Company Overview: Headquartered in Boston, Massachusetts, Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX) is a global biotechnology company, which was founded in 1989. The company is engaged in the discovery, innovation, and development of medicines for the treatment of serious diseases, with a primary focus on cystic fibrosis (CF). It has under its belt various approved medicines for treating CF, along with several ongoing clinical and research programs for the rare, life-threatening genetic disease. Its revenue generating drugs include KALYDECO, ORKAMBI, SYMDEKO/SYMKEVI, and TRIKAFTA/KAFTRIO.

VRTX Details

Making Progress with Clinical Studies and FDA Approvals: Vertex Pharmaceuticals Incorporated (NASDAQ: VRTX) is mainly focused on the innovation, development, and commercialization of small molecule drugs targeting severe infections. Apart from CF, VRTX has an extensive pipeline of investigational small molecule medicines for other serious diseases, such as Alpha-1 Antitrypsin Deficiency (AATD) and APOL1-mediated kidney diseases, and of cell and genetic therapies for diseases such as sickle cell disease, beta-thalassemia, Duchenne muscular dystrophy and type 1 diabetes mellitus. On June 10, 2021, the company stated that the data collected in the Phase 2 of its study of VX-864 in AATD confirms that an oral small molecule corrector for promoting proper folding of the mutant Z-AAT protein can increase plasma levels of mean functional alpha-1 antitrypsin (fAAT) in AATD patients. Notably, the company plans to advance other novel small molecule correctors into clinical development in 2022, which have the ability for improved clinical efficiency.  

Concurrently, the company also announced the receipt of U.S. Food and Drug Administration (FDA) approval for expanded use of TRIKAFTA for children with CF ages 6-11 years (who have at least one F508del mutation in the CF transmembrane conductance regulator (CFTR) gene). It is worth noting that the company also intends to submit the label expansion filing for Trikafta/Kaftrio in Australia, Switzerland, and Israel later this year.

1QFY21 Key Results Highlights: During Q1FY21, VRTX reported earnings of $2.49 per share, representing an ~8.73% year-over-year increase. Total revenue for Q1FY21 was $1.72 billion, rising ~13.81% from $1.52 billion in Q1FY20. Net product revenues increased ~5.44% to $1.25 billion in the U.S. and ~43.46% to $469.87 million outside the U.S., compared to Q1FY20. Net income was $653.14 million, up 8.36% year over year. During the quarter, the company reported adjusted selling, general and administrative (SG&A) expenses of ~$151 million, depicting a rise of 7.9% year over year, due to higher investments made to boost the expansion of the CF business.

Revenues & Gross Profit (Source: Analysis by Kalkine)

Other Key Developments: The company remains on track to gain from consistent top-line growth, with significant uptake of KAFTRIO in Europe and continued revenue generation from TRIKAFTA in the United States during Q1FY21 (ending March 31, 2021). Further, VRTX continues to work on its pipeline of various transformative small molecule, cell, and genetic therapies. Moreover, it recently amended the CTX001 program-related agreement with CRISPR Therapeutics, which now provides it with 60% of the program economics and enhances its position in cell and genetic therapies. The next step involves enrolling ongoing trials for CTX001 in sickle cell disease and beta-thalassemia in FY21.

During Q1FY21, VRTX received the approval for TRIKAFTA in Australia for people with CF ages 12 years and older (with at least one F508del mutation).  As of March 31, 2021, TRIKAFTA/KAFTRIO is now approved and reimbursed/accessible in 12 countries outside the U.S.

Key Metrics, Liquidity & Balance Sheet Details: The company exited the quarter with a cash balance of $6.92 billion. Its property & equipment increased ~2.88% to $986.12 million from that reported at the end of FY20. Finance lease liabilities were $572.86 million as of March 31, 2021. During Q1FY21, VRTX repurchased 1,988,941 shares for $424.95 million, and exhausted the entire authorized amount of $500.0 million under the 2020 Share Repurchase Program.

In Q1FY21, EBITDA and operating margins were 52.9% and 51.5%, higher than the year-ago figure of 49.4% and 47.5%, respectively. ROE in Q1FY21 was 7.4% vs industry median of -8.6%. Debt to equity ratio stood at 0.06x in Q1FY21, lower than the year-ago figure of 0.08x.

Profitability and Liquidity Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 43.04% of the total shareholdings, while the top 4 constitutes the maximum holding. The Vanguard Group, Inc. and T. Rowe Price Associates, Inc. holding the maximum stake at 7.89% and 6.39%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: On the downside, the company’s entire product revenue is generated from medicines for the treatment of CF. Hence, its success in the near future is dependent on increasing the sales of these CF medicines by gaining approval/reimbursement for its therapies and commercializing these therapies for younger children with CF. Moreover, VRTX may be subjected to suspensions/withdrawal of prior approvals if its products fail to comply with the regulatory requirements, which could negatively impact its business and financial condition. Also, rising expenses and stiff competition from peers may weigh on company’s financial performance, going forward. 

Outlook: For FY21, the company expects product revenue from CF to be in the range of $6.7-$6.9 billion, with combined GAAP R&D and SG&A expenses ranging from $3.8-$3.95 billion. Looking forward, progress announced in various CF drugs, continued innovation in small molecule, cell and, genetic therapies, and the recent amendment to CTX001 agreement are expected to help push its top and bottom-line figures.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s FY21E trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Over the last one month, the stock went down by ~13.33%. The stock is currently quoting towards the lower band of its 52-weeks’ trading range of $188.01 to $306.08. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of an upside of low double-digits (in percentage terms). We believe that the company can trade at a slight discount as compared to its peer’s average, considering its current focus on only CF, the risks involved with the uncertainties of medical R&D outcomes, stiff competition from peers, along with stringent regulatory scrutiny. We have taken peers like Pfizer Inc (NYSE: PFE), Gilead Sciences Inc. (NASDAQ: GILD), among others.  Considering the company’s decent Q1FY21 performance, international presence, constant progress in development and commercialization, positive future outlook, current trading levels, and valuation, we give a “Buy” recommendation on the stock at the closing price of $187.49, down by ~0.78% on June 16, 2021.  

VRTX Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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