We initiate coverage of Vertex Pharmaceuticals with a BUY rating and $550 PT (based on 35.5x P/E). Vertex is a global biotechnology company focused on creating transformative medicines for patients with cystic fibrosis and other life shortening diseases. The company currently has four cysticfibrosis (CF) therapies on the market, among them the blockbuster drug TRIKAFTA, which has a near-monopoly in the cystic fibrosis transmembrane receptor (CFTR) segment of the market. Vertex holds over 3,500 granted patents protecting its intellectual property in key geographies. The majority of the company's research centers are located in the U.S. and Germany.
Our rating is based on our view that Vertex has room to grow, with significant potential near- and medium-term upside, as its non-opioid pain drug Suzetrigine (VX-548) and its triple combination CF treatment are under regulatory review by the Food and Drug Administration (FDA), and other drug candidates for a variety of disease indications are progressing through clinical trials. At the 2023 price-to-earnings (P/E) ratio of 34.2x, Vertex trades at a premium to its competitor group median P/E of 17.0x, reflecting its market leadership in the cystic fibrosis space and its industry-wide reputation as a well-managed, research-based company. Key risks include clinical trials, regulatory, IP challenges, competition, and supply chain.
We believe that given Vertex’s financial strength (with cash and short-term investments of $10.17 billion, current ratio of 3.5x, and last-twelve-months (LTM) interest coverage of 102.1x, as of March 31, 2024), deep pipeline, two drugs under FDA regulatory review, and two drug candidates in Phase 3 development for neuropathic pain and APOL1-mediated kidney disease, there is room for organic growth as drugs in the pipeline reach the market in 2025 and beyond. The foregoing is coupled with the company's ability to execute opportune acquisitions of innovative firms developing products or technologies capable of advancing Vertex’s strategic goals.
Vertex is well-positioned to capitalize on its strong gross margin of 87% and net margin of 40%, as additional pipeline products come to market.