Vertex Pharmaceuticals: A Monopoly in the Pharma Sector.

Vertex Pharmaceuticals is a global biotechnology company focused on developing transformative treatments for serious diseases. Best known for its leadership in cystic fibrosis, Vertex has built a high-margin, patent-protected franchise that generates strong cash flows and funds its expanding pipeline. As the company broadens its focus into areas like rare blood disorders, pain, and kidney disease, it’s positioning itself for long-term growth beyond a single therapeutic area. The question is: Does this biotech innovator deserve a spot in your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these posts 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.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Vertex Pharmaceuticals. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Vertex Pharmaceuticals either. Thus, I have no personal stake in Vertex Pharmaceuticals. If you want to purchase shares (or fractional shares) of Vertex Pharmaceuticals, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $50.

The Business

Vertex Pharmaceuticals is a biotechnology company based in Boston, founded in 1989. The company is best known for developing life-changing treatments for people with cystic fibrosis, a serious genetic disease that affects the lungs and other organs. Vertex has created five medicines that help correct the underlying problem causing the disease, and these are now used by most cystic fibrosis patients in the U.S., Europe, Canada, and Australia. The company continues to expand access by gaining approval for use in younger patients and working with health systems around the world. In recent years, Vertex has expanded beyond cystic fibrosis. It introduced a groundbreaking treatment for sickle cell disease and beta thalassemia, two inherited blood disorders that can cause severe pain, anemia, and other complications. This new therapy uses gene editing technology, which allows doctors to modify a patient’s own cells to correct the genetic problem. It’s one of the first treatments of its kind and was developed in partnership with CRISPR Therapeutics. Vertex also launched a new non-opioid pain medicine in 2025 for people suffering from moderate to severe pain. This offers an alternative to traditional painkillers, without the risk of addiction. Vertex's competitive moat is a set of advantages that help it maintain leadership and protect its business. First, Vertex dominates the cystic fibrosis market. Its treatments are so advanced that there are currently no approved alternatives that work in the same way. This gives the company something close to a monopoly. Second, its medicines are protected by patents, which prevent competitors from offering similar treatments for several more years. That gives Vertex time to improve its products and bring new ones to market without losing ground. Another part of the company’s moat is its ability to keep innovating. Vertex has a strong research team and a proven track record of developing effective treatments. It also partners with leading biotech firms to stay at the forefront of new technologies like gene editing and mRNA. Finally, Vertex generates strong profits from its cystic fibrosis business, which allows it to invest heavily in research, development, and patient access programs.

