Vertex Pharmaceuticals Inc (VRTX)

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Zacks.com
Buy Vertex Pharma Below $20
Tuesday April 22, 2:34 pm ET
By Jason Napodano, CFA

Vertex Pharmaceuticals, Inc.'s (NasdaqGS: VRTX - News) stock has had a wild ride over the past several months -- it was previously down big as timeline slippage for the filing of Telaprevir and increasing cash burn rates have frustrated shareholders. However, the clinical data on Telaprevir and other pipeline candidates continues to look very strong.

There is little doubt in our mind that Telaprevir has blockbuster sales potential. The burn rate and high expectations will probably keep the shares from breaking out to the upside until the approval of the drug perhaps in 2011. In the meantime, Vertex's stock can probably be traded effectively, buying when the name goes below $20 and selling after a strong run-up.

Vertex represents an attractive long-term opportunity based on the potential blockbuster sales of Telaprevir. Other pipeline candidates such as VX-702, VX-770, and VX-509 also look very interesting. However, catalysts seem limited until the second half of the year and Vertex is burning cash at a significant rate. The financial situation is solid, considering the recent secondary debt and equity offering to raise over $400 million, but dilution remains a concern.

As these issues ebb and flow we think Vertex's stock can be an effective trading vehicle. We would be buyers below $20 based on the strength of the pipeline. We would look to lighten up on the position or take profits after a big run in the name, or when expectations seem unrealistically high.

At less than $20 Vertex becomes a Buy based on the attractiveness of Telaprevir, or the notion that Johnson & Johnson (NYSE: JNJ - News) may decide to acquire the entire company in order to obtain the U.S. rights to the drug. This is a distinct possibility, in our view, although we believe Vertex management would be hesitant to sell at that depressed of a level.

Our price target is $30 per share. Selling the HIV royalty, guidance that the FDA will accept the PROVE-3 study as part of the registration program, or the potential for lower cash burn rates in 2009 and 2010 are all things that could keep the shares moving higher.