September wasn't a great month on Wall Street. The S&P 500 dropped almost 5%, and plenty of stocks performed significantly worse. For instance, shares of biotech giant Vertex Pharmaceuticals (VRTX -2.83%) fell about 8% while cloud computing company Veeva Systems (VEEV -0.50%) saw its stock plunge nearly 14%.
But if you intend to hold the shares of companies for five years or more -- which is a smart strategy for generating above-average returns -- then a single month's results will merely amount to a blip in your portfolio's performance. And over the long haul, both Vertex and Veeva have what it takes to beat the market despite their recent poor performance.
The case for Vertex Pharmaceuticals
Boston-based Vertex Pharma boasts a strong catalog of medicines. Among them are several drugs to treat the underlying causes of cystic fibrosis (CF) -- and they are the only ones on the market to do so. Its current lineup of therapies is approved to treat up to 90% of CF patients.
So the potential for growth is there. Of the 83,000 CF patients currently in North America, Europe, and Australia, only about half are being treated, so Vertex has significant room to increase its sales. The company's best-selling medicine, Trikafta, was approved in October 2019 and generated $3.9 billion in 2020. According to some estimates, Trikafta's annual sales will reach $8.7 billion in 2026.
Vertex also has an exciting pipeline of potential treatments for type 1 diabetes, acute pain, and other conditions. The company expects to release some data from clinical trials for these programs within the next six months or so.
Perhaps Vertex's most promising candidate is CTX001, a potential treatment for sickle cell disease (SCD) and transfusion-dependent beta-thalassemia (TDT). There are few effective treatment options for either of these blood disorders. Vertex is also developing a gene therapy in partnership with Crispr Therapeutics, and it has already produced promising results in a phase 1/2 clinical trial.
For instance, 15 beta-thalassemia patients treated with CTX001 were transfusion-independent two months after the therapy with follow-ups ranging from 3 to 25 months. These patients had needed anywhere from 20 to 61 blood transfusions per year before the treatment. Phase 3 studies in both indications are in the works. If the results are positive, Vertex could request marketing authorization from regulatory authorities for CTX001 within the next couple of years.
All in all, Vertex's current drugs can still drive revenue and earnings growth, but it also has a pipeline of candidates that could help it move beyond its CF franchise. Trading at a forward price-to-earnings ratio (P/E) of 14.5 -- compared to an 11.3 average for the biotech industry -- Vertex seems a bit expensive. But paying a slight premium for a company that boasts excellent growth prospects seems more than fair. In my view, this biotech stock remains a buy.
The case for Veeva Systems
Veeva Systems provides cloud-based software solutions with a particular focus on the life sciences industry. Its suite of products is built with one goal in mind: to help companies improve operational efficiency. Its clients include many of the world's largest drugmakers. Veeva supplies them with tools for clinical trial management, which helps speed up time to market, regulatory compliance, and more.
It's not difficult to see the selling points here. The faster a drug makes it to the market, the sooner it can generate money. Also, for biopharma companies, failure to follow regulatory requirements can result in steep penalties, lawsuits, tarnished public images, and worse. Given all that, it's no surprise that Veeva Systems has been successful -- and its revenue, earnings, and share price have all grown notably.
Here are three reasons why that can continue. First, Veeva boasts a retention rate of more than 100% -- meaning it has a habit of attracting more clients than it loses. Second, the company benefits from high switching costs -- if customers jump ship, they risk losing data and spending time to train employees on a new system.
Third, Veeva Systems has multiple pathways for growth. Management still sees significant untapped markets within the life science industry, and it is expanding into cosmetics and chemicals, too. I am confident that it can replicate its previous successes in these new areas.
One issue new investors will have with Veeva Systems is its high forward P/E ratio -- about 80 as of this writing. So investors could see some volatility in the near term. When the stock market drops, high-growth stocks with steep valuations tend to fall even more sharply -- and September was an excellent example. But looking at the company's long-term potential, I think its valuation isn't a problem. That's why I intend to add shares of Veeva Systems to my portfolio.