Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Vertex's Price Pop by the Numbers: Does It Fly?

U.S. stocks finished lower on Tuesday, with the benchmark S&P 500 closing down 0.6%, while the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) lost 0.7%. The technology-heavy Nasdaq Composite Index (NASDAQINDEX: ^IXIC  ) fell 0.1%. One Nasdaq component had a banner day, however, as shares of Vertex Pharmaceuticals (NASDAQ: VRTX  ) exploded higher, hitting a new 52-week high and closing up 40.4%, as the company announced that it will seek regulatory approval for an experimental cystic fibrosis drug later this year.

Source: Wikipedia.

Vertex Phamaceuticals' annoucement follows positive results in two studies that looked at the efficacy of Vertex's experimental drug lumacaftor in combination with its currently approved therapy ivacaftor (brand name: Kalydeco), in cystic-fibrosis patients with two copies of a rare genetic mutation.

Cystic fibrosis is a rare disease to begin with, but add to that this genetic mutation, and Vertex estimates that the target market for the combination therapy is just 22,000 across North America, Europe and Australia. (While there is no single definition of a rare disease, in the U.S., the Rare Diseases Act of 2002 as "any disease or condition that affects less than 200,000 people in the United States" – a rate of approximately 1 in 1,500.)

Nevertheless, while the target market is very narrow, the price of treatment is very high. In this case, analysts are forecasting a cost of roughly $150,000 per annum. As such, Citigroup analyst Yaron Werber expects peak sales of $3.1 billion in 2015.

Now consider that the market added some $6.4 billion to Vertex's market capitalization today. If this combination therapy had been kept entirely secret until today, instead of being highly anticipated, and its approval were now a certainty, today's increase in market value would amount to "paying" roughly two times forward revenue for the new therapy – an absolute bargain! (That $6.4 billion is approximately two times Citigroup's 2015 sales estimate of $3.1 billion.)

But not so fast. Werber wrote today that the new results only increase "the likelihood for approval from 65% to 80%" but concedes "that it might be conservative." Using those figures, the increase in Vertex's market value is now equivalent to paying nearly 14 times forward revenue (or 6.4/ (3.1*0.15)), which starts to look a bit pricey, even compared with the often optimistic valuations prevalent across the biotechnology sector. Note that as of yesterday's close, Vertex itself was trading at 11.2 times the consensus revenue estimate for 2015.

On the other hand, if we assume instead that the odds of regulatory approval just went from two-thirds to certainty, the revenue multiple is above 6 -- a relative bargain.

Bottom line: If you believe that Vertex was fairly valued yesterday, then today's jump in the share price looks like it's roughly in line with prevailing valuations. But those levels could well carry some risk, particularly since they are being goosed by furious merger-and-acquisition activity in the pharmaceutical sector. In valuing Vertex in the current environment, investors may well be drawing some of their inspiration from AbbVie's (NYSE: ABBV  ) pursuit of Shire (NASDAQ: SHPG  ) , for example, as Shire has a strong franchise in rare diseases.

Leaked: This coming blockbuster will make every biotech jealous
The best biotech investors consistently reap gigantic profits by recognizing true potential earlier, and more accurately, than anyone else. There is a product in development that will revolutionize not how we treat a common chronic illness, but potentially the entire health industry. Analysts are already licking their chops at the sales potential. To outsmart Wall Street and realize multibagger returns, see The Motley Fool's new free report on the dream team responsible for this game-changing blockbuster. Click here now.

Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3006915, ~/Articles/ArticleHandler.aspx, 9/1/2015 2:16:46 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

Today's Market

updated 5 hours ago Sponsored by:
DOW 16,528.03 -114.98 -0.69%
S&P 500 1,972.18 -16.69 -0.84%
NASD 4,776.51 -51.82 -1.07%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/31/2015 4:57 PM
^DJI $16528.03 Down -114.98 -0.69%
^IXIC $4776.51 Down -51.82 -1.07%
NASDAQ Composite… CAPS Rating: No stars
ABBV $62.41 Down -1.57 -2.45%
AbbVie Inc. CAPS Rating: ****
SHPG $232.00 Down -3.96 -1.68%
Shire plc (ADR) CAPS Rating: ****
VRTX $127.52 Down -6.53 -4.87%
Vertex Pharmaceuti… CAPS Rating: ***