Shares of Vertex Pharmaceuticals (NASDAQ:VRTX) are miles below the impressive peaks the biotech stock reached last summer, largely due to a midstage clinical trial mishap that happened last fall. The company's successful cystic fibrosis franchise appears unstoppable now, but doubts about future drug development have weighed heavily on the stock. 

Could beaten-down Vertex Pharmaceuticals stock give your portfolio a lift in 2021 and beyond? An upcoming clinical trial readout will tell us a lot more about the company's future. Here are the most important factors to consider.

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Reasons to buy Vertex Pharmaceuticals

Back in October of 2019, the FDA approved Vertex's most important drug to date, Trikafta, for the treatment of cystic fibrosis (CF). This rare disorder is caused by a faulty protein that manages the flow of salt and water in and out of cells in the lungs and other organs. While there are hundreds of genetic mutations that lead to CF, Trikafta is capable of treating around 90% of the overall patient pool.

Trikafta and its precursors from Vertex are the only available treatments for an estimated 70,000 cystic fibrosis patients around the globe -- and they aren't cheap. In 2020, sales of Trikafta and the rest of Vertex Pharmaceuticals' CF franchise generated a whopping $6.2 billion in top-line revenue, and they're still on the rise. With key patents in the U.S. that don't run out until 2037 and a lack of potential competition on the horizon, Vertex is well-positioned to provide a steadily growing profit for at least another decade, and probably longer.

Vertex Pharmaceuticals isn't resting on its CF laurels, either. Last December, Vertex and its collaboration partner CRISPR Therapeutics (NASDAQ:CRSP) reported impressive results from a clinical trial of a gene therapy for two rare blood-based diseases. A single administration of CTX001 helped seven patients, who had severe sickle cell disease and transfusion-dependent thalassemia, avoid the frequent blood transfusions they relied on previously.

Before the end of June, Vertex Pharmaceuticals also intends to report mid-stage clinical trial results for VX-864, a potential new drug for the treatment of alpha-1 antitrypsin (AAT) deficiency. Patients with this disorder have trouble breathing because AAT produced in their liver never reaches lung tissue where it plays an important role. At the moment, just a few thousand people are diagnosed with AAT deficiencies, but there's also a lack of available treatments for this often misdiagnosed disorder. If VX-864 succeeds, it could go a long way to reduce reliance on the company's CF franchise.

Reasons to remain cautious

Vertex Pharmaceuticals relies entirely upon its CF franchise for revenue at the moment. While there aren't any strong competitors on the horizon, the introduction of competition before Vertex can launch CTX001, VX-864, or another potential blockbuster drug would be disastrous. 

There isn't a great deal of enthusiasm for VX-864 lately because last October, the company had to discontinue a study with a related candidate due to safety concerns. Vertex's first AAT deficiency candidate, VX-814, is resting on a scrap heap after a handful of patients that took it showed signs of severe liver damage. Since AAT is produced in the liver before it travels to the lungs, investors are worried VX-864 and any subsequent candidates from Vertex will have the same problem. 

While results from CTX001 have been impressive, sales of single administration therapies to small patient populations are highly problematic. Vertex will have to charge a seven-figure sum to realize a return on huge upfront development expenses, but this won't be possible without positive long-term outcome data. This means that even in a best-case scenario, CTX001 won't have a chance to contribute significant revenue to Vertex's top line for a few more years. 

A buy now?

At recent prices, you can scoop up shares of Vertex Pharmaceuticals at the very reasonable price of just 21 times last year's earnings. Relatively predictable cash flows from Trikafta alone justify the stock's recent prices, making this look like a pretty good stock to buy at the moment.

Engineering new small-molecule drugs to fix troublesome proteins is what Vertex does best, but trial and error still plays a big role.  It was upsetting to see VX-814 miss the mark in its human proof-of-concept trial, but these relatively minor setbacks are to be expected. In fact, the company jettisoned two clinical-stage candidates before settling on elexacaftor, the third component in Trikafta.

Vertex's second clinical-stage attempt at AAT treatment, VX-864, is structurally distinct from ill-fated VX-814, so it's far too early to predict a similar issue. If VX-864 flops too, just remember it's better to discover these issues in early proof-of-concept trials instead of larger, more expensive studies designed to support a new drug application.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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