In many cases, analysts are guilty of being overly optimistic about the near-term prospects of the stocks they cover. But sometimes they err in a completely opposite way.
Vertex Pharmaceuticals (VRTX 0.10%) looks like a good case in point. Wall Street thinks this stock will rise 12% over the next 12 months. Although that's not too shabby of a gain, here's why it could jump a lot more.
Behind analysts' expectations
Let's first address why some on Wall Street don't have greater expectations for Vertex. One of the biggest factors is the biotech stock's previous success. Vertex's shares skyrocketed nearly 32% last year and are up close to 15% so far in 2023. There's skepticism as to how long this strong momentum can continue.
Raymond James analysts Danielle Brill and Alex Nackenoff recently wrote to clients that one of their top concerns about Vertex is that "sales growth is beginning to plateau." Vertex's sales jumped 18% year over year in 2022, but the company projects sales growth of only 8% in 2023.
What about the potential approval of gene-editing therapy exa-cel? Vertex and its partner, CRISPR Therapeutics, have already filed for approvals of the therapy in treating sickle cell disease and transfusion-dependent beta-thalassemia in the U.S., U.K., and European Union.
It's not that analysts don't think that exa-cel will receive a thumbs-up from regulators. Instead, their primary issue is that Vertex won't receive a significant financial benefit right out of the gate.
Why I'm more bullish over the near term
I agree with the underlying reasons why Wall Street doesn't think Vertex will deliver a more impressive gain over the next 12 months. It is hard to keep sizzling momentum going. The biotech's sales growth is slowing. Vertex won't enjoy a major influx of revenue in the immediate days after a presumed approval for exa-cel.
So why am I more bullish about Vertex than most analysts are over the near term? For one thing, the company should have more good news than just the exa-cel regulatory decisions. More importantly, though, I know that investors are forward-looking.
Vertex expects to complete a late-stage study of its vanzacaftor triple-drug therapy targeting cystic fibrosis (CF) by the end of 2023. It should wrap up late-stage testing of VX-548 in treating acute pain by late this year or early 2024.
Sure, even assuming positive results from these studies, both therapies would still have a while to go before they could reach the market. However, I'm convinced that investors will look ahead to what they'll view as virtual slam-dunk approvals.
I also think they'll see both of these therapies as big future moneymakers for Vertex. The vanzacaftor triple should be the company's most profitable CF therapy yet. VX-548 has blockbuster potential as a powerful non-opioid painkiller.
A monster stock over the long term
To be fair, some Wall Street analysts are much more optimistic about Vertex. The highest 12-month price target among the 27 analysts surveyed by Refinitiv in May reflects an upside potential of nearly 38%.
I'm not predicting that the biotech stock will soar that much over the near term. However, my view is that Vertex will be a monster stock over the next decade.
In addition to the candidates already mentioned, Vertex's pipeline features a promising therapy in pivotal studies called inaxaplin. The drug targets APOL1-mediated kidney disease, an indication that affects more patients globally than CF. The company also has a program in early-stage clinical testing that holds the potential to cure type 1 diabetes.
On top of all of this, Vertex's coffers are overflowing with cash. The big biotech's cash stockpile totaled $11.5 billion as of March 31, 2023. I fully expect Vertex to put some of this money to use in business development deals and stock buybacks.
