Racking up a five-bagger investment -- when one of your holdings grows by 5x -- is quite the accomplishment, and finding potential five-baggers is a great way to set your portfolio up for success.
On that note, powerful pharmaceutical businesses like Johnson & Johnson (JNJ 1.18%) and Vertex Pharmaceuticals (VRTX 2.34%) are stable enough and profitable enough to 5x, and they've both done it before. But which of these competitors has the hustle to become a five-bagger faster? Let's do some quick math to see how realistic it is for each company, then later we'll compare the results.
Slow and steady might win the race for J&J
Johnson & Johnson's market capitalization is around $461 billion, making it one of the largest businesses in the world. To grow five times its current market cap, it would need to reach a market cap of more than $2.3 trillion.
Thanks to its galaxy of consumer health goods and medicines sold globally, it had total revenue of $93.7 billion in 2021. You're probably familiar with its products like Band-Aid and Tylenol, but it also makes medical technologies and vaccines, not to mention a plethora of other medicines. It has at least 107 drugs in development, and a normal year sees it commercializing several medicines while submitting requests to regulators for the approval of many more.
NYSE: JNJ
Key Data Points
In 2016, its sales were $71.8 billion in total, so the compound annual growth rate (CAGR) of its revenue between 2016 and 2021 was around 5.5%. Given that J&J is so large, it will be hard for the company to accelerate growth by a lot, and it will take billions in additional revenue to make the top line budge.
But it plans to spin off its slowly expanding consumer health segment altogether over the next year and a half or so, leaving J&J with its somewhat faster-paced pharmaceutical and medical devices segments, which brought in $77 billion in 2021. We'll use that figure as the starting point for the calculation.
Management expects "sustained above-market growth" for the pharma segment. Assuming a 12% growth rate or more, given the long-term rate of return for the S&P 500 is around 10%, and keeping the stock's price-to-sales (P/S) multiple of around 5 constant, J&J would need around 16 years to grow its sales fivefold its current pharma sales, post spinoff. This, however, is a conservative estimate and it's possible that the company's valuation multiples could re-rate higher as a result of the spinoff, as could its growth rate, and so reducing the amount of time taken to grow to 5x levels.
Vertex is approaching new markets
Vertex Pharmaceuticals would need to reach a market cap of around $400 billion to grow 5x. Last year, the company made $7.5 billion in revenue from sales of its cystic fibrosis (CF) medicines. Five years prior, in 2016, it only brought in $1.7 billion, meaning that its sales had a CAGR of around 34.5%.
To accomplish that rapid clip, it commercialized several new drugs and combinations of its drugs that treat CF, a rare pulmonary disorder affecting an estimated 70,000 people globally. It plans to keep pursuing drug development for CF while also entering into new areas like pain relief, rare blood disorders, and kidney disease.
NASDAQ: VRTX
Key Data Points
Its pipeline isn't as large as J&J's, but it's still so chock-full of programs that it should have no problem bringing multiple new medicines to the market in the coming years to continue driving further progress with the top line. Plus, the fact that it's a significantly smaller business than J&J means that it won't have as difficult a time adding proportionally to its revenue.
Right now, its P/S ratio of around 9.4 means that even if its annual revenue growth slowed considerably to reach a moderate pace of 20% per annum -- perhaps as a result of later-than-expected commercialization of new medicines or major setbacks in its clinical programs -- the stock would take around 9.6 years to 5x. If we assume that it can maintain the same pace it had over the last five years, it will only take 5.9 years.
Therefore, it's almost certain that an investment in Vertex Pharmaceuticals will be 5x sooner than one in Johnson & Johnson, even if we assume that Vertex's growth rate will fall sharply and that J&J's will accelerate to more than double its current pace.
