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Vertex Pharmaceuticals: A monopoly in the pharma sector.

Opdateret: 5. nov.


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 received royalties from the Cystic Fibrosis division of Vertex Pharmaceuticals, meaning I have an interest in the company. If you want to see the stocks in my portfolio or if you want to copy my portfolio, you can read how to do so here. Despite me having an interest in Vertex Pharmaceuticals, I will keep the analysis unbiased.


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 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 does live 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 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. Before getting into the numbers, it is important to know that their first drug KALYDECO was approved in 2012, and their second drug ORKAMBI in 2016. Hence, it is much more interesting to look from year 2016 and forward. Since 2017 Vertex Pharmaceuticals has delivered a nice ROIC well above the required 10 %. Hence, I would be very happy to be investing in Vertex Pharmaceuticals based on the ROIC.



The next numbers are the book value + dividend. In my old format this was known as the equity growth rate. It was the most important of the four growth rates I used to use in my analyses, which is why I will continue to use it moving forward. As you are used to see the numbers in percentage, I have decided to share both the numbers and the percentage growth year over year. From 2016 and onwards, Vertex Pharmaceuticals has delivered growth each year over year, which is something that I really like to see. From 2016 and onwards, Vertex Pharmaceuticals is a textbook example of how you want to see a company grow their 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. 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 it isn't something I'm worried about for the time being, but I would like to see a rise in 2022.


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 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 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 still in different clinical trial phases. It means 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. 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 was in 2021 at 9,01 (lower than 2020 and 2018 but higher than 2019). I chose an Estimated future EPS growth rate of 15 (Finbox expects EPS to grow by 19,1 % the next five years but 15 is the highest I use), Estimated future PE 30 (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 $273,30, 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 $135,15 (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 2.643,5. The Capital Expenditures was 235. 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 164,5 in our further calculations. The Tax Provision was 388,3. We have 256,026 outstanding shares. Hence, the calculation will be like this: (2.643,5 - 164,5 +388,3) / 256,026 x 10 = $111,99 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 14,87 and a growth rate of 15 %, if you want your purchase back in 8 years, the PAYBACK TIME price is $234,74.


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 an even more 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 rather 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 PAYBACK TIME price at $234,74, I will open a position. Until then, I'm happy just to have exposure to the company through Royalty Pharma.


My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how I do it, and how you can do it yourself, you can read this post.


I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.


Some of the greatest investors in the world believe in karma, and to receive, you will have to give (Warren Buffett and Mohnish Pabrai are great examples). If you appreciated my analysis and want to get some good karma, I would kindly ask you to donate a bit to the Andean Cat. It is one of the rarest and least known cats in the world, and due to habitat loss, it is feared that it could go extinct. If you have enjoyed the analysis and want some good karma, I hope that you will donate a little to the Andean cat here. Even a little will make a huge difference to save these wonderful animals. Thank you.



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