Vertex Pharmaceuticals (VRTX 0.20%) stock has been trading sideways for the past year despite a string of positive developments most drugmakers can only dream of. Recently, the company submitted an application for one of two new drug candidates that smashed through goals set in clinical trials.
If approved, Vertex's next-generation cystic fibrosis treatment could boost the company's addressable patient population -- and its bottom line. A bit further down the road, a partnership with CRISPR Therapeutics (CRSP -1.98%) could increase Vertex's reach even further.
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Are Vertex shares worth a valuation that's extremely optimistic right now? Let's look a little closer to find out.
Reasons to buy
Roughly half of all people with cystic fibrosis (CF) are currently eligible for treatment with one of three drugs from Vertex. This is why sales of Kalydeco, Orkambi, and Symdeko are expected to reach a combined $3.5 billion in 2019, and this figure could double in a few short years.
At the moment, Vertex's treatments are taken by around 18,000 CF patients out of a combined 75,000 in the U.S., EU, and Australia. Recently, the company sent the Food and Drug Administration a New Drug Application for a triple combination that could eventually treat around 90% of CF patients.
The still-unnamed triplet combination contains elexacaftor, the candidate formerly known as VX-445, plus the active ingredients in Symdeko. The only new component, elexacaftor, was one of two that performed so well in phase 2 trials that the company advanced both into phase 3 testing.
Vertex proudly reported that VX-445 and VX-659 succeeded in phase 3, and it still isn't entirely clear which performs best. It's rare for two different drug candidates that look like winners in a petri dish to perform equally well in animal models, and you almost never see two get through a human proof-of-concept trial without a clear winner. Simultaneously selecting two molecules in the discovery stage that make it all the way through pivotal human trials with flying colors never happens.
While there was probably some luck involved, Vertex Pharmaceuticals owes its impressive track record to an excellent discovery team and its uncanny ability to model new drug candidates' potential activity in a digital-simulation setting before plowing time and money into animal models.
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Reasons to be nervous
Vertex is far ahead of any potential competition in the CF space, but this lead won't last forever. In an attempt to stay ahead of the curve, the company recently doubled down on a risky partnership with gene-editing pioneer CRISPR Therapeutics, and it acquired a privately held gene-editing developer Exonics for $245 million.
Vertex handed CRISPR Therapeutics $175 million up front and payments to the gene-editing start-up could rise to $1 billion if partnered candidates pass predetermined milestones. The partners will try to develop a treatment that edits the dystrophin gene in live muscle cells to help patients with Duchenne muscular dystrophy and myotonic dystrophy type 1 produce muscle-protecting dystrophin that works.
The CRISPR Therapeutics deal is ambitious, but that money could slide down the drain thanks to a potential new gene therapy to treat muscular dystrophy that's miles ahead of Vertex on the development timeline. In other words, there's a solid chance that Vertex will spend a heap of money to develop gene-editing candidates that it can't sell.
A more pressing concern for investors thinking about buying Vertex is its valuation. Most commercial-stage biotechs trade at mid-single-digit multiples of trailing revenue, but this one's been trading at a nosebleed-inducing 13.8 times trailing revenue. Approval for the elexacaftor-containing triplet seems likely in the first half of 2020, but investors nervous about a limited CF population are worried that the drug's growth will level off in a few years.
Image source: Getty Images.
A buy now?
By the numbers, Vertex looks awfully risky because of its dependence on expensive drugs aimed at a very limited patient population, but that thinking doesn't take into account the company's hyper-efficient track record.
Developing CF drugs was considered impossible before Vertex did it, and zero attempts by competitors have succeeded. A lot can happen in the coming decades, but I wouldn't be surprised if Vertex's triplet combination doesn't experience significant competition until the company loses market exclusivity.
Vertex's apparent ability to assess how new drug candidates will work in humans before beginning time-consuming trials is exactly what any biotech needs to keep developing new products that can replace dwindling revenue from aging ones. We can't possibly predict when competition might enter the CF space, but the odds are pretty good that Vertex will already have another viable revenue stream when it happens. That makes this a stock to buy now and hold on to for the long haul.
