Vertex Pharmaceuticals (VRTX 1.89%) has been one of the hottest growth stocks to own within the healthcare industry. The company has a dominant cystic fibrosis (CF) business, and it has been expanding into other areas as well. Last year, Vertex's shares rose by just under 41%, easily outperforming the S&P 500, which increased by a still-respectable 24%.
Can this biotech continue rallying after posting its latest earnings numbers, or has it become too expensive?
Vertex's growth rate is slowing down
On Feb. 5, Vertex reported its year-end numbers for 2023. Product revenue totaled $9.9 billion for the past year, rising by around 11% from 2022. The company continues to lean heavily on Trikafta/Kaftrio, its leading CF brand, which brought in $8.9 billion in revenue, accounting for 91% of the top line. Net income also increased by 9% $3.6 billion.
For the current year, Vertex is projecting that its product revenue will come in between $10.55 billion and $10.75 billion, implying a growth rate at the midpoint of around 8% this year. That could be a troubling sign for growth investors, who may be looking for more than just single-digit growth.
NASDAQ: VRTX
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Plenty of promising opportunities on the horizon
While the business isn't growing at a terribly fast pace, there are catalysts that could significantly improve its top line in the future. The company has been working on developing its business so it evolves beyond CF, which is crucial to ensuring it has more growth opportunities to pursue.
Inaxaplin is a drug that is in phase 2/3 trials for treating kidney disease. And VX-548 is a promising non-opioid pain treatment. The company recently announced positive results from a phase 3 trial that evaluated its efficacy in treating moderate to severe acute pain. Vertex is going to submit a new drug application for the treatment around the middle of this year. Its annual sales could hit a peak of $5 billion, according to analysts.
The company also received good news earlier this year when the Food and Drug Administration approved the gene therapy treatment it has been developing with CRISPR Therapeutics, Casgevy. Regulators already approved it last year as a treatment for sickle cell disease, and now it is also approved for transfusion-dependent beta thalassemia. Vertex will share in the profits of the therapy with CRISPR (Vertex will take a 60% cut).
The commercialization of Casgevy means that Vertex could soon be getting a boost from the therapy, which has a list price of $2.2 million. But because it doesn't have a huge market, its sales might not hit $1 billion until 2027. And it will reach a peak at over $2.2 billion in 2030, according to estimates from Bloomberg.
Does Vertex's potential justify its price tag?
Vertex has a market capitalization of $110 billion and trades at a multiple of just under 27 times its estimated future profits. That's considerably higher than the average healthcare stock, which trades at 19 times its estimated future earnings.
But when looking at the long term, Vertex has a price-to-earnings growth ratio, or PEG, of just 0.60. The lower the PEG, the better value there is for investors as it suggests there's a lot of earnings growth in the next five years for the business. The lower the PEG, the better the deal. And anything less than 1 is typically good.
Despite the expected growth, however, the consensus analyst price target for the stock is just under $395, which implies that Wall Street expects the stock's value to come down within the next year.
Should you invest in Vertex stock?
As long as you're willing to buy and hold and aren't looking for quick profits, Vertex Pharmaceuticals can make for a solid long-term investment. The company has a strong CF business, an approved gene therapy treatment in Casgevy, and its most-prized product may be its non-opioid pain medication, VX-548.
Vertex is still in its early growth stages and as the company gets bigger and more diversified, its valuation could soar much higher than where it is today. Analyst price targets may imply downside risk right now, but those targets normally look at just the next 12 months. And targets get upgraded over time.
This is a strong, growing business, and even with an elevated valuation, Vertex looks to be well worth the premium investors need to pay for it.
