Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) is enjoying a phenomenal 2017, up over 110% year-to-date. This stellar performance is all the more impressive considering that the sector exchange-traded fund Market Vectors Pharmaceutical ETF (NYSEARCA:PPH) is up a comparatively pedestrian 5%. But with so much gained over a short period of time, can VRTX stock sustain this rally?
Many of the fundamentals appear supportive of a continued rally. Vertex Pharmaceuticals specializes in cystic fibrosis (CF) treatment.
According to their corporate statement, VRTX developed the very first therapies for the life-threatening genetic disease. Since its early days, Vertex has grown to become the world leader in CF treatment innovations, offering multiple patient options.
Going first to market has significant advantages, as InvestorPlace contributor Ian Bezek outlined. Without sounding cynical, CF’s complexity ensures a healthy revenue stream for the foreseeable future. According to the National Heart, Lung, and Blood Institute, no cure for CF exists. Patients must undergo a broad range of therapies to address similarly extensive symptoms. This dynamic more or less requires Vertex Pharmaceuticals to perform further research for more effective remedies.
Bezek argues that this ongoing care is a reliable revenue stream for VRTX stock “right up until patent protection expires and generics come to market … However, given that the total patient population consists of fewer than 100,000 people, it’s likely too small a target to attract many peers as long as Vertex’s drugs are effective and safe.”
Based on its dominant presence in CF, VRTX stock may appear to be a no-brainer investment. However, significant caution is warranted.
VRTX Stock Depends on a Risky Proposition
Just in case you missed Bezek’s earlier point, CF is a very small market. According to the Cystic Fibrosis Foundation, only 70,000 cases exist worldwide. More than 30,000 people in the U.S. have the disease. Against a total demographic of about 330 million, the allocation is extremely small. From a business perspective, such a tiny base challenges Vertex Pharmaceuticals.
Furthermore, treating CF isn’t just a matter of popping a few pills, or following a nutritionist’s diet plan. The disease impacts sufferers differently, and therefore, proper treatment requires individualized strategies. These variances include physical apparatuses, special dietary needs, and enzyme supplements.
The lack of a one-size-fits-all solution negatively impacts VRTX stock. The U.S. market is almost unreasonably small, and the different treatments required necessarily splits the market even further. Honestly, and this will sound cynical, Vertex has no incentive to find a cure.
Here’s what I mean: Kalydeco is Vertex’s wonder drug. According to The New York Times, CF typically kills its sufferers by the time they reach their forties. Kalydeco is completely different from other treatments in that it addresses the disease’s root cause. Naturally, this allows patients who ordinarily would have had a death sentence to live longer, healthier lives. A big-league win for VRTX stock, right? Not so fast!
Kalydeco only works for patients who have a rare form of the disease. Nominally, this comes out to 2,000 people. So from an already diminutive base, Vertex Pharmaceuticals can only deliver treatments for approximately 7%. But the worst part is that Kalydeco costs more than $300,000 a year!
It’s All-in or Nothing for Vertex Pharmaceuticals
With such a hefty price tag for its key drug, I’m not sure what you can expect from VRTX stock. I can’t imagine that health insurance companies are eager to pick up these costs. Furthermore, I think we can kiss goodbye any potential opportunities in developing economies.
While Vertex Pharmaceuticals is more than just a “CF company,” its drug pipeline is heavily levered towards this one disease. In addition, the most promising therapies — treatments in advanced clinical stages — are exclusively CF-centric. The other drug pipelines — acute spinal cord injury, pain, oncology and influenza — are comparatively afterthoughts. None of them are beyond stage two.
Without the CF market, VRTX stock risks major downside. As a consequence, Vertex Pharmaceuticals is more vulnerable to competition than investors may care to admit. Bezek notes that Galapagos NV (ADR) (NASDAQ:GLPG) is “researching their own cystic fibrosis drugs that could take a bite out of Vertex’s market.” I would note that it’ll be game over if Galapagos developed a cheaper drug than Kalydeco.
Finally, I’m not a big fan of buying pharma shares at extremely-elevated valuations, especially at this juncture. One bad clinical trial could send VRTX stock sinking. I believe the pain would be even greater considering that Vertex is levered-up on the CF market.
The bottom line for me is that Vertex Pharmaceuticals is a groundbreaking firm with a strategic liability. So far, the plan has worked to perfection this year. But pharma is a volatile industry, and VRTX stock isn’t the most historically stable investment. While I’d like to give it a shot, the risk-reward balance just isn’t favorable.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
