I've been a big fan of Vertex Pharmaceuticals (VRTX -0.06%), and the biotech stock has made me a lot of money throughout the years. Vertex continues to enjoy a virtual monopoly in treating cystic fibrosis (CF) but it's advancing multiple promising programs in its pipeline.
However, investors who watch valuation metrics closely might have noticed something concerning about Vertex: Its shares trade at a price-to-sales (P/S) ratio of over 11x. Is Vertex stock too expensive right now?
Relatively speaking
Let's acknowledge right out of the gate that a P/S multiple of more than 11x is usually viewed as sky-high. For example, the S&P 500 currently trades at only 2.72x sales. However, it's not a great approach to compare the valuations of biopharmaceutical stocks with those of other industries because the dynamics shaping their respective markets are very different.
How does Vertex's P/S ratio stack up against its biopharma peers? It still seems quite expensive. The average P/S multiple for biotech stocks in January 2024 (the latest data available) was 6.44x, according to New York University's Stern School of Business Professor Aswath Damodaran.
Granted, there are a couple of big biopharma stocks with steeper valuations than Vertex. Eli Lilly's and Novo Nordisk's shares trade at 20.6x sales and 16.2x sales, respectively. It should be noted, though, that both of these drugmakers have diabetes and weight-loss drugs that some analysts think could become all-time bestsellers.
But Vertex's P/S ratio isn't nearly as worrisome when we look at the company's past valuations. Actually, it's on the low end of the historical range.
VRTX PS Ratio data by YCharts.
Unfortunately, this comparison isn't perfect. The Vertex of 10 years ago had significantly greater growth prospects in treating CF than the company does today.
Look to the future, not the past
That leads me to an important point in the discussion of Vertex's valuation. We should look to the future and not to the past. The P/S ratio of over 11x is based on Vertex's trailing-12-month sales. What matters more is the company's expected sales going forward.
Vertex provided full-year 2024 revenue guidance of between $10.55 billion and $10.75 billion. The midpoint of this range gives the company a forward P/S multiple of a little over 10x. That still seems pricey.
However, Vertex's future beyond 2024 should be much more exciting. Sales for newly approved gene-editing therapy Casgevy should accelerate after the initial ramp-up this year. Goldman Sachs projects the rare blood disorder treatment could generate peak annual sales of $3.9 billion.
Other analysts are more conservative, though, with the consensus peak sales estimate of around $2.2 billion. Vertex will also have to split the net profits 60-40 with its partner, CRISPR Therapeutics.
The company could have two other new products on the market in 2025. It plans to file for regulatory approvals this summer for a vanzacaftor triple-drug combo targeting CF and non-opioid pain drug VX-548. Both appear to hold the potential to rake in $2 billion or more in sales.
If you've been keeping score, Vertex has a realistic chance of adding at least $6 billion in annual sales over time from new products that have either recently launched or could launch next year. These opportunities make the company's valuation much more palatable.
We're not finished, though. Vertex is also advancing experimental APOL1-mediated kidney disease (AMKD) drug inaxaplin into late-stage testing. AMKD affects more patients worldwide than CF does -- and there are no approved therapies that treat the underlying cause of the disease.
Perhaps Vertex is a bargain
There's an argument that Vertex is actually a bargain based on another widely used valuation metric. Vertex's price-to-earnings-to-growth (PEG) ratio, using five-year earnings growth projections, is 0.57. Any PEG multiple of 1 or below is considered to be attractive. Vertex's PEG ratio is lower than nearly every other big biopharma stock on the market.
It's possible that the growth forecasts for Vertex could be overly optimistic or the company's late-stage pipeline candidates could flop. I wouldn't bet on it, though. Vertex has a good track record of success when it advances programs into phase 3 testing.
I don't think this stock is too expensive at all. Vertex remains one of my favorites to buy and hold right now.
