What's Wrong With Vertex Pharmaceuticals Stock?

Key Points

• Disappointing trial results for VX-993 led to a sell-off of Vertex's stock recently.

• The company's financials remain strong, and sales were up 12% last quarter.

• Vertex has been broadening its pipeline, which can lead to much more growth in the future.

• 10 stocks we like better than Vertex Pharmaceuticals ›

Vertex Pharmaceuticals (NASDAQ: VRTX) has been a top pharma stock in recent years. It has been generating strong revenue growth while also building out its portfolio of drugs, expanding its growth opportunities in the process. This is the type of stock that you might expect to see taking off this year.

But that isn't happening.

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Instead, the share price of Vertex recently plunged. Excitement around the company has cooled drastically. What's wrong with Vertex Pharmaceuticals, and is it an investment worth buying on the dip, or could there be more trouble ahead for the healthcare stock?

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Vertex's stock tanks after underwhelming study

On Aug. 4, Vertex released its latest quarterly numbers as well as results from a study for VX-993, which is a treatment for acute pain. It was the latter that had the most impact on the stock, and it wasn't good news. Vertex said that the treatment did not meet the primary endpoint in its phase 2 trial, and that it will not move on to further trials related to acute pain.

The company has an approved pain medication, Journavx, which regulators approved earlier this year for moderate to severe acute pain. The non-opioid medication was a big win for the company, and investors were hoping VX-993 might be able to build on that success and potentially be a better option for patients. As is often the case with pharma stocks, bad news from a clinical trial can quickly send a stock into a tailspin. Before the recent news came out, Vertex's stock was trading at around $470. As of Tuesday, it had fallen to roughly $396.

How the business looks today

Despite the setback for Vertex, the business remains in solid shape. In its most recent quarter, which ended on June 30, the company's revenue rose by more than 12% year over year, to just under $3 billion. Vertex is on track to hit its guidance of around $12 billion in revenue for the full year, which would translate into an increase of 9% from the previous year.

The company is a leader in cystic fibrosis drugs, and they account for nearly all of its revenue. But Vertex's business is broadening, and there is much more growth on the horizon. Journavx has only recently launched, and it brought in $12 million over the last three months. Casgevy, a gene therapy treatment for sickle cell disease and transfusion-dependent beta-thalassemia, has brought in over $30 million. Both of these products could be blockbusters, generating revenue of more than $1 billion at their respective peaks.

What I like most about Vertex's business is its fantastic profit margins. Last quarter, the company's net income totaled $1 billion, which was 35% of its top line. With solid margins, the company can easily grow its profits in the long run, paving the way for a higher valuation.

Vertex is a reasonably priced stock with a lot of potential upside

According to analyst estimates, Vertex's stock is trading at 22 times its projected future earnings. That's modest given the average S&P 500 stock trades at a forward price-to-earnings multiple of 24.

Vertex has the potential to be a tremendous growth stock to own in the long run. While the recent news around VX-993 may be disappointing, it shouldn't dissuade investors from investing in the business. Not every trial will turn out well, and not every drug will be a blockbuster. But with a growing portfolio of drugs and a highly profitable business, Vertex is one of the better healthcare stocks to buy and hold right now.

Should you invest $1,000 in Vertex Pharmaceuticals right now?

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.