Berkshire Hathaway (BRK.A 0.72%) (BRK.B 0.51%) CEO Warren Buffett loves a good metaphor. One of his most potent pieces of sage advice centers around identifying companies with a wide and long-lasting moat that can protect a terrific economic castle with an honest lord in charge.
Buffett's adept use of Feudal European society to describe competitive positioning, the long-term sustainability of a company's profits, and managerial quality is profound. So much so that the term "economic moat" is seared into the DNA of dyed-in-the-wool value investors.
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Even so, Berkshire Hathaway's portfolio isn't the only place to unearth top-shelf companies with rock-solid profits and gold-star management teams. The Oracle of Omaha's deep aversion to risk has caused him, along with his stock-picking lieutenants Todd Combs and Ted Weschler, to overlook several innovation-oriented companies that have steadily built a sizable competitive moat and are headed up by elite management teams.
Innovation-oriented biopharmaceutical stocks are a prime example. Biopharma stocks, on balance, have rarely found a long-term home in Berkshire Hathaway's portfolio due to the fiercely competitive nature of the field and their unique vulnerability to patent challenges and expirations.
Johnson & Johnson (JNJ -0.83%), in fact, is one of the few drugmakers the diversified holding company has held on a consistent basis in recent times. And J&J probably only made the cut due to its AAA-rated balance sheet and 61-year streak of raising its dividend. The rare disease juggernaut discussed below, however, ticks all the boxes of a classic Warren Buffett stock.
Limited competition, deep value, and stellar management
Vertex Pharmaceuticals (VRTX -0.49%) has built a formidable competitive moat through its dominance in the hard-to-treat lung disease cystic fibrosis (CF). By virtue of its four Food and Drug Administration (FDA) approved medications (Kalydeco, Orkambi, Symdeko, and Trikafta), Vertex has the ability to cover approximately 90% of the global CF population. CF is a rare, inherited disorder that afflicts an estimated 83,000 people worldwide.
Vertex enjoys a virtual monopoly in this setting, thanks to the inability of rival drugmakers like AbbVie, Novartis, and Gilead Sciences, among others, to develop truly effective treatments for the devastating lung disease. AbbVie, in fact, recently scuttled yet another mid-stage CF asset. As a result of this lack of competition in its core market, Vertex's annual revenue has been growing at a blistering pace since the 2012 launch of its pioneering CF offering Kalydeco.
VRTX Revenue (Annual) data by YCharts
Vertex's earnings power isn't protected just by the bad luck of its would-be competitors. The biotech also sports a deep and robust patent portfolio that should extend the commercial shelf life of newer drugs like Trikafta until 2037. That's key, given the overall importance of Trikafta to Vertex's growth potential. In the most recent quarter, for instance, the drug pulled in an astounding $2.1 billion in sales, accounting for an outsized 88% of total CF sales during the three-month period.
Vertex's supercharged CF franchise has also enabled the biotech to build an enormous cash position. The company exited the first quarter of 2023 with a whopping $11.5 billion in cash and cash equivalents. What's important to understand is that Vertex has been using its sizable CF profits and healthy balance sheet to take risks on cutting-edge modalities such as genomic and cellular therapies.
This high-risk, high-reward effort recently culminated in a regulatory submission to the FDA for the CRISPR Therapeutics (CRSP 2.34%) partnered gene-edited product, exa-cel. Last month, Vertex and CRISPR completed exa-cel's regulatory filings to the FDA as a potential treatment for the rare blood disorders sickle cell disease and transfusion-dependent beta thalassemia. Vertex and CRISPR have a revenue-sharing agreement in place for exa-cel, but, even so, the profits from this first-of-its-kind therapy could be substantial.
All of this is made possible by Vertex's brilliant leadership, spearheaded by CEO Reshma Kewalramani, M.D., FASN. Under Kewalramani's guidance, the biotech has turned Trikafta into a mega-blockbuster product, shepherded exa-cel through a complex clinical trial process with the help of partner CRISPR, amassed a hefty cash position, and executed multiple high-value business development deals such as the recent acquisition of ViaCyte. This ViaCyte deal, for instance, could lead to the first-ever curative treatment for type 1 diabetes.
Is this Buffett-like stock a buy?
Despite its shares rising by a market-beating 20% to start 2023, Vertex's stock probably has even more room to run. Investors are likely to continue to bid up the biotech's shares due to its economically insensitive business model, value-creating pipeline activities, and rock-solid balance sheet.
Another key issue to consider is Vertex's ever-growing cash position. At some point, the biotech will have to choose what to do with all that money. Vertex could decide to expand its pipeline via another acquisition in high-value areas like cellular therapy, ratchet up its share buyback program, or perhaps accelerate the development of promising internal pipeline candidates. The key takeaway is that Vertex's strong financial position gives it enormous flexibility in terms of pursuing value-creating opportunities for shareholders.
