Buy Vertex Pharma Below $25

Vertex Pharmaceuticals, Inc. (VRTX - Analyst Report) represents an attractive long-term opportunity based on the potential blockbuster sales of telaprevir and its newly established position as the market leader for new HCV treatment options with the closing of the ViroChem deal in March 2009. Also, VX-770 for cystic fibrosis also looks very interesting. The financial situation is also solid with an estimated $700 million in cash predicted to be on hand at the end of the year.

That being said, dilution still remains a concern given the high burn rate and the likely need for cash ahead of the telaprevir launch. Also, Vertex stock seems to react very negatively every time Schering-Plough (SGP) releases data on its phase III candidate, boceprevir.

As these issues ebb and flow, we think Vertex’s stock can be an effective trading vehicle. We would be buyers below $25 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 $25 Vertex becomes a Buy based on the attractiveness of telaprevir and the HCV pipeline, 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 and/or VX-770. This is a distinctive possibility in our view, although we believe Vertex management would be hesitant to sell without a big premium.

We are hesitant to recommend the name despite what we see as a significantly opportunity for telaprevir. Timeline slippage and news out of Schering-Plough on boceprevir can cause a big move down in the stock. Nevertheless, our price target of $34 represents significant upside.