Vertex Pharmaceuticals: Expect Growth Beyond Trikafta (NASDAQ:VRTX)

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Vertex Pharmaceuticals (NASDAQ:VRTX) has become a highly profitable, large-cap pharmaceutical company over the last decade. Its revenue is generated by therapies for cystic fibrosis. It has a pipeline of potential therapies in clinical trials that are likely to allow it to branch out into other disease targets. Given its success over the years, its future potential, and its stock price, it has become one of my favorite large-cap biotechnology companies to accumulate. In this article I will focus on key aspects of the pipeline that should drive future value. First, however, I will review Q3 2022 results and the current situation.

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Q3 2022 Vertex Pharmaceuticals Results

Vertex reported a strong Q3 as revenue and profits grew rapidly. Revenue was $2.33 billion, up 18% from $1.98 billion in Q3 2021. GAAP net income was $931 million, up 9% y/y, resulting in EPS of $3.59. Non-GAAP net income was $1.04 billion, up 14% y/y. Those results were based on strong sales of Vertex’s newest cystic fibrosis drug, Trikafta, which were up 29% y/y to $2.01 billion. The three earlier CF drugs, Orkambi, Kalydeco, and Symdeko, provided the remaining revenue, but their sales fell y/y as they were replaced by Trikafta. CF is caused by a variety of genetic mutations. Trikafta works with more of those types of mutations than the earlier drugs. On a global scale there are many patients who need a better treatment, so Trikafta sales should continue to ramp up for some time.

In valuing Vertex, it should be noted that it ended Q3 with a cash balance of $9.8 billion with no debt. It had closed its acquisition of ViaCyte on September 27, 2022, using $320 million in cash. It is well positioned to acquire further assets but said that share buybacks would only be used to offset dilution. Expect no change to dividend policy anytime soon, though it certainly could pay a hefty dividend out of cash flow.

Vertex Pipeline: Exa-cel

Exa-cel (exagamglogene autotemcel) is a potential therapy for both sickle cell disease and beta thalassemia. It uses CRISPR technology to edit stem cells to produce fetal hemoglobin. Exa-cel has been in trials for years, with a Phase 3 study begun in 2022 in patients aged 2 to 11 and a Phase 3b study for patients aged 12 to 35 years. On September 27, 2022, Vertex announced it would begin a rolling submission to the FDA that should be completed by the end of Q1 2023. It will make a similar application in the EU. It is applying for approval for both sickle cell disease and transfusion-dependent beta thalassemia. Exa-cel had already been granted Fast Track and Orphan Drug status. If all goes well it could become a commercial therapy in 2024. Commercialization is an issue, mainly due to the likely pricing of the therapy, and partly because it would be the first approved CRISPR therapy for a genetic disease. The therapy is in partnership with CRISPR Therapeutics (CRSP), with Vertex having a 60% share.

VX-548 for Pain

VX-548 is a small molecule that targets the voltage-gated sodium channels of nerve cells that transmit pain signals. In 2022 Vertex advanced VX-548 to two Phase 3 studies for acute pain, one for patients following bunionectomies and one following abdominoplasties. 2,000 patients are to be enrolled in those trials. Vertex also intends to initiate a Phase 2 dose-ranging study of VX-548 in neuropathic pain by the end of 2022. No timeline for trial completion has been announced yet, but if enrollment goes well the trials could be completed by the end of 2023. In response to questions about bringing a high-priced, novel therapy to the pain market, Vertex management said that because of unmet need in the acute pain setting, and the dangers of using opioids for acute pain, the opportunity is significant.

VX-147 for APOL1 Kidney Disease

VX-147 (inaxaplin) for APOL1-mediated kidney disease is currently in a Phase 2/3 trial. Persons with 2 or more mutations in the APOL1 gene are at risk for kidney disease development. VX-147 is a small molecule that inhibits APOL1 protein. Additional small molecules are in preclinical study for this indication. Patients continue to enroll in the trial, with no timeline given, at present, for trial completion.

VX-880 for diabetes

Although not likely to become commercial for years, the revenue potential makes VX-880 for type 1 diabetes a key pipeline asset. VX-880 is live, engineered cells derived from stem cells. They are introduced to replace the insulin producing cells destroyed at the onset of type 1 diabetes. Two early patients treated with half the target dose of VX-880 achieved insulin production. Patients continue to be enrolled in the study. A device to work with VX-880 has been developed, with a submission to the FDA to use the device in clinical trials expected by year end. More data will be presented in 2023. In a further extension the VX-880 cells are being edited to be cloaked from the immune system, so another trial will be needed for that formulation.

Rest of pipeline

I have covered the therapies with potential to produce revenue in the next few years, but the Vertex pipeline is broader still. VX-864 for Alpha-1 antitrypsin deficiency is in a Phase 2 trial. A gene-edited therapy for Duchenne muscular dystrophy is pre-clinical, with an IND expected to be submitted to the FDA in 2023. Vertex announced a collaboration with Entrada Therapeutics (TRDA) for a Myotonic Dystrophy Type 1 therapy in December, 2022. While the pipeline in cystic fibrosis is mainly about extending the label to younger patients, Vertex announced its New Drug Application for VX-522, an mRNA therapy, was cleared by the FDA on December 12,2022.

Analysis and Valuation

Vertex Pharmaceuticals stock closed at $291.59 on Monday, December 20, 2022, giving in a market capitalization of nearly $75 billion. Its forward PE (price to earnings) ratio is near 20, which would be typical for a company with a more modest growth rate. Given its 18% y/y revenue growth, it would be rational if it had a higher PE, assuming growth can continue at that rate or faster. Given the pipeline, and in particular the potential of VX-548 for pain and VX-880 for type 1 diabetes, I expect revenue to increase dramatically as the decade progresses. However, it is unusual for all drug trials to be successful, and the stock price can fall when negative data is announced. Commercialization is also an issue, particularly with CRISPR-based therapies. I believe as more of them come to market payers will become more comfortable with the large up-front payments required for them, which will save payers money longer-run. On the whole, I find Vertex to be attractive at the current price and I have started accumulating it as a long-term investment. This is a shift in my view, largely due to the ramping of Trikafta sales since its 2019 introduction, the expansion of the pipeline, and the stock price not being any higher now than it was at its peak in 2020.

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