Management

Reshma Kewalramani serves as the CEO of Vertex Pharmaceuticals, a role she assumed in April 2020 after joining the company in 2017. She was previously Vertex’s Chief Medical Officer and Executive Vice President of Global Medicines Development and Medical Affairs. Before joining Vertex, she spent over 12 years at Amgen, where she held leadership roles in research and development. Reshma Kewalramani is the first woman to lead a large U.S. biotech company, a milestone that reflects both her expertise and influence in the industry. Under her leadership, Vertex has expanded beyond its dominant position in cystic fibrosis treatment into new therapeutic areas such as sickle cell disease, beta thalassemia, pain management, and kidney disorders. During her tenure, the company secured the first-ever approval for a CRISPR-based gene-editing therapy and launched a novel non-opioid pain medicine, both signaling Vertex’s ability to lead in cutting-edge science. Reshma Kewalramani has emphasized a strategy of “serial innovation,” combining rigorous scientific research with disciplined investment to pursue transformative treatments for serious diseases. She holds a Bachelor of Arts from Boston University, an M.D. from the Boston University School of Medicine, and completed her residency and fellowship at Massachusetts General Hospital and Brigham and Women’s Hospital. In addition to her medical training, Reshma Kewalramani completed the General Management Program at Harvard Business School. She was named one of the “Top 25 Women Leaders in Biotech” by Healthcare Technology Report and was elected to the National Academy of Medicine in 2023. Reshma Kewalramani has spoken about the importance of long-term commitment to patients, once noting in an interview, “Our purpose is to transform lives. That doesn't happen overnight, but with persistence, it becomes possible.” Her leadership style combines scientific depth with a forward-looking vision for innovation and patient access. Given her background as a physician-scientist and her proven ability to guide Vertex into new therapeutic frontiers, I believe Reshma Kewalramani is the right person to lead the company into its next chapter of growth and impact.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We want to see a 10-year history, with all numbers exceeding 10% in each year. Before delving into the numbers, it’s important to note that Vertex Pharmaceuticals had their first therapy, KALYDECO, approved in 2012, followed by their second therapy, ORKAMBI, in 2016. Therefore, it makes more sense to focus on performance from 2016 onward, as that’s when the business began gaining meaningful commercial traction. Since 2017, Vertex has consistently delivered a strong ROIC, well above the 10% benchmark. ROIC declined slightly in 2024, marking its lowest point since 2019. However, this dip was primarily driven by the acquisition of Alpine Immune, so it's not a major concern. In fact, even with the acquisition factored in, Vertex still posted an ROIC above 20%, which is impressive. Given its dominant position in cystic fibrosis, expanding pipeline, and disciplined capital allocation, I believe Vertex is well positioned to maintain a high ROIC in the years ahead.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the percentage growth year over year. Equity decreased slightly before the launch of ORKAMBI in 2016. However, since 2016, Vertex Pharmaceuticals has grown its equity by more than 10% annually—until 2024, when it experienced its first decline in equity since 2015. This drop can largely be attributed to increased operating and acquisition-related expenses, including a higher R&D budget and the acquisition of Alpine Immune. That said, it’s worth noting that despite the decline, Vertex’s equity in 2024 still reached its second-highest level over the past decade, which is encouraging.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. Vertex Pharmaceuticals has consistently delivered positive free cash flow every year since 2016, following the launch of ORKAMBI, and continued to do so until 2024, when the company recorded negative free cash flow. The reason for this dip is the acquisition of Alpine Immune. If not for that acquisition, free cash flow in 2024 would have been approximately 3.636. Vertex has maintained a strong levered free cash flow margin since 2017 and would have done so again in 2024. Adjusted for the acquisition, the 2024 margin would have been around 33%, which is impressive. The company reinvests most of its free cash flow into innovation, which is expected to drive long-term shareholder value. It also returns some capital to shareholders through share buybacks and repurchased 2,7 million shares during 2024. However, these repurchases were nearly offset by stock-based compensation, resulting in only a slight decrease in shares outstanding. If not for the Alpine Immune acquisition, the free cash flow yield would have been around 3,5%, which suggests that the shares are trading at a relatively high valuation. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to investigate is the level of debt, specifically whether a business has manageable debt that can be paid off within a period of three years. This is assessed by dividing the total long-term debt by earnings. Vertex reported negative earnings in 2024, but management has stated that the acquisition of Alpine Immune reduced earnings per share by $17. Given that reported EPS was -2,08, adjusting for the acquisition implies an underlying EPS of 14,92. Based on this figure, the debt-to-earnings calculation shows that Vertex effectively has no debt. In fact, Vertex has not carried any long-term debt since the launch of ORKAMBI in 2016, which strongly suggests that debt is not likely to become a concern in the future. This conservative financial position is clearly a significant advantage and further strengthens the case for Vertex as an attractive long-term investment.

