Vertex Pharmaceuticals (VRTX 0.10%) has given more than one investor a headache over the past year. The company's shares have suffered ever since the company announced the failure of two candidates -- one in October 2020 and one this spring -- in clinical trials. They've dropped more than 30% since the first failure. Investors worry that Vertex is struggling to expand beyond its core portfolio of cystic fibrosis (CF) treatments.
Considering the time Vertex shares have spent in the doldrums, you may be getting a little impatient. In fact, you may be wondering: Will this beaten-down stock ever will recover? Before answering, here are three things to know.
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1. CF may bring in billions for a long while
As I mentioned, investors' one big concern right now is about Vertex's ability to develop drugs beyond its core program. That's understandable. But it's important to put the concern into perspective. Let's consider the revenue CF treatments generate for Vertex, its market share, and how long it's likely to maintain its position in the market.
CF treatments generate billions in revenue and profit for Vertex.
VRTX Net Income (Annual) data by YCharts
The company is the global CF treatment market leader. In fact, the only up-and-coming treatment that may threaten its latest blockbuster Trikafta is another candidate in Vertex's pipeline. The company recently launched a phase 3 trial of that candidate. And Vertex said last year that it expects to maintain market leadership until at least the late 2030s.
All of this means that Vertex isn't about to see revenue fall any time soon. So, if it takes Vertex time to reach commercialization with non-CF programs, that's OK.
2. Two pipeline candidates could be gamechangers
Vertex is making progress in several areas beyond CF. The company is studying candidates in seven other treatment areas. Two candidates in particular have caught my eye: a treatment for blood disorders and a therapy for type 1 diabetes (T1D).
Let's start with CTX001 for blood disorders. The company has reported positive trial results in both beta thalassemia and sickle cell disease. If all continues to go well, Vertex and partner CRISPR Therapeutics plan to file for regulatory approval by the end of next year. The potential product could be a gamechanger because it is a designed as a one-time curative treatment. Today, treatment options for these disorders are limited.
Farther down the road, Vertex's T1D candidate could become another key product. Treatment options for T1D pretty much boil down to administering insulin. Vertex's candidate is a stem-cell derived therapy that is meant to actually restore the body's ability to produce insulin. It did so in the first patient in a phase 1/2 trial.
Both of these potential products could be significant for Vertex -- and add billions to revenue.
3. At today's level, Vertex is a bargain
Vertex is trading at its lowest in relation to forward earnings estimates since at least the start of last year.
VRTX PE Ratio (Forward) data by YCharts
This looks like a bargain considering the strength of Vertex's CF portfolio and the company's potential products on the horizon. In the worst scenario, Vertex may continue to bring in billions of dollars in revenue from the CF program -- but take a while to bring a non-CF product to market. In the best scenario, Vertex could generate revenue from a non-CF blockbuster -- CXT001 -- as early as in 2023. This is considering a late 2022 regulatory filing and six to 10 months review time. And that's on top of CF product revenue growth.
In either case, Vertex today is looking inexpensive.
So, will Vertex bounce back?
Of course, no one can say for sure if Vertex shares will climb. But the company has the elements necessary for a rebound -- and eventual gains. I'm talking about blockbuster revenue and market leadership well into the future, and promising candidates in the pipeline. These factors are key to driving a biotech stock higher over time.
I'm not expecting Vertex's rebound to happen overnight. The clinical trial failures seriously shook investor confidence. But if Vertex announces more and more positive news from its blood disorders and T1D programs, it has a strong chance of winning that confidence back.
