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By Kelsey Tsai, CFA | 12-20-2017 03:00 PM

We See This Firm Emerging as a Rare-Disease Powerhouse

Vertex Pharmaceutical's monopoly in the cystic fibrosis market forms the basis of our narrow-moat rating, and we expect that moat to continue to grow.

While Vertex Pharmaceuticals was once best known for a blockbuster hepatitis C drug, the firm's future is now tied to its robust cystic fibrosis portfolio. With its approved treatments and more products in the pipeline, Vertex is creating a dominant franchise in this lucrative rare-disease market.

Vertex's portfolio of disease-modifying drugs forms the basis of our narrow economic moat rating. The company is well supported by lengthy patent protection and first-mover status in the cystic fibrosis market. As the only disease-modifying drugs in that market, Vertex's products now make up the backbone of cystic fibrosis therapy.

Given the limited treatment options for cystic fibrosis and the chronic nature of the disease, Vertex is able to command strong pricing power over the course of a patient's life. Despite this aggressive pricing, uptake has been swift.

We assign Vertex a positive moat trend based on its promising clinical results for pipeline products and the lack of near-term competition in cystic fibrosis, which should allow it to continue to dominate. We believe the company will remain the leader in this rare-disease space for the foreseeable future.

In 2017, the company saw positive first-in-human results from its triple-combination drug program; this new regimen would unlock a large cystic fibrosis patient opportunity for the firm. Those positive results drove the share price into the stratosphere: The stock is up more than 90% this year. Despite the surge, shares still trade at an attractive 15% discount to our fair value estimate. Vertex is among our best ideas today.

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