in my opinion, needs to deliver more news on its late-stage drugs before a target higher than $65 is justified, nevertheless a high P/E does not take into account the rapid pace of game-changing drug development.
Following a May drug trial report, the chief legal officer, Ty Howton, and chief commercial officer, Nancy Wysenski, stepped down from their posts. This, the company says, was unrelated to an SEC inquiry as to whether insider activity around the price-spike was within trading guidelines. The company is presently seeking to fill the chief commercial officer role.
Cystic Fibrosis Therapy Prospects and Other Projects
Earlier in May, Vertex reported that very positive data was gleaned from its test of a possible therapy for cystic fibrosis. The research team reported results in which 76% of all patients tested had significantly better results than placebo. Thus, the release time for the drug might be ahead of the initial second half 2014 arrival schedule, as the drug will be entering phase II later this year. Though this drug’s penetration into the market of those with cystic fibrosis may not be enormous, nevertheless a mere 15% penetration would yield a $1.8 billion return in 2016. There was a slight setback later in May, as stated earlier, as management reported that the positive reports—though still promising—were slightly inflated. This, however, should not affect the success of the drug in future trials.
Revenues for Vertex are expected to be around $1.97 billion for 2012, driven primarily by $1.5 billion in sales of INCIVEK, which is used to treat hepatitis C. That said, sales for INCIVEK are slowing, making it more important that Vertex develop its Kalycedo cystic fibrosis treatment to account for the deficit. Kalycedo sales for the first quarter of 2012 reached $18.4 million. Indeed, much of the research and development costs for Vertex—which total about $800 million in 2012 and 2013—will likely focus on cystic fibrosis and new regimens for hepatitis C. Additionally, potential drugs are being developed for rheumatoid arthritis and epilepsy, though these drugs are in earlier concept stages.
Thus, it is vital that next-generation regimens are developed for hepatitis C treatment and for cystic fibrosis treatment. The landscape for hepatitis C therapy is becoming competitive as Merck (NYSE: MRK), Gilead Sciences (NASDAQ: GILD), and Bristol-Myers Squibb (NYSE: BMY), among others, develop alternative treatments. In 2011, Merck released Victrelis, a drug which improves the cure rate for hepatitis C. Bristol Myers Squibb and Gilead are contemplating a joint testing venture for phase III medications for the disease. Thus, Vertex will be receiving pressure to push medicines through with similar efficacy and promise as these.
Theirs is a large amount of risk and turbulence in the world of pharmaceuticals owing to the gamble that is drug development. Year-over-year, Vertex has reported an earnings per share increase of over 100%. Its revenue this year, reported earlier, will be a huge jump from 2010 revenue of around $200 million. Respectably, presently maintains a 26% debt-to-capital ratio. Vertex thus has a relatively low debt structure.
In all, biotechnology has grown quicker over the past year than the S&P 1500 benchmark and the health care industry broadly. Vertex is presently extracting a net profit margin of 17% from its sales in 2012. I think that Vertex makes an attractive, albeit risky, buy if cystic fibrosis and hepatitis C medications follow through on hoped-for developments. Of course, if either of these fall through, then the company will have to erect an alternative, long-term strategy.
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