Below we take a look at Disney (DIS) and 4 Other Stocks Billionaire Phill Gross Was Buying Up in Q1. For our methodology and a more comprehensive list of stocks that were on the billionaire money manager’s wish list in the first quarter, please see Disney (DIS) and 9 Other Stocks Billionaire Phill Gross Was Buying Up in Q1.
5. Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX)
Value of Adage Capital Management’s 13F Position: $207 million
Number of Hedge Fund Shareholders: 49
Hedge funds have been unloading Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) in droves in recent quarters, with a net total of 31% of Q1 2021 shareholders having sold out of the stock a year later. Phill Gross’ Adage Capital Management has bucked that trend however, more than tripling its stake in Vertez during Q1 to 793,290 shares.
Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) shares have gained 29% this year and 44% over the past 12 months thanks to the biotechnology company’s strong and growing pipeline of treatments. Vertex currently dominates the cystic fibrosis space, having the only approved drugs on the U.S and European markets and with very little competition in its rear view mirror. The patents for Trikafta/Kaftrio, its bestselling CF drug, won’t expire for another 15 years. In addition to some of its other key drugs like Orkambi, Kalydeco, Symdeko, the company is developing novel treatments that target everything from acute pain to Type 1 Diabetes.
Tweedy Browne Company loves the pricing power that Vertex Pharmaceuticals Incorporated (NASDAQ:VRTX) has in the cystic fibrosis space and believes its strength in that domain will allow the company to develop even better treatments and build a stronger and more diverse portfolio, as detailed in the fund’s Q4 2021 investor letter:
“Portfolio activity during the quarter was relatively modest, and mostly on the sell side, taking advantage of the market’s advance to trim or sell positions that were trading at or above our estimates of their underlying intrinsic values. In terms of newly established positions, there were only two, (including) Vertex Pharmaceutical, a US-based pharma company specializing in therapies for cystic fibrosis (Value Fund). Both of these companies at purchase were trading at substantial discounts from our estimates of their underlying intrinsic values, and, in our view, are financially strong and well positioned for future growth.
Vertex Pharmaceutical, which was purchased by the Tweedy, Browne Value Fund in mid-November 2021, is a biotechnology company that specializes in rare diseases/orphan drugs. The company’s current strength is in the treatment of cystic fibrosis, where its therapies are the gold standard of care globally. Analysts expect that Vertex will be able to maintain its dominant position in the treatment of this disease, which afflicts 83,000 people worldwide, largely due to the effectiveness of its therapies, the fact that patent expirations for its drugs are a long way off into the future (2030-2037), and the lack of effective competition. This affords Vertex pricing power for its drugs, as there are currently no good alternative therapies. Assuming the company receives complete international and pediatric approvals, Vertex’s portfolio of approved drugs would be eligible to treat 90% of the people who have this disease.
Vertex’s therapies are also not one and done drugs, but rather start in early childhood and continue throughout the patient’s lifetime. The company’s strong cash flow, in our view, should support the company’s development of even better next generation drugs to treat cystic fibrosis as well as diversify its drug pipeline to treat other rare diseases. However, many of these treatments are on the horizon or are in their incipient stages of development.
In the quarter just prior to the Fund’s initial purchase of Vertex, knowledgeable insiders, including the company’s CEO and its lead independent director, purchased millions of dollars of the company’s stock at prices higher than we paid for the Fund’s shares. The company itself also repurchased approximately $642 million worth of its shares in the 3rd quarter at or around the same prices paid by the CEO and lead director ($195 per share). We estimate the company’s underlying intrinsic value to be in the range of $240 to $250 per share, and we believe that estimate is well supported by current, here-and-now cash flow, operating income and earnings per share. Morningstar and Goldman Sachs have valued the company at substantially higher prices than our estimate of $240 – $250 per share. The Fund’s weighted average cost in the stock is $187. At initial purchase, the company was trading at approximately 14 times current earnings, and 9.9 times enterprise value to earnings before interest and taxes.”
