It sometimes feels as though there are as many stocks as there are stars in the sky. But even with a barrage of options, individual investors often gravitate toward specific industries, perhaps because of familiarity, personal preferences, investment goals, or other factors.
One sector I have always found particularly appealing is healthcare, and there is one corporation whose prospects over the next five years seem so secure that I'd be willing to bet the farm on its being able to deliver market-beating returns over this period.
That company is none other than biotech giant Vertex Pharmaceuticals (VRTX 1.43%). Here's why this drugmaker is my highest-conviction holding for at least the next half-decade.
Vertex's business never sleeps
There are many quality stocks in the market, some of which I'm invested in right now. E-commerce giant Amazon comes to mind. But even this juggernaut is facing headwinds as its consumers have decreased spending in the midst of a challenging economic environment, leading to lower revenue and earnings. That could continue throughout the rest of the year and perhaps a bit longer.
Intuitive Surgical is another top stock I own, but it's also dealing with near-term issues. A resurgence of COVID-19 cases in some places recently led to a slowdown in its business. Vertex Pharmaceuticals faces no such problem. The drugs it offers to treat cystic fibrosis (CF), a rare genetic disease that affects patients' lungs, must be taken regularly to manage this potentially deadly illness.
While one could say the same about many biotech companies, Vertex has an advantage very few of its peers do: For CF patients, it's the only game in town. Vertex markets the only medicines that target the underlying causes of CF. So the company's results won't be substantially affected even in recessions, so long as there are CF patients to treat. In 2022, the company's revenue of $8.93 billion jumped by 18% year over year.
Vertex's net income soared by 42% year over year to $3.3 billion. Meanwhile, there are more than 20,000 CF patients, out of 88,000 in key markets who are eligible for the company's current medicines and have yet to start treatment. Vertex is working on a treatment to address the remaining 5,000 who aren't eligible for any of its current medicines.
That's a total of more than 25,000, or more than 28% of its total patient population. Considering Vertex's first CF drug got approved in 2012, the remaining market still gives it considerable room to grow over the next five years, and the company's financial results will be largely unaffected by any economic or market downturn.
New products will keep rolling in
Vertex Pharmaceuticals wouldn't be such an attractive biotech stock if it wasn't innovating. The company's pipeline makes it even more of a solid stock to buy. Within its CF business, Vertex is developing a potential, once-daily option that could confer greater clinical benefits to patients. Its current crown jewel, Trikafta, is typically taken in the morning and evening.
But Vertex is also seeking to diversify its lineup. Consider exa-cel, a potential therapy for sickle cell disease (SCD) and transfusion-dependent beta-thalassemia (TDT) -- two rare genetic blood-related disorders. Vertex and its partner, CRISPR Therapeutics, have issued regulatory applications in Europe already and are in the process of doing the same in the United States.
Few competitors have earned approval for TDT and SCD therapies, and this market could be worth tens of billions of dollars. Vertex's VX-548 is a potential pain medication undergoing a phase 3 study. Here, the biotech hopes to address the fact that painkillers typically come with severe side effects -- think opioids. The company's VX-880 targets type 1 diabetes and could help patients produce their own insulin.
Vertex expects to launch five products in the next five years, each with a sizable market opportunity So revenue and earnings growth shouldn't slow down at all for the biotech, quite the contrary.
Don't mind the valuation
With near- and mid-term catalysts on the way and massive earnings potential, Vertex Pharmaceuticals' financial results should be excellent throughout the next five years, driving its stock price higher. But what about the valuation? If the company's shares are too expensive, the stock's upside could be limited. It may look that way: Vertex's forward price-to-earnings ratio of 20.4 is higher than the biotech industry's average multiple of 15.3.
Still, companies with excellent prospects often command premiums on the market; it's not a deal-breaker, not by a long shot. In fact, given Vertex's potential over the next few years, I believe its current price is more than fair. So even at current levels, investors would do well to buy shares of this company and hold them for a while. Vertex Pharmaceuticals has outperformed the market in the past decade; there's no reason it can't pull that off again.