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Risks

The loss of patent protection is a risk for Vertex Pharmaceuticals. Patents give the company exclusive rights to sell its therapies for a set period of time, which is crucial for maintaining high margins and profitability. Once these patents expire, Vertex could face competition from lower-cost alternatives, such as generics or biosimilars, that can quickly eat into sales. In the pharmaceutical industry, it’s common for a drug’s revenue to drop by more than half within a few years after losing patent exclusivity. Generics are typically small-molecule drugs that can be copied and sold at a fraction of the price once the original patent expires. While Vertex’s cystic fibrosis drugs are more complex and would likely face biosimilar - not generic - competition, the financial impact can still be substantial. Biosimilars are not exact copies but are highly similar versions of biologic drugs, and once approved, they can be substituted more easily than entirely new therapies. Vertex’s current cystic fibrosis portfolio is protected by patents that extend into the 2030s, but these protections will eventually run out. To avoid a revenue cliff, the company must successfully launch new therapies. That makes innovation not just a growth driver, but a requirement for sustaining the business over time. However, replacing the revenue from blockbuster drugs is no easy task. The path from early research to an approved therapy is long, expensive, and filled with uncertainty. Vertex is investing heavily in research and development, with active programs in sickle cell disease, beta thalassemia, pain, kidney diseases, type 1 diabetes, and other serious conditions. But even with significant investment, many promising drug candidates fail due to issues with safety, effectiveness, manufacturing, or market acceptance. And even those that succeed scientifically may struggle commercially if they cannot secure favorable reimbursement or compete against existing treatments.

Competition is another key risk for Vertex Pharmaceuticals, particularly because of the company’s heavy dependence on its cystic fibrosis (CF) franchise. Today, more than 90% of Vertex’s revenue comes from CF therapies, which makes the company highly concentrated in a single therapeutic area. While Vertex currently holds a dominant position and no approved alternatives exist for its CFTR modulators, this leadership is unlikely to go unchallenged forever. Rival companies have attempted to enter the CF space in the past—most notably AbbVie—and it’s possible that other pharmaceutical or biotech firms could develop alternative treatments, either using similar approaches or entirely new technologies. For instance, gene therapy or mRNA-based treatments for CF could eventually provide competition. Even though Vertex is actively developing its own mRNA therapy, VX-522, with Moderna, the pace of innovation in biotech means that disruption can come from unexpected places. The risk extends beyond CF. As Vertex expands into other areas like sickle cell disease, type 1 diabetes, and pain management, it faces a new set of competitors, many of which have greater financial resources or established platforms. For example, Bluebird Bio has already launched a gene therapy for sickle cell disease, and in type 1 diabetes, several companies are pursuing cell-based therapies. In the pain space, Vertex’s non-opioid approach is promising, but it competes in a crowded field where many others are searching for the next breakthrough. In a rapidly evolving and competitive biotech landscape, Vertex must not only continue to innovate but also move quickly and execute well. Failure to do so could reduce its edge and erode the strong position it has built through its CF franchise.

Regulatory and legislative risk is another important consideration when evaluating Vertex Pharmaceuticals. As a global biotechnology company, Vertex operates in a highly regulated industry where the rules governing drug development, approval, marketing, and reimbursement are both complex and subject to change. In the U.S., the healthcare system is regulated by multiple federal and state agencies, and pharmaceutical companies must comply with a wide range of laws that govern how drugs are marketed and reimbursed. For example, laws such as the Anti-Kickback Statute and the False Claims Act regulate financial interactions with healthcare providers and how products are promoted. If regulators determine that Vertex’s marketing or pricing practices violate these rules, the company could face fines, legal action, or restrictions on how its products are sold. Outside the U.S., Vertex faces an entirely different set of regulatory challenges. Most foreign markets have government-run or heavily regulated healthcare systems that impose strict pricing controls, lengthy approval timelines, and complex reimbursement procedures. In many countries, companies must negotiate prices with national health authorities before launching a new therapy, and these negotiations can delay access to treatments or result in lower-than-expected pricing. In addition, governments may revise reimbursement rules or introduce new cost-containment measures that reduce revenues from existing products. Europe, for example, requires that pharmaceutical companies undergo centralized or country-specific pricing and access reviews before bringing a product to market. These processes can be slow, unpredictable, and vary widely from country to country. In some cases, Vertex may have to offer significant discounts or comply with strict utilization criteria to secure reimbursement, which can impact the profitability of its international operations.

