The share price of Vertex Pharmaceuticals has dropped quite a lot lately, is it time to buy?
Opdateret: 3. maj
Vertex Pharmaceuticals is the leader when it comes developing drugs for Cystic Fibrosis. Lately, the share price has dropped, and you might wonder if it is time to add it to your portfolio. In this analysis I will investigate Vertex Pharmaceuticals as an investment.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since I have attended the workshop with Phil Town, I have decided to change the layout of my analyses a bit. I will do some more calculations and also briefly go through why the company has meaning to me. If you want to read more about how I evaluate a company, please go to "MY STRATEGY" on my website.
Usually, I do not write blog post about any of the companies that features in my newsletter. The reason is that there should be some benefits for the people that sign up for my newsletter that get some exclusive content that I don't share elsewhere. At the same time, I do not do calculations in my newsletters, as these should benefit my copiers. Nevertheless, it seems like there is a lot of interest in my opinion on Vertex Pharmaceuticals, which is why I have decided to make an exception and let a company from my newsletter feature in my blog. I don't expect to do this again, so make sure to sign up for my newsletter (You can do so in the bottom of this page), if you want exclusive content on some companies. And if you don't want to spend the time on calculating the buy prices yourself, you can look into copying me by copytrading.
Vertex Pharmaceuticals is an American biopharmaceutical company that was founded in 1989. Now the company has four approved medicines that treat the underlying cause of Cystic Fibrosis (CF). These drugs are TRIKAFTA, SYMDEKO, ORKAMBI and KALYDECO. As with all other pharmaceutical companies it is not difficult to determine a moat for Vertex Pharmaceuticals. All pharmaceutical companies, including Vertex Pharmaceuticals, have a secret moat due to their patents. Meaning that once you invest in pharmaceuticals you need to be up to date with their drugs, and their patents. None of the drugs have a patent expiry before 2027 in the United States, while the earliest patent expiry in the European Union is in 2025. Vertex Pharmaceuticals is a Cystic Fibrosis leader that currently doesn't have any real competition, which is obviously a very nice thing if you are considering investing in a company.
Their CEO is Reshma Kewalramani. She first joined Vertex Pharmaceuticals in 2017, and prior to becoming the CEO in 2020, she held positions as Chief Medical Officer and Executive Vice President of Global Medicines Development and Medical Affairs. Before joining Vertex Pharmaceuticals, she spent more than 12 years at Amgen, where she held various positions. She has a medical degree with honors from the Boston University School of Medicine and has completed the General Management Program at Harvard Business School. It is difficult to determine if Reshma Kewalramani is a good CEO, as she has only held the position for a limited amount of time and has no prior experience as a CEO from elsewhere. Nevertheless, it is interesting that she doesn't have much experience from the business side of running a pharmaceutical company and still got appointed as CEO. It isn't a coincident though, as Vertex Pharmaceuticals only considered scientists for the role, as they want to develop medicines for other diseases and needed one with a strong scientifical background to lead them in that direction, and Reshma Kewalramani certainly fits that bill. One positive, if you are considering investing in Vertex Pharmaceuticals, is that she has pledged to use the same price strategy as her predecessor, which resulted in Vertex Pharmaceuticals succeeded in charging countries more than they said they would pay. While Reshma Kewalramani is still new to the job, it wouldn't put me off investing in Vertex Pharmaceuticals, as she has a vast experience in the industry and the scientific background that is needed.
I have determined that Vertex Pharmaceuticals has a strong secret moat. And while it is too early to determine if the current management is good, I do feel like the CEO has an interesting profile to drive the company forward. Now let us investigate the big five numbers to see, if Vertex Pharmaceuticals does live up to our requirements for a strong moat. In case you want an explanation about what the big five numbers are, you can have a look at "MY STRATEGY" on the website.
The first number I investigate is the return on investment capital, also known as ROIC. WI would like to see 10 years of history and we want the numbers to be above 10 % in all the benchmarks. I wouldn't put too much attention to the two oldest benchmarks, as their first drug KALYDECO was approved in 2012, and their second drug ORKAMBI in 2016. Hence, it is much more interesting to look from the 5-year benchmark and forward, and Vertex Pharmaceuticals has certainly delivered a fantastic ROIC in those benchmarks.
The next numbers I will investigate are the Sales Growth Rates. Ideally the numbers should be above 10% in each benchmark and increasing. Vertex Pharmaceuticals show fantastic numbers across the board. A company with a sales growth rate above 20 % in all benchmarks is always an interesting company.
The next numbers are the EPS Growth Rates. As with all other growth rates we want the numbers to be above 10 % in all benchmarks. These numbers are nothing less than fantastic. They continue to grow at very high numbers in each benchmark. Nothing really to say, the numbers speak for themselves.
The Equity Growth Rate is the most important of the four growth rates. Once again Vertex Pharmaceuticals delivers on the numbers. All benchmarks are well above the 10 % requirement, and you certainly don't see a a company with such an equity growth rate often.
Finally, I investigate the Cash Growth Rates. Once again Vertex Pharmaceuticals delivers! There is a clear pattern and that is that they deliver, also when we look at the cash growth rate. Nothing really to analyze on when the numbers are like these.
