Vertex Pharmaceuticals: A Monopoly in the Pharma Sector.
Opdateret: 7. aug.
Vertex Pharmaceuticals currently holds a monopoly in the Cystic Fibrosis market, and a monopoly is nice thing when investing in a company. Vertex Pharmaceuticals also has an interesting pipeline when it comes to developing drugs for other diseases, meaning they should eventually get exposure to other markets. The question is if now is the time to add it to 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.
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.
For full disclosure, I should mention that I do not currently own shares in Vertex Pharmaceuticals. However, I do own shares in Royalty Pharma, which receives royalties from the Cystic Fibrosis division of Vertex Pharmaceuticals. This means that I have a vested interest in the company. If you are interested in viewing the stocks in my portfolio or if you would like to copy my portfolio, you can find instructions on how to do so here. Despite my interest in Vertex Pharmaceuticals, I will maintain an unbiased analysis. If you are interested in purchasingshares or fractional shares of Vertex Pharmaceuticals, you have the option to do so through eToro. eToro is very user-friendly and easy to get started with. You can start with as little as $50. Click on the picture below to get started.
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 stay updated on their therapies and patents. None of the therapies 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 leader in the field of Cystic Fibrosis and currently does not face any significant competition. This is undoubtedly advantageous for potential investors.
Their CEO is Reshma Kewalramani. She first joined Vertex Pharmaceuticals in 2017. 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 over 12 years at Amgen, where she held multiple positions. She holds a medical degree with honors from the Boston University School of Medicine and has successfully 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 elsewhere.Nevertheless, it is interesting that she doesn't have much experience in the business side of running a pharmaceutical company and still got appointed as CEO. It isn't a coincidence, though, that Vertex Pharmaceuticals only considered scientists for the role. They want to develop medicines for other diseases and needed someone with a strong scientificbackground to lead them in that direction. Reshma Kewalramani certainly fits that bill. One positive aspect to consider when investing in Vertex Pharmaceuticals is that she has pledged to maintain the same price strategy as her predecessor. This strategy has proven successful in allowing Vertex Pharmaceuticals to charge countries more than initially agreed upon. While Reshma Kewalramani is still new to the job, her vast experience in the industry and scientific background make me confident in investing in Vertex Pharmaceuticals.
I believe 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 numbers to see if Vertex Pharmaceuticals lives up to our requirements for a strong moat. In case you want an explanation about what the numbers are, you can have a look at "MY STRATEGY" on the website.
The first number I investigate is the return on invested capital, also known as ROIC. I would like to see 10 years of historical data, and we want the numbers to be above 10% in all benchmarks. Before delving into the numbers, it is important to note that Vertex Pharmaceuticals had their first therapy, KALYDECO, approved in 2012, followed by their second therapy, ORKAMBI, in 2016. Hence, it is much more interesting to look from 2016 onwards. Since 2017, Vertex Pharmaceuticals has consistently achieved a strong Return on Invested Capital (ROIC) well above the minimum requirement of 10%. Hence, I would be very happy to invest in Vertex Pharmaceuticals based on the ROIC.
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 actualnumbers and the percentage growth year over year. From 2016 onwards, Vertex Pharmaceuticals has consistently achieved year-over-year growth, which is something I really appreciate. From 2016 onwards, Vertex Pharmaceuticals is a textbook example of how a company can successfully grow its equity.
Finally, we investigate the free cash flow. In short, free cash flow is the cash a company generates after it has paid for operating expenses and capital expenditure. Levered free cash flow is the amount of money a company has left remaining after paying all of its financial obligations, I use the margin for it to make more sense. Free cash flow yield is the free cash flow per share a company is expected to earn against its market value per share. It is the same pattern from the other numbers we have looked at, where 2016 is the year of change. Ever since 2016 Vertex Pharmaceuticals has delivered a positive free cash flow. Free cash flow did decline in 2021 but increased again in 2022, reaching its highest level ever, while levered free cash flow is the second highest ever. Free cash flow yield is also the second highest ever.
Another important aspect to investigate is the level of debt, specifically whether a business has a manageable debt that can be paid off within a period of 3 years. We do this by dividing the total long-term debt by earnings. 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 why Vertex Pharmaceuticals is an intriguing investment opportunity.
