Vertex Pharmaceuticals (VRTX 0.15%) is a biotech that focuses on treating rare diseases. Its stock has vastly underperformed in the past year after a wild run-up, falling nearly 36% from its July highs.

This is the company that has developed the only pharma-based treatments for cystic fibrosis (CF), a genetic disease that causes persistent lung infections. Vertex had been very successful in tackling the condition and commercializing its drugs. So what went wrong? 

Cystic fibrosis patient using a nebulizer.

Image source: Getty Images.

What happened? 

On June 11, Vertex shares tanked by 10% in a single day after the company halted the development of VX-864, a drug under investigation for treating a liver disease called alpha-1 antitrypsin deficiency (AATD). Although VX-864 met the primary endpoint in phase 2, researchers did not believe it would translate into meaningful clinical benefit. Last October, Vertex discontinued another candidate, VX-814, for the same condition. The company has been reinvesting 26% of its sales every quarter back into research and development, so the failure was pretty disappointing.

That leaves just CTX001, a gene therapy for treating hereditary blood disorders, as its leading pipeline candidate. However, Vertex is developing the transfusion therapy jointly with CRISPR Therapeutics (CRSP -1.33%). In addition to profit-sharing agreements, Vertex already paid the latter $900 million up front to jointly develop the technology. So even after approval, it has a long way to go to break even.

Can you still count on Vertex? 

From an investment standpoint, the biggest problem with Vertex is that it is too dependent on its triple-combination cystic fibrosis therapy Trikafta, which was approved in October 2019. In clinical studies, Trikafta demonstrated a 10% to 13% benefit in improving patients' lung function, improved their quality of life and body mass index, and offered respiratory relief. However, those benefits come at a staggering cost of $311,000 per year. 

There are only about 83,000 CF patients in developed countries. Nearly half of them are already taking Vertex medications. It's safe to say that the company has hit a brick wall in terms of generating prescription volume due to its pricing.  

During the first quarter of 2021, the company's revenue increased by just 14% year over year to $1.4 billion. Meanwhile, its net income increased by 16% year over year to $781 million. Keep in mind that Vertex showed 77% revenue growth and 128% earnings growth in Q1 2020 compared to Q1 2019. 

All of this spells trouble, as Vertex stock is currently trading at 8 times revenue and 19 times earnings. Without the launch of new pipeline candidates, it can't sustain those valuation levels. I think there is more struggle to come for its shares. It's best to avoid the biotech for the time being.