Why You Should Sell Vertex

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 |  About: Vertex Pharmaceuticals Incorporated (VRTX), Includes: ABT, GILD, IDIX
by: Rx Stocks

Biotechnology companies, with new drugs, often trade at a high multiple (PE ratio). The current PE ratio for Vertex (NASDAQ:VRTX) is near 80. Sometimes the growth rate justifies it. Admittedly, initial growth of Vertex' revenue was spectacular, as judged by year over year revenue growth.

From Yahoo Finance:

View: Annual Data | Quarterly Data All numbers in thousands
Click to enlarge
Period Ending Dec 31, 2011 Dec 31, 2010 Dec 31, 2009
Total Revenue 1,410,626 143,370 101,889
Cost of Revenue 80,505 12,730 14,202
Gross Profit 1,330,121 130,640 87,687
Click to enlarge

But revenue growth for Vertex has stalled.

From Yahoo Finance:

Period Ending Sep 29, 2012 Jun 29, 2012 Mar 30, 2012 Dec 30, 2011
Total Revenue 336,006 418,305 438,737 563,340
Cost of Revenue 38,536 114,423 39,211 30,127
Gross Profit 297,470 303,882 399,526 533,213
Click to enlarge

Vertex' earnings will be released Tuesday January 29, 2012, which likely account for recent volatility. Some speculate pent up demand has been met, others that competition has intensified. Merck also sells a Hepatitis C protease inhibitor, Victrelis. Notably, Merck's drug was awarded Best Pharmaceutical Agent in October, 2012 (VICTRELIS (boceprevir) Awarded 2012 Prix Galien U.S.A. Best Pharmaceutical Agent).

There may be more competition in store, Gilead (NASDAQ:GILD) has a very effective drugs in development. The two Gilead drugs are in phase 3 trials and also beginning trials in combination (both drugs administered together). Bloomberg reporting from American Association for the Study of Liver Diseases in Boston stated

Results showed that combining Gilead's experimental drugs with a standard medicine cleared the hepatitis C virus in all 25 patients in a 12-week trial.

There are many other potential Hepatitis C drug competitors, Abbott (NYSE:ABT) and Idenix (IDIX), to name two.

Vertex has one other approved drug, Kalydeco, all the other drugs in the pipeline are only in Phase 2 development. Kalydeco "is a prescription medicine used for the treatment of cystic fibrosis (CF) in patients age 6 years and older who have a certain mutation in their CF gene called the G551D mutation".

Remarkable share price increases occurred with new drug approvals as reflected in the chart. Incivek was approved in May of 2011 and the U.S. approval of Kalydeco came in January of 2012 and European approval in July of 2012. Vertex' stock price has been volatile since.

From Yahoo Finance:

Chart forVertex Pharmaceuticals Incorporated

Bottom line, Vertex has a PE of almost 80, flat sales, and the pipeline has drugs only in Phase 2 development. Sell Vertex shares. The only caveat is a remote chance of an upside surprise when earnings are released Tuesday January 29, 2012.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.