To sum up the five numbers. The most important number will always be the ROIC, and if we discard the oldest benchmarks where they had none or only one drug approved, Vertex Pharmaceuticals delivers a fantastic ROIC. However, it isn't as fantastic as all the growth rates. In all growth rates in all benchmarks, Vertex Pharmaceuticals delivers fantastic numbers, they are not below 25 %, not even once. Obviously, the historical numbers make Vertex Pharmaceuticals a very intriguing company. Nevertheless, there are more to a company than historical numbers, which is what we will investigate in the rest of the analysis.
Another important thing to investigate is debt, and we want to see if a business has a reasonable debt that can be paid off within 3 years. We do so by dividing the total long-term debt by current cash flow. Doing the calculation on Vertex Pharmaceuticals, I can see that Vertex Pharmaceuticals has no debt! It is obviously a fantastic thing, and yet another reason that Vertex Pharmaceuticals is an intriguing investing opportunity.
Based on my findings so far, Vertex Pharmaceuticals looks very intriguing. However, all investments come with a risk, and so does Vertex Pharmaceuticals. One risk that always comes with pharma companies is drug pricing. Lately, we just had some news regarding the Reduced Costs and Continued Cures Act, which would allow price negotiation by Medicare. It is too early to say if it will get approved in Congress and how it will affect pharmaceutical companies moving forward. However, drug pricing is not a new discussion and so far, the strong pharmaceutical lobby has prevented it to be something that would affect the companies. Nevertheless, as with all pharmaceutical companies, it is a risk for Vertex Pharmaceuticals as well, especially now as we see a very heated debate regarding drug pricing, and Vertex Pharmaceuticals is known for their relative high drug pricing. Another risk that Vertex Pharmaceuticals is limited to drugs for Cystic Fibrosis. There are 83.000 people suffering from CF in the United States, Europe, and Australia, which means there is a limited number of patients. And right now, Vertex Pharmaceuticals do not have any competition but other companies such as Abbvie, is currently doing Phase 2 trials on a CF drug, and while it will still take years before the drug will be marketed if successful, competition might force Vertex Pharmaceuticals to lower their prices in the future.
It is difficult for Vertex Pharmaceuticals to deal with the risk of drug pricing, it is a risk you must deal with, if you are investing in the pharma sector. However, they can deal with the other risk. Vertex Pharmaceuticals believes that 90 % of the 83.000 people suffering from CF in the United States, Europe and Australia can benefit from their treatment. It means that it is estimated that there are still 30.000 of these patients that are not treated with any of their drugs, which means there are still plenty of potential to grow their CF business. Another way to deal with their concentrated drug portfolio is their pipeline. Right now, they are trying to develop drugs for people suffering from various diseases, and some of the diseases they are trying to develop drugs for are sickle cell disease, type 1 diabetes, and treatment for acute pain. These are markets that are much greater than the CF market. It is estimated that there are 150.000 patients in the United States and Europe alone that suffers from sickle cell disease. Type 1 diabetes is a much larger disease, as 2,6 million people suffer from it in in the United States and Europe. And the acute pain therapies are a $4 billion market. However, it is important to mention that while many of the drugs in their pipeline have shown promising results, all of them are in either phase 1 or phase it. It means it will take years to develop them, and it is far from certain that they will be successful.
All right, we have gone through the numbers, potential and risk regarding Vertex Pharmaceuticals, and now it is time for us to calculate a price for Vertex Pharmaceuticals. In order to calculate price, we will need the numbers that I have explained in the "MY STRATEGY" section of the website, as I do not want to go through the whole calculation here. I chose to use an EPS as it is now at 7,66 (lower than 2020 and 2018 but higher than 2019). I chose an Estimated future EPS growth rate of 10 (which I believe to be achievable), Estimated future PE 20 (which the double of the growth rate, as the historically PE for Vertex Pharmaceuticals has been higher) and we already have the minimum acceptable return rate on 15 %. Doing the calculations by using the formula I described in "MY STRATEGY" we come up with the sticker price (some call it fair value or intrinsic value) of $98,22, and we want to have a margin of safety on 50 % so we will divide it by 2, meaning that we want to buy Vertex Pharmaceuticals at price of $49,11 (or lower obviously), if we use the Margin of Safety price.
Our second way to calculate a buy price is the TEN CAP price, which is also explained at "MY STRATEGY". To do so, we need some numbers from their financial statements, keep in mind that all numbers are in millions. The Operating Cash Flow last year was 3.253,51. The Capital Expenditures was 259,8. I tried to look through their annual report to see, how much of the capital expenditures were used on maintenance. I couldn't find it though, so as a rule of thumb, you expect 70 % of the capital expenditures to be used on maintenance, meaning we will use 181,85 in our further calculations. The Tax Provision was 405,15. We have 259,43 outstanding shares. Hence, the calculation will be like this: (3.253,51 - 181,85 + 405,15) / 259,43 x 10 = $134 in TEN CAP price.
The last calculation is the PAYBACK TIME. I also described in "MY STRATEGY". With the Free Cash Flow Per Share at 8,60 and a growth rate of 10 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $108,18.
I believe that Vertex Pharmaceuticals is a very interesting company. The historical numbers are fantastic, and they have a monopoly in treating Cystic Fibrosis, which they will have for years to come. If they succeed in developing drugs for other diseases, Vertex Pharmaceuticals could be a very interesting investment opportunity. There are some slight concerns regarding drug pricing, but it is something you will need to stomach, if you are investing in any pharmaceutical company. Management is unknown, which is a slight concern, but I also find it interesting that they choose to go another route than other pharmaceutical companies. If Vertex Pharmaceuticals drop to my TEN CAP price at $134, I will open a position.
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