Vertex Pharmaceuticals (VRTX 0.88%) recently excited the medical community with clinical trial results from an experimental diabetes treatment it's developing. In a nutshell, it looks like a single infusion of VX-880 allowed a dozen diabetes patients to begin producing their own insulin. It worked so well that nearly everyone treated has reduced their reliance on regular insulin injections.
In response to good news from the VX-880 program, Wells Fargo analyst Mohit Bansal raised his price target to $555 and maintained an overweight rating. The new target implies a gain of about 19% from recent prices.
NASDAQ: VRTX
Key Data Points
Is Vertex Pharmaceuticals a good investment right now? Let's weigh its strengths against some of its challenges to find out.
Why VX-880 could make Vertex Pharmaceuticals a great investment
There are roughly 1.5 million American adults with diagnosed cases of type 1 diabetes. This is the early-onset form of the disease that occurs after a patient's immune system attacks and destroys islet cells in the pancreas.
Blood sugar levels spike after a meal, and in healthy folks, islet cells start secreting appropriate amounts of insulin, which tells tissues to absorb that sugar. Type 1 diabetes patients who lack viable beta cells can manually inject themselves with insulin, but injecting an appropriate amount every time is a challenge.
During a recent study with type 1 diabetes patients, around a fifth of participants experienced a severe hypoglycemic event during a 12-month period. This means too much insulin dropped their blood sugar concentration low enough that they could have lost consciousness or worse. Surprisingly, these patients were very well cared for. Among the participants, 91.7% were using constant blood glucose monitors, plus a majority employed automated insulin delivery systems.
Studies suggest that around the world, there are over 1 million type 1 diabetes patients who will experience life-threatening hypoglycemic events, no matter how well they try to manage their disease. For these patients, VX-880 could make a big difference.
At the latest meeting of the American Diabetes Association, Vertex presented results from the first 12 patients to receive a full dose of VX-880 in a mid-stage trial. This is essentially a vial of mass-produced islet cells designed to restore the pancreas' insulin-secreting ability, and it appears to work as intended.
All 12 patients treated with a full dose of VX-880 experienced serious hypoglycemic events before starting the study. After treatment, none experienced a severe hypoglycemic event, and all achieved a standard blood glucose target level.
More than diabetes
Vertex Pharmaceuticals' diabetes program is turning heads, but it's not the company's main area of expertise. Vertex supports its diabetes program with surging profits from cystic fibrosis treatment Trikafta.
There are no viable competitors to Trikafta in late clinical-stage development, and the main patent protecting its market exclusivity doesn't expire until 2037. In the first quarter, Trikafta sales surged 18% year over year to an annualized $9.9 billion, and it isn't the company's only growth driver.
Last December, the Food and Drug Administration (FDA) approved Casgevy for the treatment of severe sickle cell disease. This is a cell-based treatment that Vertex developed in partnership with CRISPR Therapeutics. In January, the FDA expanded Casgevy's label to include patients with transfusion-dependent beta-thalassemia.
Reasons to remain cautious
While VX-880 restores the pancreas' ability to produce insulin naturally, it doesn't prevent immune systems from attacking new islet cells the same way they destroyed the ones that type 1 diabetes patients were born with.
Trial participants treated with VX-880 are also given immunosuppressive drugs that keep their immune systems from destroying their new islet cells. While VX-880 is a once-and-done treatment, it requires lifelong immunosuppression that will saddle patients with a new set of problems.
Casgevy is another once-and-done treatment, which means Vertex can only sell it to patients one time instead of month after month, like most prescription drugs.
Compared to Trikafta, Casgevy will make minor contributions to Vertex Pharmaceuticals' total revenue in the years ahead. Any contribution from VX-880 will likely be just as limited due to a lifelong immunosuppression requirement.
A buy now?
At recent prices, you can buy Vertex stock for about 35.2 times trailing free cash flow. This is a high multiple, but the business is growing fast enough to justify the valuation. Trailing free cash flow has risen about 96% over the past three years.
Growing profits from Trikafta make Vertex's valuation seem sensible, but there isn't a great deal of room for upside. It's probably best to watch this story unfold from a safe distance until you can buy the stock at a significantly lower price.
