Macro Tsimmis

intelligently hedged investment

Vertex (VRTX) update #24

Posted by intelledgement on Wed, 18 Feb 09

Our speculative biotech developer, Vertex Pharaceuticals (VRTX), today announced a surprise secondary offering of ten million shares priced at $32/share. The move was unexpected, in view of the company’s $832 million cash position as of 4Q08. Vertex conducted two secondary offerings in 2008, including one for $288 million in notes and $113 million in stock last February, and one for $217 million in stock just last September.

Our projections—which included what we felt to be a conservative 10% projection for annual dilution through the first profitable year of 2011—forsaw 160 million shares to be outstanding as of the end of 2009…but here we are in February looking at 183 million, which is running at a 17.5% level of dilution (since 2007 when 132 million shares were outstanding). Our model projects a price/sales ratio of 9 for VRTX in 2014, presuming sales of telaprevir ensue in 2011. At a rate of 10% annual dilution, our market valuation projection gave us a stock price of $161 in 2014 which, discounted 25% per year, meant we could reasonably expect VRTX to be at $38 by the end of 2009. However, at a rate of 17.5% annual dilution (dropping to 5% dilution after the company goes into the black), the 2014 value drops to $124…which yields a fair end-2009 value of $29.

If we presume that there will be no more secondaries in 2009—hopefully, with the company having $1B in cash, that should be a reasonable presumption—and that the dilution in 2010 will not exceed 10%, then we have a 2014 target of $148 and an end-2009 fair value of $35 (here is a revised price projections spreadsheet). The price is around $32 here, so we are getting close to the edge on this play. If the projected ROI declines further from here, we will have to cash in our chips.

Previous VRTX-related posts:


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