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Why Is Vertex (VRTX) Down 3.5% Since Last Earnings Report?

Zacks Equity Research
In the latest trading session, Electronic Arts (EA) closed at $87.50, marking a -1.89% move from the previous day.

A month has gone by since the last earnings report for Vertex Pharmaceuticals (VRTX). Shares have lost about 3.5% in that time frame, outperforming 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 the most recent earnings report in order to get a better handle on the important drivers.

Vertex Q1 Earnings and Revenues Surpass Estimates

Vertex’s first-quarter 2019 earnings per share of $1.14 beat the Zacks Consensus Estimate of 98 cents. Moreover, earnings rose 50% year over year as higher product sales were partially offset by higher costs and taxes.

Revenues were $858.4 million in the first quarter and surpassing the Zacks Consensus Estimate of $851.0 million. The company’s sales surged 34% year over year, driven by the rapid uptake of its newest CF medicine, Symdeko, in the United States.

CF Franchise Sales Strong

Vertex’s first-quarter revenues consisted of sales from its CF products such as Kalydeco, Orkambi and Symdeko and collaborative and royalty revenues of $1.2 million.

Total CF product revenues were $857.0 million in the quarter, up 34.4% year over year, mainly driven by the rapid uptake of Symdeko in the United States and the recent launch of Symkevi in Germany.

However, CF product revenues declined sequentially in the first quarter hurt by a channel inventory build that occurred at the end of 2018 and higher gross to net adjustments this quarter.

Symdeko generated sales of $320.3 million in the reported quarter, reflecting an increase of 8.8% sequentially as new patients initiated treatment. Symdeko revenues included $32 million of Symkevi revenues from ex U.S. markets primarily from Germany. On the call, the company said that Symkevi launch is off to a strong start in Germany.

The company said that Symdeko demand came from all eligible groups of patients including treatment-naïve F508del homozygous patients, those who have discontinued Orkambi treatment and also patients switching from Orkambi or Kalydeco to Symdeko.

In 2019, the company expects additional patients to initiate treatment with Symdeko in the United States and EU, including younger patients in the United States, which should boost revenues from the drug.

Kalydeco sales declined 2.4% to $244 million year over year due to patient switching to Symdeko.

Orkambi sales decreased 17.2% year over year to $293 million due to a switch in patient base to Symdeko from Orkambi as patients discontinued Orkambi to start treatment with Symdeko, which partially offset the increase in eligible patient population due to label expansion approvals.

Costs Rise

Adjusted operating income rose 81% to $377 million in the quarter driven by higher revenues and disciplined spending.

Adjusted research and development (R&D) expenses increased 5.1% to $273.2 million in the first quarter due to expansion of Vertex's pipeline in CF and other new disease areas.

Adjusted selling, general and administrative (SG&A) expenses escalated 14.8% to $114.3 million in the reported quarter due to investments made in supporting CF patients’ treatment, globally.

2019 Revenue Guidance

Vertex maintained its 2019 outlook for CF product sales and combined operating costs.

The company expects total full-year revenues for CF products to be in the range of $3.45-$3.55 billion, indicating year-over-year growth of approximately 15%. The full-year impact of Symdeko’s launch, ex-US reimbursement agreements and label expansions of the CF drugs are expected to drive CF product revenue growth in 2019.

Combined adjusted research and development (R&D) plus selling, general and administrative (SG&A) expenses in 2019 are anticipated in the range of $1.65-$1.70 billion. Adjusted tax rate is still expected to be between 21% and 22%.

The increase in operating expense was due to estimated costs related to the development and the potential launch of triple combinations regimen and expansion of early-stage non-CF pipeline.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed an upward trend in fresh estimates. The consensus estimate has shifted 7.35% due to these changes.

VGM Scores

At this time, Vertex has a nice Growth Score of B, a grade with the same score on the momentum front. However, 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 C. 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 #2 (Buy). We expect an above average return from the stock in the next few months.



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