What’s Next For Vertex Pharmaceuticals Stock After An 8% Fall Last Week?

by Trefis Team
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[Updated: 6/14/2021] VRTX Stock Decline

The stock price of Vertex Pharmaceuticals (NASDAQ: VRTX) has seen an 8.1% drop over the last five trading days, after the company announced that it will discontinue the clinical trials for VX-864, an experimental treatment for the rare genetic disorder alpha-1 antitrypsin (AATD). Note that earlier in October 2020, the company discontinued VX-814, another drug that was being investigated for a potential treatment for AATD. The development around VX-814 caused a large 20% hit to the stock in a single trading session, while the VX-864 news led to an 11% fall in VRTX stock in Friday’s trading session. Although the peak sales for VX-864 were pegged around $1.0 billion, the chances of it being effective were on the lower side, after the setback with VX-814. As such, we believe that VRTX stock did not warrant an 11% drop following this development, and it remains undervalued in our view.

Now that VRTX stock has fallen 8.1% in just five days, will it resume its downward trajectory over the coming weeks, or is a rise in the stock imminent? Going by the historical performance of VRTX stock, it appears that the stock will rebound in the near term. Using the recent trend (8.1% fall in a week) and ten years of historical stock data, the Trefis AI engine finds that VRTX stock will likely move by over 3% over the next one month (twenty-one trading days). 

According to the Trefis Machine Learning Engine, which identifies trends in a company’s stock price using historical stock data, returns for VRTX stock average around 3.4% in the next one-month (twenty-one trading days) period after experiencing a 5% fall in a week (five trading days), marking a 1.7% excess return compared to the S&P500. Also, there is a 59% probability of a positive return over the next twenty-one trading days and 57% percent probability of a positive excess return.

But how would these numbers change if you are interested in holding VRTX stock for a shorter or a longer time period? You can test the answer and many other combinations on the Trefis Machine Learning Engine to test Vertex Pharmaceuticals stock chances of a rise after a fall. You can test the chance of recovery over different time intervals of a quarter, month, or even just one day!

Some Fun Scenarios, FAQs & Making Sense of Vertex Pharmaceuticals Stock Movements:

Question 1: Is the average return for Vertex Pharmaceuticals stock higher after a drop?

Answer: Consider two situations,

Case 1: Vertex Pharmaceuticals stock drops by -5% or more in a week

Case 2: Vertex Pharmaceuticals stock rises by 5% or more in a week

Is the average return for Vertex Pharmaceuticals stock higher over the subsequent month after Case 1 or Case 2?

VRTX stock fares better after Case 1, with an average return of 3.4% over the next month (21 trading days) under Case 1 (where the stock has just suffered a 5% loss over the previous week), versus, an average return of 0.3% for Case 2.

Try the Trefis machine learning engine above to see for yourself how Vertex Pharmaceuticals stock is likely to behave after any specific gain or loss over a period.

Question 2: Does patience pay?

Answer: If you buy and hold Vertex Pharmaceuticals stock, the expectation is over time the near-term fluctuations will cancel out, and the long-term positive trend will favor you – at least if the company is otherwise strong.

Overall, according to data and Trefis machine learning engine’s calculations, patience absolutely pays for most stocks!

Question 3: What about the average return after a rise if you wait for a while?

Answer: The average return after a rise is understandably lower than after a fall as detailed in the previous question. Interestingly, though, if a stock has gained over the last few days, you would do better to avoid short-term bets for most stocks.

It’s pretty powerful to test the trend for yourself for Vertex Pharmaceuticals stock by changing the inputs in the charts above.

