Is Vertex One Of The Cleanest Growth Stories In Biotech?

Summary

• Vertex Pharmaceuticals showed a 40% revenue increase from a year ago.
• A larger patient base boosted profits on the company's three approved CF medications.
• VRTX share prices have doubled in the last two years.

Vertex Pharmaceuticals (VRTX)is making headlines for all the right reasons. The Boston-based company reported Q4 FY2018 earnings on February 5, and the results were a blockbuster for the company.

Start at the beginning: Vertex is a mid-size drug developer, working on treatments for cystic fibrosis. There is no cure for CF, and the disease is progressive. Treatments until now have focused on ameliorating symptoms; Vertex’ new drugs have taken a different approach and targeted the underlying cause of the disease.

The three medications Vertex has on the market – Symdeko, Kalydeco, and Orkambi – work by modifying the incorrect protein expression in the lungs resulting from the underlying genetic mutation. This novel approach has let Vertex carve out an exclusive niche in the biotech industry.

So, what else went right for Vertex in 2018?

Widening the Patient Base…

This past year, Vertex saw approval of Symdeko in the US as well as the first full year of sales since Kalydeco’s approval. This significantly increased the number of cystic fibrosis patients receiving the company’s approved medications. 2018 saw, according to the company’s Q4 report, “…the rapid uptake of SYMDEKO in the U.S. and the full year impact of KALYDECO label expansions.”

More important than just the increase in the patient base, is the potential changing demographic of the patient base. At the end of 2018 and the beginning of 2019, both Kalydeco and Orkambi were approved for use in children as young as 2 years. Earlier intervention in the disease promises greater benefits from the treatment and a longer, healthier life for patients, while also increasing the potential lifetime use of Vertex products.

…Led to Increased Revenues…

Vertex’ fourth quarter numbers reflected the wider patient base and distribution of the company’s CF treatments. Product revenues for Q4 reached $868 million, and the company’s outlook going forward is even better: financial guidance for FY2019 suggests product revenues between $3.45 and $3.55 billion.

For the full year 2018, Vertex reported company revenues of $3.04 billion, a 40% increase from 2017’s $2.17 billion. Q4 revenues were $870.11 million, compared to the year-ago quarter’s $651.63 million, a quarterly gain of 33%. Quarterly EPS was $1.30, far surpassing the forecast $1.05, and more than double last year’s Q4 EPS of $0.61. Companies don’t often report gains like this.

…And a Higher Share Price

Increased profits, of course, let in turn to higher share prices. VRTX is up 10% year-to-date, outperforming the 8% gain of the S&P 500. The stock currently trades for $181, and the average price target, $210, gives an upside potential of 16%. VRTX shares hold a ‘Strong Buy’ on the analyst consensus.

Looking at the broader picture, VRTX shares have doubled in value since December 2016.

The Analysts are Excited

The market analysts started reviewing Vertex stock immediately after release of the Q4 earnings report. Do Kim, of BMO Capital, looked at the revenue numbers and saw plenty of room for further growth: “We increase long-term CF revenue projections, following another solid 4Q18 beat on revenues and EPS. We believe 2019 CF revenue guidance of $3.45-3.55bn (consensus $3.51bn) will prove conservative, as it only accounts for existing reimbursement agreements, with any new agreements representing upside.”

Kim’s optimistic outlook is reflected in his price target. He sees Vertex hitting $234 per share, suggesting a 29% upside to the stock.

J.P. Morgan analyst Cory Kasimov also took an upbeat view of Vertex. Noting the all-around good news in the company’s earnings conference call, Kasimov continued, “… with a prevailing dominance in the CF space, a reliably growing top line, and a pipeline which is coming steadily into focus, we consider VRTX to be one of the cleanest growth stories in biotech.”

He gave VRTX a 15% upside, with a $209 price target and a ‘Buy’ rating, all clear signs of his optimism on this company.

In the dry writing style of Wall Street stock analysis, to say, “this is one of the cleanest growth stories in biotech,” is equivalent to jumping up and down and waving a megaphone.

A Final Word from the CEO

Dr. Jeffrey Leiden, CEO of Vertex, summed up the quarterly report, and his company’s successful year. His comments apply as well to a review of VRTX stock: “Through our continued progress in treating CF and other serious diseases, we believe Vertex will continue to create revenue and earnings growth in 2019 and beyond.”

Author: Michael Marcus

Analyst’s Disclosure: I/we 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. I have no business relationship with any company whose stock is mentioned in this article.