Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) has turned in triple-digit gains so far this year after news that the firm is on the verge of having several new cystic fibrosis treatments FDA approved. That’s a big deal in the biotech world because treatments for the disease are few and far between, so Vertex is filling a much-needed gap in an underserved market. VRTX stock now boasts a price-to-earnings ratio of 209 and trades at 49 times its forecast earnings, making it a very scary buy for a value investor like myself.
At $149.38 per share, VRTX stock is expensive, but the question is whether or not the stock is too expensive. Have we already missed the boat or does the pharmaceutical company really have the growth potential that investors believe it does.
New Treatments From Vertex
VRTX has had a huge amount of success with its cystic fibrosis drugs, and promising clinical trials suggest the firm will continue to grow its treatment options in the future.
Orkambi, one of the firm’s CF drugs, has been credited with putting VRTX on the path to profitability, and rightly so as the drug is one of the only options that many cystic fibrosis patients have. However, new clinical trials show that a new drug, tezacaftor, together with Vertex’s Kalydeco could be a successful combination therapy and the duo could hit the market as early as next year.
Analysts also say that the combined therapy treatment would significantly expand Vertex’s patient population. But the real momentum behind VRTX stock has been news that a triple combo therapy of tezacaftor, Kalydeco and another corrector, which has been successful thus far in clinical trials, will allow the drugmaker to treat 90% of CF patients.
Compare that to the 50% that the firm currently addresses and you have a huge amount of growth potential in front of you.
Profitability for VRTX Stock
One of the worries for VRTX stock is that the company has yet to turn a profit. Yes, the firm has been able to grow its sales by 65% from 2015 to 2016, but the fact remains that VRTX hasn’t made any money yet.
Now, the increasing number of patients that Vertex will be able to treat with its double and triple combo therapies will add a significant amount to the firm’s bottom line. Plus, the new therapies are expected to generate reoccurring revenue, as patients will likely continue them for longer than Orkambi, which many patients stopped using when they developed respiratory issues.
As fellow InvestorPlace contributor Dana Blankenhorn pointed out, adding just 600 new patients translates into roughly $136 million in additional revenue. What VRTX is talking about doing could add more than 30,000 new patients to its roster.
At the moment, Vertex’s addressable market is 29,000 and has the potential to increase to 44,000 with the new combo treatment and label expansions. If one of VRTX’s triple combo treatments makes it to market, that figure could jump up to 68,000- roughly 90% of all cystic fibrosis patients.
The Problem with VRTX
So, when you look at those numbers, a forward P/E of 49 doesn’t look quite as intimidating. However, there are some other factors to consider which make me a little bit dubious.
For one, there’s the fact that Vertex is currently treating about half of cystic fibrosis patients without turning a profit. That’s a problem because while VRTX is coming up with ground-breaking treatments, those discoveries haven’t been translating into gains for shareholders.
A lot of the drugmaker’s success will depend on whether or not the firm can raise prices, increase margins and expand its labels for Orkambi and the Kalydeco/tezacaftor combo therapy. That’s a big question mark because it means the firm will need to gain approval in Europe, where new treatments are often resisted due to their prices. Then there’s the possibility that the FDA will turn either drug down for certain patient populations.
There’s also the ongoing political battle over the price of new drugs.
The bottom line is that VRTX’s valuation is based on a lot of what-if’s, and in the biotech space, those what-if’s are pretty unpredictable. New drugs fail all the time for a multitude of reasons, and VRTX stock would feel the burn for even the smallest missteps now that these sky-high aspirations are priced in.
Competition
Then there’s the potential competition in the CF space. Even I have to admit that VRTX is head and shoulders above its competitors when it comes to getting a triple combo therapy approved, but that doesn’t mean they’re not out there. AbbVie Inc (NYSE:ABBV) and Galapagos NV (ADR) (NASDAQ:GLPG) are working together on CF combination treatments of their own that could take away from the monumental projections for VRTX.
Granted, those drugs are still very early on in the approval process, with trials on a combo treatment expected to begin at the end of the year, but that doesn’t mean that they won’t catch up, especially if Vertex runs into some roadblocks in the approval process.
The Bottom Line
VRTX stock has a lot of potential, there’s no doubt about that. But at the moment, it’s too expensive. Investors are excited about big things to come for the biotech firm, but the uncertain nature of the biotech space makes me cautious about banking on so many what-if’s. I’d wait for the inevitable bad news pull-back before taking a position.
As of this writing, Laura Hoy did not hold a position in any of the aforementioned securities.
