Alternative Pain Medicine Vertex: Investors Underestimate Potential (NASDAQ:VRTX)

I believe that Vertex (NASDAQ:VRTX) stock is significantly undervalued because investors are massively underestimating the value of the company’s pain treatment, VX-548. From my point of view, there is a good chance that the VX-548 will become a huge success. That’s because I believe There is a great hunger in America for a drug that treats pain more effectively than acetaminophen and NSAIDs and is less likely to be abused by patients. And by my calculations, Vertex’s stock doesn’t come close to reflecting the huge potential of the VX-548. As a result, I recommend long-term investors buy VRTX stock.

Last quarter, Vertex began the process of submitting the drug for FDA approval, but the agency has yet to issue a decision on the application. However, the agency previously granted the treatment breakthrough status, suggesting it believes the therapy has significant potential.

VX-548 is probably more effective than low-intensity analgesics

In phase III trials, VX-548 alleviated pain in postoperative patients significantly more than placebo. What’s more, the drug reduced pain in “tummy tuck” patients more than Vicodin, which incorporates an opioid and is often addictive.

But the difference in the amount of pain relief provided by VX-548 and Vicodin for these patients did not reach statistical significance. And among patients who underwent a bunionectomy, Vicodin alleviated pain significantly more than VX-548. Overall, my conclusion from the data is that given VX-548’s ability to relieve pain more than Vicodin among tummy tuck patients, in all likelihood VX-548 is significantly more potent than NSAIDs and ibuprofen, which are much, much weaker than opioids. . However, data on tummy tuck patients suggest that VX-548 is probably not as potent as opioids.

CEO Reshma Kewalramani said VX-548 can “bridge … the therapeutic (gap)” between NSAIDs and ibuprofen on the one hand and opioids on the other. My research suggests that this thesis is quite valid, as there does not appear to be any treatment between the two classes that can be used to reduce pain in a wide variety of patients. For example, when discussing options for patients with back pain, Aetna (AET), the health insurance giant, listed “physical therapy, acupuncture and/or cognitive behavioral therapy” as possible treatments. And he noted that “opioids, while effective at blocking pain signals in the short term, don’t offer much help to people with chronic pain.” It did not list other drugs that could be used to reduce patients’ back pain.

VX-548 is unlikely to cause dependence or abuse

VX-548 works by inhibiting an ion channel, NAv1.8, which has been shown to be “vital…for nerve membrane voltage changes and the transmission of painful stimuli in the peripheral nervous system.”

Because the drug, unlike opioids, does not interact directly with the brain, it is unlikely to trigger high levels of addiction or abuse. And Stephen Waxman, MD, PhD, director of the Center for Neuroscience and Regeneration Research at Yale School of Medicine, said that because NAv1.8 is not present in the brain, inhibiting it can provide pain relief “without central side effects like would be … drowsiness or the potential for addiction.” Kewalramani, Vertex’s CEO, said VX-548 “has no addictive potential.”

A likely hunger for non-opioid pain relievers

Opioids are highly addictive. What’s more, between 2020 and 2022 alone, prescription opioids were implicated in the deaths of about 48,000 Americans, according to the NIH. Since the opioid crisis began in the late 1990s, drugs have ended or ruined the lives of hundreds of thousands of Americans.

In the past, payers have been reluctant to cover expensive, narrowly tailored pain relievers such as lidocaine patches, which are less addictive but more expensive than generic opioids. But because of the huge number of deaths that prescription opioids have caused, along with the extensive and negative publicity the drugs have received in the US, I think there will be significant pressure from the American public and, to some extent, of the country’s political leaders. on private insurers to cover VX-548.

Also, importantly, opioid addiction is actually quite expensive for the country. According to a CDC study, for example, “opioid use disorder and fatal opioid overdose” cost the U.S. a combined total of more than $1 trillion in 2017 alone.

In addition, Vertex, with $5.8 billion in cash and little debt at the end of last quarter, has plenty of funds to spend on advertising VX-548 to rally public support for it. It can also spend significant funds lobbying politicians to support the drug.

With all these points in mind, I expect Medicare to provide widespread coverage for the drug.

Estimating potential earnings through VRT stock

In 2022, approximately 130 million opioid prescriptions were filled in the US Teva’s (TEVA) the migraine pain medication Ajovy costs about $1,000 per dose. Assuming VX-548 will cost about the same and patients will receive an average of five doses, that translates to $5,000 in revenue per patient for Vertex. We can also assume that the gross margin of the drug will be around 80%, in line with the overall pharmaceutical market. So I’m going to assume that for every patient that takes the drug, the company’s cash flow will be increased by $4,000.

I think Vertex will start with a relatively low market share in the early years before growing rapidly as its salespeople educate doctors about the drug as more insurers, including Medicare, are successfully persuaded to cover plan and as more patients hear about this drug. drug. As a result, we estimate that from 2025 to 2029, VX-548 may capture 0.2%, 0.5%, 0.8%, and 1.2% of the US opioid market, respectively. Using our previous assumptions, this would increase the company’s cash flows by approximately $1 billion, $2.5 billion, $4 billion and $6 billion in each of those years.

According to the Discounted Future Cash Flows model we used, with a Discount Rate of 8%, these cash flows have a present value of $10.65 billion. Last year, Vertex generated cash from operations of $3.5 billion. If we add $10.65 billion to this figure, the result is $14.15 billion. The average forward price-cash flow multiple for the pharmaceutical sector is 16.35. Multiplying the last two digits results in a total of $231 billion. That’s 85% above the stock’s current market cap of $125 billion.

Risks for my thesis

For one reason or another, the FDA may decide not to approve VX-548, or most insurers may decide not to cover the drug. If the FDA doesn’t approve the drug, it won’t generate revenue, and if insurers don’t cover it, it likely won’t significantly increase Vertex’s sales. After the drug is approved, the treatment may be found to have dangerous side effects, causing it to be taken off the market. Finally, revenue from the company’s other treatments may fall sharply, making my estimates overly optimistic.