Reasons to invest

Vertex Pharmaceuticals’ cystic fibrosis (CF) portfolio remains a strong reason to invest. It is not only the company’s core revenue engine but also a high-margin, patent-protected business with significant growth potential and limited competition. Vertex has developed and refined a portfolio of CFTR modulators—therapies that treat the root cause of CF rather than just managing the symptoms. With the approval of ALYFTREK in December 2024, the company now has five approved CF therapies and continues to strengthen its leadership in this space. What makes the CF portfolio especially compelling is its pattern of continuous innovation. Each new generation of modulators builds on the previous one, offering improvements in efficacy, convenience, and patient reach. ALYFTREK, for example, demonstrated similar lung function outcomes to TRIKAFTA (the current standard of care) in clinical trials but showed greater improvement in CFTR function. It also introduces once-daily dosing, which simplifies treatment for patients - a feature that has been positively received by both physicians and patients. Notably, ALYFTREK is approved for 31 additional rare mutations not covered by TRIKAFTA, broadening the pool of eligible patients. The financial profile of ALYFTREK further strengthens Vertex’s investment case. The therapy carries a lower royalty burden than TRIKAFTA, which is expected to boost gross margins starting in 2025. In addition, ALYFTREK extends Vertex’s patent protection in CF from 2037 to 2039, adding two more years of exclusivity to a next-generation product. This kind of strategic lifecycle planning helps reinforce the company’s long-term competitive moat in CF. Vertex’s CF franchise is a clear example of how scientific expertise, thoughtful innovation, and disciplined execution can turn a single therapeutic category into a durable and defensible growth platform. With global demand continuing to rise, eligibility expanding, and the pipeline advancing, the CF portfolio offers investors both stable cash flow today and a strong foundation for revenue growth well into the next decade.

Diversification of the portfolio is an another reason invest in Vertex Pharmaceuticals. While the company’s cystic fibrosis franchise remains its core revenue driver, Vertex has taken meaningful steps to expand into new therapeutic areas. This strategic shift not only reduces long-term dependence on a single product category but also opens the door to entirely new sources of growth. The launch of CASGEVY, Vertex’s one-time gene-editing therapy for sickle cell disease and beta thalassemia, marks a significant milestone in this diversification journey. Approved in multiple regions and supported by growing reimbursement coverage, CASGEVY offers transformative potential for patients with severe blood disorders. Momentum is building, with more than 50 authorized treatment centers activated globally and the first patients already having received treatment. With regulatory approvals expanding across the U.S., U.K., Europe, and the Middle East, CASGEVY is positioned to become a multi-billion-dollar opportunity and a cornerstone of Vertex’s long-term strategy beyond cystic fibrosis. Another major development is the approval of JOURNAVX, the first oral, non-opioid pain signal inhibitor and the first new class of pain medicine in over 20 years. Designed to treat moderate-to-severe acute pain without the addictive potential of opioids, JOURNAVX addresses a massive market—roughly 80 million patients in the U.S. each year seek prescription pain relief, and approximately half of them are currently prescribed opioids. Vertex is working quickly to secure broad access through hospitals, pharmacies, and insurance providers, and early interest from physicians, patients, and policymakers has been strong. With growing societal and legislative support for non-opioid alternatives, JOURNAVX has the potential to become a major franchise in its own right. Together, CASGEVY and JOURNAVX represent a shift from a single-therapy company into a more diversified, multi-platform business. This reduces the long-term risk associated with patent expirations in the cystic fibrosis portfolio while providing new avenues for sustained revenue growth.

