Vertex Pharmaceuticals (VRTX 3.40%), a leading drugmaker, is performing exceedingly well for the year — or at least it was, until it released its first-quarter update. The results were not to the market’s liking, so much so that they led to a significant post-earnings dip for the stock. Shares are still in the green year to date, but only barely.
However, Vertex’s past stock-market meltdowns — and what happened afterward — might suggest that its most recent drop represents an excellent buying opportunity.
Image source: Getty Images.
Vertex tends to bounce back strong
Let’s review some reasons that led to Vertex Pharmaceuticals’ post-earnings dip. First, the company’s financial results were not as strong as expected: It missed revenue and earnings estimates.
Second, the biotech announced a clinical setback. It decided to pause the development of VX-522, a next-gen, mRNA-based therapy for cystic fibrosis (CF), due to potential tolerability issues. Vertex famously dominates the CF area, and its current medicines can treat about 90% of patients with this rare disease. It was developing VX-522 for some patients who are not eligible for the existing standards of care, but the medicine’s future is now uncertain.
With that out of the way, let’s review how Vertex’s shares have reacted after double-digit plunges in the past five years.
Back in 2020, the company announced it would give up the development of VX-814, a potential treatment for alpha-1 antitrypsin deficiency (AATD), a rare disease that can cause lung and liver damage. Vertex’s shares fell off a cliff following this announcement on Oct. 14, 2020, but they bounced back big-time thereafter:
VRTX Total Return Level data by YCharts.
More recently, on Dec. 19, Vertex announced phase 2 results for suzetrigrine (marketed as Journavx in treating acute pain) in patients with painful lumbosacral radiculopathy. The data was positive, or so said the company. Wall Street disagreed, sending Vertex’s shares down significantly. Once again, the stock rebounded admirably, at least until its most recent dip. And even considering this post-earnings decline, Vertex’s shares have outperformed broader equities since that debacle:
VRTX Total Return Level data by YCharts.
Of course, these examples don’t guarantee the same thing will happen this time, but there are good reasons beyond the historical record to believe it will.
There are still excellent reasons to buy the stock
Let’s dig deeper into Vertex’s Q1 update. Its results did miss analyst projections, partly because of copies of its CF medicine in Russia that ate into its revenue and earnings. Vertex Pharmaceuticals believes this issue is isolated to Russia, and that even there the company should be able to solve it eventually, since these are illegal copies.
What about the recent clinical setback? The worst-case scenario would be for the drugmaker to abandon the development of VX-522. We don’t know if this will happen yet, but if it does, it wouldn’t be the first time one of its CF therapies fails a study. Developing medicines that address the underlying causes of this rare condition is challenging; that’s why no biotech company has been able to do it except for Vertex Pharmaceuticals.
Even if this one fails, the company’s significant experience in this area suggests that it will eventually crack the code for patients who are currently ineligible for its existing drugs. It has developed newer medicines with broader patient populations multiple times in the past 10 years. Of note, Vertex also took a $379 million impairment charge in the first quarter that affected its bottom line, due to its decision to give up development of VX-264, an investigational therapy for type 1 diabetes (T1D).
But the issues that led to Vertex’s poor first-quarter results are temporary. It has excellent long-term prospects, as its CF lineup is still going strong. The recent addition of Alyftrek — a newer CF therapy — to its portfolio should eventually make a meaningful impact.
The company’s other products, Casgevy (which treats two rare blood diseases) and Journavx, should also meaningfully contribute to top-line growth. Vertex’s pipeline features VX-880, another medicine being developed for T1D; given this therapy’s progress, Vertex expects regulatory submissions in 2026. Elsewhere, it is working on potential breakthrough drugs such as inaxaplin, which could become the first medicine that targets the underlying causes of a condition called APOL-1 mediated kidney disease.
With all that going on, Vertex Pharmaceuticals should still perform well in the long run. Its shares look like a no-brainer buy on the dip.
