Vertex Pharmaceuticals (VRTX -0.06%) is heading toward a big moment: a regulatory decision on what may become its next game-changing product. And this potential product, exa-cel for blood disorders, is outside of Vertex's specialty area of cystic fibrosis (CF). Investors previously worried about Vertex's ability to expand beyond CF, so a nod here could be big.
The stock has reflected this excitement. Vertex shares have climbed more than 20% so far this year. Now, as we head into the second half of the year, we may wonder if Vertex can keep up the pace. Should we be bearish or bullish on this billion-dollar biotech company? Let's consider both cases.
The bear case
As mentioned above, Vertex shares already have advanced quite a bit. Some of the excitement about exa-cel may be priced in. This means that until the regulatory decisions -- one in December and one in March -- the shares may not move significantly higher. The U.S. Food and Drug Administration granted Vertex priority review for sickle cell disease, speeding up the review time to Dec. 8. Regulators will decide on exa-cel for beta thalassemia on March 30 of next year.
It's also important to consider that Vertex has partnered with CRISPR Therapeutics on exa-cel. The treatment is based on CRISPR's gene editing technology. Vertex will leave 40% of the profits to CRISPR. Though Vertex takes the lion's share, the revenue from exa-cel likely won't come close to what it makes from its CF treatments. CRISPR doesn't share profits in the CF program. Last year, Vertex's blockbuster CF drug, Trikafta, brought in more than $7 billion in revenue.
All of this means that, yes, exa-cel makes a great addition to Vertex's portfolio. But the revenue contribution may not be transformational for the company -- and it may not drive enormous stock gains.
The bull case
It's true that exa-cel probably won't beat Trikafta's annual revenue. But the candidate is key for Vertex for a couple of reasons. First, it shows the biotech can indeed expand beyond CF. This is important because Vertex aims to broaden its portfolio of drugs to include various treatment areas – from type 1 diabetes (T1D) to pain management. If investors see success with exa-cel, they may become more confident about Vertex's ability to win in other areas too.
Second, though exa-cel revenue may not reach that of a big CF drug, it still could be significant. It's expected to reach blockbuster levels. And it addresses an area with limited treatment options today. This strengthens Vertex's reputation as a company that makes life-changing products.
It's important to remember some of Vertex's pipeline programs are approaching the finish line -- so a new wave of revenue growth may not be far off. Vertex aims to complete pivotal trials for its non-opioid pain candidate later this year or early next year. The company is going for a broad moderate-to-severe acute pain label that would allow the potential product to be widely used. Vertex also is testing a new CF candidate in phase 3 trials -- so growth in the company's specialty area isn't over.
Bear or bull?
Should you be bearish or bullish on Vertex? It's true that Vertex's shares today may reflect an exa-cel win. The stock is trading for 28 times trailing 12-month earnings, its highest this year. But this is considerably cheaper than it was just a few years ago.
Meanwhile, revenue has continued to climb. And new products -- across treatment areas -- could further boost growth down the road.
All of this means that, even if Vertex doesn't advance as much in the second half as it did in the first half, now still is a great time to buy shares. The company's long-term outlook is bright. And if all goes well in the later stages of clinical development, revenue could increase considerably over time. That should lead to positive share performance too. So, the bull case outweighs the bear case for this top biotech company.