Based on my findings so far, Vertex Pharmaceuticals looks very intriguing. However, all investments come with risks, and Vertex Pharmaceuticals is no exception. One risk that always comes with pharmaceutical companies is drug pricing. Lately, we received news about the Reduced Costs and Continued Cures Act, which proposes allowing Medicare to negotiate prices. It is too early to say if it will be approved in Congress and how it will impact pharmaceutical companies in the future. However, drug pricing is not a new topic of discussion, and thus far, the powerful pharmaceutical lobby has prevented any significant impact on the companies. Nevertheless, like all pharmaceutical companies, Vertex Pharmaceuticals also faces risks, particularly in the current climate of intense debate surrounding drug pricing. Vertex Pharmaceuticals is known for its relatively high drug prices. Another risk that Vertex Pharmaceuticals is that it focuses solely on therapies 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 does not have any competition, but other companies are developing therapies for Cystic Fibrosis. One such company is a biotech startup called Carbon Sciences, which is developing a gene therapy for Cystic Fibrosis. This therapy has received investment from the Cystic Fibrosis Foundation. It will still take years before the therapy is marketed, if successful. Competition might force Vertex Pharmaceuticals to lower its prices in the future.
It is impossible for Vertex Pharmaceuticals to manage the risk of drug pricing, but it is a risk that you must live with wheninvesting in the pharmaceutical sector. However, Vertex Pharmaceuticals can handle 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 an estimated 30.000 of these patients are still untreated with any of their drugs, indicating there is still significant potential for growth in their CF business. Another way to address their concentrated drug portfolio is through their pipeline. Right now, researchers are working on developing drugs to treat various diseases. Some of the diseases they are focusing on include sickle cell disease, type 1 diabetes, and acute pain management. These markets are much larger than the CF market. It is estimated that there are 150.000 patients in the United States and Europe alone who suffer from sickle cell disease. Type 1 diabetes is a significantdisease, affecting 2,6 million people in the United States and Europe. The market for acute pain therapies is worth $4 billion. However, it is important to mention that while many of the drugs in their pipeline have shown promising results, all of them are still in various clinical trial phases. It means that their success is far from certain.
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. 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 of 12,82, which is the one from 2022, it is lower than in 2020 and 2018 but higher than in 2019. I chose an estimated future EPS growth rate of 12% (Finbox expects EPS to grow by 12% over the next 5 years). The estimated future PE is 24, which is double the growth rate, as the historical PE for Vertex Pharmaceuticals has been higher. Additionally, we already have the minimum acceptable return rate of 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $236,21. 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 $118,11 (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 4.129,9. The capital expenditures were 204,7. I tried to look through their annualreport to see how much of the capital expenditures were used for maintenance. I couldn't find it, but as a rule of thumb, you can expect 70% of the capital expenditures to be used for maintenance. This means that we will use 143,3 in our further calculations. The tax provision was 910,4. We have 257,012 outstanding shares. Hence, the calculation will be like this: (4.129,9 - 143,3 + 910,4) / 257,012 x 10 = $190,54 in Ten Cap price.
The last calculation is the Payback Time. I also described in "MY STRATEGY". With Vertex Pharmaceuticals' Free Cash Flow Per Share at 15,29 and a growth rate of 12%, if you want to recoup your investment in 8 years, the Payback Time price is $210,63.
Vertex Pharmaceuticals is a highly intriguing company. The historical figures are impressive, and they currently hold a monopoly in the treatment of Cystic Fibrosis, which is expected to continue for many years. If Vertex Pharmaceuticals succeeds in developing drugs for other diseases, it could become an even more compelling investment opportunity. There are some minor concerns regarding drug pricing, but it is something you will need to accept if you are investing in any pharmaceutical company. Management is relatively unknown, which is a slight concern. However, I also find it intriguingthat they have chosen to take a different approach than other pharmaceutical companies. If Vertex Pharmaceuticals drops to my Payback Time price at $210,63, I will open a position. Until then, I'm happy to have exposure to the company through Royalty Pharma.
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