[Updated: 4/13/2021] VRTX Stock Undervalued

We believe that the stock price of Vertex Pharmaceuticals (VRTX) is undervalued at current levels of $215. VRTX stock is up a mere 6% off the March 2020 bottom compared to the S&P which moved 85%. VRTX stock has significantly underperformed the broader markets due to multiple factors. Firstly, in mid-October 2020, the company discontinued VX-814, a drug that was being investigated for a potential treatment for alpha-1 antitrypsin deficiency (AATD). This development caused a large 20% hit to the stock in a single trading session. Secondly, the company’s Q4 results were lower than street expectations, weighing on the stock price growth. However, now that the stock has corrected (down 13% in the last one year) despite revenue growing 49% y-o-y over the last four quarters, we believe VRTX stock is likely to see higher levels. Our dashboard Buy Or Fear Vertex Pharmaceuticals Stock provides the key numbers behind our thinking.

Looking at a wider time horizon, VRTX stock is up 29% from the levels of $166 seen toward the end of 2018. Most of the stock price appreciation since 2018 can be attributed to the company’s EPS growth. Diving into fundamentals, total revenues grew 2x from $3.0 billion in 2018 to $6.2 billion in 2020, primarily due to strong sales for Trikafta, which was approved by the U.S. FDA in late 2019 and it alone garnered $3.9 billion in its first full-year of sales in 2020. The company’s net margins on a GAAP basis have been volatile rising from 11% in 2017 to 69% in 2018, and dropping to 44% in 2020. The surge in 2018 can be attributed to a tax benefit of over $1.5 billion from release of the company’s valuation allowance. This clubbed with a 2% growth in total shares outstanding due to share issuance has meant that the company’s earnings grew 27% from $8.24 in 2018 to $10.44 in 2020 on a per share basis.

Despite the strong fundamentals, the company’s P/E multiple didn’t see much growth, rising from 20x in 2018 to 23x in 2020. The P/E multiple is currently back at 20x, which we believe is low and compares with levels of 23x seen as recently as late 2020.

Outlook

2020 has been a solid year for Vertex’s revenue growth, courtesy of Trikafta. Vertex’s current commercial drugs primarily deal with Cystic Fibrosis (CF), a genetic disease that affects the lungs and digestive system. While Trifkafta is expected to be the single biggest revenue driver for the next few years, investors are also concerned about the company’s future outside of CF. The company’s management has also stated that they are looking to acquire more assets to bolster its pipeline, something that may interest investors when any deal is announced.

For now, all eyes will be on the expansion of Trikafta. The company reported a solid 29% jump in its adjusted revenues in Q4 2020, led by growth in Trikafta. Furthermore, the company’s adjusted net income margin grew over 500 bps to 41% in Q4 2020, compared to 35% in the prior year quarter. While the earnings were bolstered by margin expansion, partly due to lower R&D expenses, the overall earnings growth was below the street expectations.

Looking forward, Vertex will likely see an increase in demand for its CF drugs, given the market is large, and it is expected to grow in high-teens on an average over the next few years. While the Covid-19 related lockdowns had earlier impacted expansion of several drugs in 2020, due to a delay in new patient enrollments, the trend has largely reversed over the recent months. Now that one-third of the U.S. population has already received at least one dose of the Covid-19 vaccine, the U.S. in particular is fast approaching toward normalcy. That said, any further recovery in the economy and its timing hinge on the broader containment of the coronavirus spread. We are now seeing a large spike in Covid-19 cases in some of the countries, such as India and Brazil, owing to the new variants of the virus. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia.

Finally, looking at the valuation, we believe that VRTX stock is undervalued at the current levels of $215. Currently, investors seem to be worried about the pipeline and revenue dependency only on CF drugs. However, going by the numbers, Vertex’s revenues are estimated to grow 12% in 2021 as well as 2022, while EPS on an adjusted basis is expected to grow to $13.10 in 2022, compared to $10.32 in 2020. At the current price of $215, VRTX stock is trading at 19x its 2021 and 16x its 2022 earnings, compared to levels of 23x seen as recently as late 2020, implying that VRTX stock is undervalued currently.

While VRTX stock could see upside, 2020 has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Masimo vs. Vertex Pharmaceuticals.

See all Trefis Price Estimates and Download Trefis Data here

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