We Think This Narrow-Moat Biotech Is Cheap

Stefan Quenneville: Since last summer, there has been a dramatic sell-off in the biotech sector due to concerns about the sustainability of drug pricing in the U.S. We think this has created a very attractive opportunity for investors to look at "moaty" and undervalued biotech names like Vertex Pharmaceuticals.

We think Vertex has a narrow moat based on its increasingly dominant position in the cystic fibrosis market. Cystic fibrosis is a rare orphan disease that affects about 70,000 people worldwide. Vertex has a series of drugs that target different genetic subtypes of cystic fibrosis and are extremely effective at treating this very severe disease. Because of the efficacy of their drugs, [Vertex is] able to command very strong pricing power, with their drugs costing between $200,000 and $300,000 per year. So despite the small number of patients, they have a number of blockbuster opportunities already on the market and we think that they are going to be the dominant player in cystic fibrosis for the medium to long term given the efficacy of their drugs.

From a competitive perspective, there are an increasing number of players looking at the cystic fibrosis market, but most of the competition is relatively early-stage with the most advanced players being only in Phase 2. We think this is going to give Vertex a number of years to entrench their position in the market before they have to face any potential competition.

From a stock perspective, given Vertex's narrow moat and very attractive discount to our fair value estimate, we think it's a good time for investors to have a look at the name.