A growing and diverse pipeline is another reason to invest in Vertex. The company is advancing a wide range of therapies that focus on serious diseases with few or no effective treatments and aim to address the root causes of illness, not just manage the symptoms. One of the most promising areas is type 1 diabetes. Vertex’s lead program, VX-880, is a cell therapy currently in Phase 3 trials. If patients in the study remain insulin-independent for one year, the company plans to file for regulatory approval. In parallel, Vertex is developing a version of the treatment that wouldn’t require patients to take immunosuppressive drugs—something that could make it safer and more widely accessible. Over time, these therapies could help tens of thousands of people, and the company is already working on future versions designed to reach the broader type 1 diabetes population. In kidney disease, Vertex is advancing several promising treatments for conditions with limited existing options. One of them, inaxaplin, is being studied for a rare genetic kidney disorder. Another therapy, povetacicept, targets IgA nephropathy—a chronic condition caused by an overactive immune system that can lead to kidney failure. Vertex expects to reach a key milestone in this program later this year. Finally, VX-407 is being developed for polycystic kidney disease, a condition that causes cysts to grow in the kidneys and often leads to kidney failure. The treatment is designed to fix the underlying protein defect behind the disease and could initially help around 30.000 patients, with the potential to eventually benefit hundreds of thousands. What makes Vertex’s pipeline particularly compelling is how well it aligns with the company’s core strengths: targeting serious illnesses, focusing on the biology driving disease, and developing treatments that have the potential to bring long-lasting benefits to patients.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 14,92, which is from the year 2024, excluding the Alpine Immune acquisition. I have selected a projected future EPS growth rate of 13%. Finbox expects EPS to grow by 13,1% in the next five years. Additionally, I have selected a projected future P/E ratio of 26, which is double the growth rate. This decision is based on Vertex Pharmaceuticals' historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $325,50. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Vertex Pharmaceuticals at a price of $162,75 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 4.140 (excluding the Alpine Immune acquisition), and capital expenditures were 298. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 209 in our calculations. The tax provision was 784. We have 257,5 outstanding shares. Hence, the calculation will be as follows: (4.140– 209 + 784) / 257,5 x 10 = $183,11 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With Vertex Pharmaceuticals' free cash flow per share at $14,02 (excluding the Alpine Immune acquisition) and a growth rate of 13%, if you want to recoup your investment in 8 years, the Payback Time price is $203,55.

Conclusion

I believe that Vertex Pharmaceuticals is an intriguing company due to its monopoly in a therapeutic area. I also believe that the company is well-managed. Vertex delivered a lower-than-usual ROIC and negative free cash flow in 2024, but this was mainly due to its acquisition of Alpine Immune, so it doesn’t concern me. Excluding the acquisition, the company continues to generate strong free cash flow and maintain high levered free cash flow margins. The loss of patent protection is a key risk for Vertex because it limits the period during which the company can exclusively sell its high-margin therapies. As these patents expire, maintaining revenue and profitability will depend on Vertex’s ability to replace its current blockbuster drugs with successful new treatments. Competition is also a risk for Vertex because the company remains heavily reliant on its cystic fibrosis franchise, and future breakthroughs from other companies could threaten its leadership over time. As Vertex expands into new areas like sickle cell disease, diabetes, and pain, it must also prove itself against well-funded competitors in each of these fields. Regulatory and legislative risk is another concern, as Vertex operates in a highly regulated industry where changes in laws, pricing rules, or approval processes can directly impact how and where its therapies are sold. Both in the U.S. and abroad, the company must navigate complex legal frameworks and negotiate with health authorities. Vertex’s cystic fibrosis portfolio is a key reason to invest because it provides the company with a highly profitable, patent-protected revenue stream built on continuous innovation. With five approved therapies and the recent launch of ALYFTREK, which expands patient eligibility and improves convenience, the CF franchise offers both dependable cash flow today and a clear path for long-term growth. Diversification is another reason to invest in Vertex, as the company is expanding beyond cystic fibrosis into new areas like gene-editing for blood disorders and non-opioid pain treatment. With the launches of CASGEVY and JOURNAVX, Vertex is building new revenue streams that reduce long-term reliance on a single therapeutic area. A growing and diverse pipeline is also a reason to invest in Vertex, as the company is developing treatments for serious, underserved diseases like type 1 diabetes and kidney disorders, with several programs already in late-stage trials. I believe that Vertex is a great company, and buying shares at the intrinsic value of the margin of safety price of $325 could be a good long-term investment.

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