galapagos wordt steeds meer genoemd: 3 Reasons to Be Cautious on Vertex Pharmaceuticals Incorporated (VRTX) Stock
[InvestorPlace]
Tom Taulli
,InvestorPlace•August 29, 2017
Biotech companies are a great source for finding huge gainers. And yes, a clear example of this is Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX). For the year so far, the shares are up a sizzling 109% to $153, which is an increase of about $18.5 billion in market cap.
VRTX Stock: 3 Reasons to Be Cautious on Vertex Pharmaceuticals Incorporated (VRTX) Stock
VRTX Stock: 3 Reasons to Be Cautious on Vertex Pharmaceuticals Incorporated (VRTX) Stock
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Founded in the late 1980s, Vertex Pharmaceuticals pioneered groundbreaking therapies for cystic fibrosis. This genetic disease, which has no cure, results in mucus that builds up in a person’s lungs and leads to various medical complications. Unfortunately, life expectancy is 42 to 50 years old.
It was back in early 2012 that Vertex Pharmaceuticals received FDA approval for its drug, Kalydeco. Then a few years later, the company received clearance for Orkambi. The key for both of these treatments is that they target the causes of cystic fibrosis — not the symptoms.
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OK then, for investors, what about the prospects for VRTX stock? Could this company be the next Amgen, Inc. (NASDAQ:AMGN) or Celgene Corporation (NASDAQ:CELG)?
Well, even though Vertex Pharmaceuticals is a standout company and has posted strong growth over the past few years, there should actually be some caution. And here are three reasons why:
VRTX Stock Issue No. 1 — Market
Cystic fibrosis is a rare disease, with about 1,000 new cases reported each year. The global population is about 70,000.
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In other words, there is an upward limit to the revenue potential. What’s more, given that VRTX has an overwhelming share of the market already, it is likely to get tougher to increase the growth ramp for the long haul.
According to InvestorPlace.com’s Josh Enomoto: “The U.S. market is almost unreasonably small, and the different treatments required necessarily splits the market even further.”
Now, VRTX’s management certainly understands this risk and as a result, has been using its cash flows to fund other drugs that go beyond the core business. But there are some problems — that is, the treatments are still in the early phases and are in highly competitive category.
VRTX Stock Issue No. 2 — Market
Based on data from the Centers for Medicare and Medicaid Services, healthcare costs in the U.S. grew at a 4.8% pace to $3 trillion from 2004 to 2015. The agency also predicts that the rate will increase to 5.6% for the next decade. Just some of the factors for the growth include the aging population, the advances in medical technologies, litigation and the overall lifestyles of Americans.
In light of all these factors, the U.S. government (through Medicare and Medicaid) as well as insurers are looking for ways to deal with the rising costs. Oh, and there are similar approaches in Europe as well (often the policies are even more onerous).
So all of this is certainly worrisome for VRTX stock. Note that the company charges as much as $300,000 per year for its treatments.
All in all, it’s a good bet that — in the coming years — there will be increasing pressures to reduce the pricing.
VRTX Stock Issue No. 3 — Valuation
The valuation on VRTX stock is far from cheap. Consider that the forward price-to-earnings multiple is about 50X.
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Admittedly, there should be a premium valuation because of the company’s strong growth rate. Yet it is important to keep in mind that there are still plenty of risks, as noted above. Plus, the drug development process can be quite volatile, especially for very complex diseases like cystic fibrosis.
Finally, there is emerging competition in the market. As should be no surprise, a variety of startups, such as Synedgen, are focused on the opportunity, as well as larger players like Galapagos NV (ADR) (NASDAQ:GLPG), which has the backing of AbbVie Inc (NYSE:ABBV).
Tom Taulli runs the InvestorPlace blog IPO Playbook and operates PathwayTax.com, which provides year-round tax services. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.