Strong Vertex Pharma Pipeline

Vertex Pharmaceuticals, Inc.’s (VRTX - Snapshot Report) stock has had a wild ride over the past several months. It was previously down big, as the timeline slippage for the filing of telaprevir, its oral protease inhibitor for the treatment of hepatitis C, and increasing cash burn rates frustrated shareholders. However, the clinical data on telaprevir and other pipeline candidates continues to look very strong. That said, the cash burn rate and high expectations keep us at a Hold rating.

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, but dilution remains a concern. As these issues ebb and flow, we think Vertex’s stock can be an effective trading vehicle. 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 $25, Vertex becomes a Buy based on the attractiveness of telaprevir, or the notion that Johnson & Johnson (JNJ - Analyst Report) may decide to acquire the entire company in order to obtain the U.S. rights to the drug. This is a distinctive possibility in our view, although we believe Vertex management would be hesitant to sell at that depressed of a level.

We are hesitant to recommend the name despite what we see as a significantly under-valued story based on the risk that cash burn rates will remain above $300 million through 2010, that timeline slippage will cause further delays in telaprevir, or that Schering Plough Corp’s (SGP) boceprevir looks superior. Our price target is $34 per share.

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Read the full analyst report on VRTX