A struggling economy and a bear market haven’t been able to stop Vertex Pharmaceuticals (VRTX 3.14%). Over the past year, the company’s shares are up by 17%. And Wall Street continues to be enamored with the drugmaker, which has a consensus buy rating, according to Yahoo! Finance. But Vertex looks expensive when going by traditional valuation metrics.
A price-to-sales (P/S) ratio between 1 and 2 is usually considered in the “reasonably valued” range. Vertex’s forward multiple comes in at more than four times the upper bounds of this range. Also, the company’s forward price-to earnings (P/E) multiple is higher than that of the biotech industry, which is currently about 15. Should investors stay away from the stock?
VRTX PE ratio (forward), data by YCharts. PE = price to earnings.
Looking at its prospects
Calculating a company’s forward P/S and P/E multiples requires estimating future sales and earnings. That can be difficult given the sheer number of unknowns. But even without exact numbers, we can get a feel for Vertex’s revenue and earnings prospects across the next five years.
Consider the company’s cystic fibrosis (CF) franchise. It’s the only drugmaker that sells medicines targeting the underlying causes of CF. Its most important product is Trikafta, which can treat up to 90% of CF patients (more than 20,000 out of 88,000 of whom are untreated). Recently, Vertex’s Kalydeco earned approval to treat infants with CF as young as one month old, something that could be meaningful over the mid-term in growing its revenue.
Vertex Pharmaceuticals has several other potential CF approvals that could land well before 2028, but even excluding those, its CF-related revenue in the next half-decade should grow at a good pace. Analysts see the company’s top line increasing by 8.2% per year in the next five years. That’s pretty good for a biotech giant, but it’s well below Vertex’s nearly 38% annual top-line growth in the past five years.
The estimate of 8.2% growth per year also seems highly conservative, at least to me. Even assuming it reasonably reflects the growth of Vertex’s CF franchise, the company has a massive potential approval on the way, namely that of exa-cel. This gene-editing therapy for sickle cell disease (SCD) and beta-thalassemia (TDT) could easily be worth an initial $64 billion. How so? A price of about $2 million would be reasonable for treatment with exa-cel.
And together with its partner, CRISPR Therapeutics, Vertex plans to target 32,000 SCD and TDT patients initially. The two entities have also been in talks with government payers to ensure that exa-cel will be covered (it would be inaccessible to most patients without coverage). Exa-cel could earn the green light by early next year, and revenue should start coming in not too long after that point.
Vertex will receive 60% of the profits and incur 60% of the costs associated with exa-cel under its agreement with CRISPR. Considering all that, exa-cel could add billions in revenue to Vertex’s financial results in the next five years and beyond.
There is more to be excited about
The company’s P/E and P/S ratios have historically been very high.
VRTX PS ratio, data by YCharts.
But the biotech has, at least to some extent, justified its sky-high valuation metrics over the past decade by outperforming the broader market over this period. In my view, Vertex Pharmaceuticals will do more of the same thing. It isn’t just the company’s CF franchise and the upcoming approval of exa-cel.
The drugmaker has several programs in the mid and late stages of development targeting neuropathic and acute pain, APOL1-mediated kidney disease, and Alpha-1 antitrypsin deficiency. The company also has candidates for type 1 diabetes in the early stages of development — and here, it is looking for a functional cure for the chronic illness.
The company has far too much going its way, so even with high traditional valuation metrics, investors should take Wall Street’s advice and buy Vertex Pharmaceuticals’ shares.
Prosper Junior Bakiny has positions in Vertex Pharmaceuticals. The Motley Fool has positions in and recommends CRISPR Therapeutics and Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.