Why Is Vertex (VRTX) Down 3.4% Since Last Earnings Report?

It has been about a month since the last earnings report for Vertex Pharmaceuticals (VRTX). Shares have lost about 3.4% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Vertex due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Vertex Q2 Earnings & Sales Beat, Revenue Guidance Up

Vertex’s second-quarter 2020 earnings per share of $2.61 beat the Zacks Consensus Estimate of $2.13. Moreover, earnings skyrocketed 107.1% year over year. Strong product revenues led to higher earnings in the reported quarter.

Revenues of $1.52 billion also surpassed the Zacks Consensus Estimate of $1.41 billion. Vertex’s second-quarter sales comprised only CF product revenues. The company did not record any collaborative and royalty revenues during the reported quarter. Total revenues soared 62% year over year, driven by the rapid uptake of Trikafta in the United States. Moreover, higher international revenues due to the reimbursement approvals received for Orkambi and Symkevi in some international markets in 2019 also drove revenues.

CF Franchise Sales Strong

Trikafta generated sales worth $918 million, compared with $895 million in the first quarter of 2020. The drug has seen solid uptake in the United States since its early launch and has been a key growth driver for Vertex’s growth

Regarding Trikafta’s launch, the company said that majority of the approximately 18,000 eligible patients have now initiated treatment with the medicine. The company said that the compliance and persistence rates and patient inventory levels for Trikafta seen to date with the launch are high.

First-half sales of Trikafta benefited from some early refills by patients due to COVID-19 disruptions. This increased patient inventory will normalize in the second half of the year. Meanwhile, the pace of new patient initiations of Trikafta might slow in the second half as a high percentage of currently eligible patients are already on Trikafta. These factors could result in slower growth of Trikafta in the second half.

Management said that if approved, they will launch the drug virtually in Europe in the peak of the pandemic.  This may hurt initial uptake of the drug as patients may not be able to see their doctors for treatment initiation. Therefore there is uncertainty about actual rate and level of uptake in Europe

Symdeko/ Symkevi registered sales of $172 million in the second quarter, down 52.5% year over year.

Kalydeco recorded sales of $203 million in the quarter, reflecting a 22.5% decrease year over year. Orkambi generated sales of $232 million in the reported quarter, down 26.6% year over year. Sales of Kalydeco, Symdeko/ Symkevi and Orkambi were hurt by patient switching to Trikafta.

Costs Rise

Adjusted operating income rose 112% to $874 million in the quarter driven by higher revenues and disciplined spending.

Adjusted research and development (R&D) expenses rose 18.5% to $321 million in the second quarter due to expansion of CF and non-CF pipeline.

Adjusted selling, general and administrative (SG&A) expenses increased 18.7% to $146 million in the reported quarter due to investments made to support CF patients’ treatment, globally.

2020 Outlook

Vertex raised its revenue guidance for the year primarily based on Trikafta’s continued strong performance in the quarter.

The company now expects total revenues from CF products in the range of $5.7-$5.9 billion compared with the previous range of $5.3-$5.6 billion. The new guidance, at the midpoint, reflects approximately 45% growth over 2019.

Moreover, combined adjusted R&D and SG&A expense guidance for 2020 was maintained in the band of $1.95-$2 billion, which is higher than the 2019 level due to Trikafta launch-related costs and the expansion of the R&D pipeline. Adjusted tax rate is expected in the range of 21.

Enrollment and dosing have been re-initiated in a phase II study on VX-814 in some sites in AATD after they were paused due to COVID-19 in the first quarter.

 

How Have Estimates Been Moving Since Then?

It turns out, estimates review have trended upward during the past month. The consensus estimate has shifted 9.37% due to these changes.

VGM Scores

Currently, Vertex has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. Charting a somewhat similar path, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions looks promising. It comes with little surprise Vertex has a Zacks Rank #1 (Strong Buy). We expect an above average return from the stock in the next few months.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.