While drug maker's Hepatitis C (HCV) portfolios (and the potential acquisitions of them) are the talk of the town these days, Vertex Pharmaceuticals' (VRTX) stock is currently trading near 52-week lows.
VRTX 52-Week Chart
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The company's shares continue to trade down despite the fact that it has a recently-approved FDA HCV product, Incivek, on the market that it co-developed with Johnson & Johnson (JNJ). Incivek's sales are steadily increasing. Greater marketing, increased awareness and improved coverage, among other things, should only help grow the company's bottom line and ultimately increase shareholder value.
Apart from the company's two marketable products (the other one being Lexiva, used for the treatment of HIV infection, which Vertex co-discovered with and is being marketed by GlaxoSmitKline (GSK)), it also has a relatively diverse and promising pipeline with product candidates in various stages of development:
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It has been some time since I made the not-so-bold prediction that the FDA would approve Incikek/Telaprevir (click here to view the article), and I must admit that I was less than impressed with the stock's behavior since the piece was published. In hindsight, it was a wise move to sell the vast majority of my VRTX holdings shortly after Incivek's approval, as there have been rampant shorting, analyst downgrades and downward price target revisions to go along with various critiques of management's decision-making and execution.
I am now trying to look at Vertex with a new set of eyes, in light of Gilead's recent purchase of Pharmasset (VRUS) and the stock's current bargain-basement pricing.
Many names are being thrown around as the next potential HCV portfolio takeover, such as Achillion Pharmaceuticals (ACHN), which is rich with HCV product candidates and currently trades around $6.00 a share with a market cap of about $416M. The question becomes: Should Vertex be thrown into the takeover conversation?
Lets look at some of Vertex's key data:
|Market Cap (intraday)||5.79B|
|Enterprise Value (Nov 22, 2011)||5.59B|
|Trailing P/E (ttm, intraday):||N/A|
|Forward P/E (fye Dec 31, 2012)||5.95|
|PEG Ratio (5 yr expected)||-0.76|
|Enterprise Value/Revenue (ttm)||6.12|
|Enterprise Value/EBITDA (ttm)||-40.32|
|Profit Margin (ttm):||-33.90%|
|Operating Margin (ttm):||-18.85%|
|Return on Assets (ttm):||-5.40%|
|Return on Equity (ttm):||-47.41%|
|Revenue Per Share (ttm):||4.49|
|Qtrly Revenue Growth (yoy):||2,670.30%|
|Gross Profit (ttm):||130.64M|
|Net Income Avl to Common (ttm):||-309.45M|
|Diluted EPS (ttm):||-1.52|
|Total Cash (mrq):||658.68M|
|Total Cash Per Share (mrq):||3.16|
|Total Debt (mrq):||498.42M|
|Total Debt/Equity (mrq):||68.20|
|Current Ratio (mrq):||2.27|
|Book Value Per Share (mrq):||2.78|
|Operating Cash Flow (ttm):||-526.03M|
|Levered Free Cash Flow (ttm):||-378.06M|
While the current analysts' consensus has Vertex becoming profitable for the first time ever in the near future and many of the above metrics are quite impressive when compared to those of Pharmasset, pre-acquisition, Vertex has partnership and licensing issues which may act as a hurdle for any potential acquirer. Then you have the fact that the company has never stated an intent to be acquired, rather it has made clear that it plans to continue on with its current business plan.
I believe the above obstacles, and any not listed (there are likely many), can be overcome if the price is right and, given the stock's 94% institutional ownership, a serious offer would likely have to come at a significant premium to today's levels.
A Vertex buyout seems unlikely to occur in the near future. But I will be watching the price action closely, looking for an opportune time to rebuild a full position. That time may come soon.
Disclosure: I am long VRTX, ACHN, GSK.