One way to reduce the degree of difficulty associated with pharma investing is to pursue companies that dominate their markets. Two pharma companies I like because of the breadth and depth of their “ownership” are Zoetis and Vertex Pharmaceuticals.
Though often overlooked, Zoetis is among the world’s leading pharmaceutical companies. The reason it often flies under the radar is because Zoetis manufactures medicines and vaccines for livestock and pets.
This is a huge market and Zoetis is the 800-pound gorilla. The U.S. alone is home to more than 180 million pet dogs and cats, as well as millions more horses and livestock. What this market doesn’t contain however are well funded and aggressive competitors like Johnson & Johnson.
In animal health, Zoetis, with a $ 46 billion market cap is a global player, with approximately half of its sales occurring outside of the United States.
The case for the Zoetis is the domination of its markets, as well as the stability of those markets. Whether pets or livestock, animal populations are growing steadily, and owners are motivated to spend based on two of the most powerful motives on earth: love or profit. These factors have enabled ZTS to grow earnings from $ 1.16 per share in 2013 to $ 2.93 last year, for average annual profit growth of 26.1%.
Vertex Pharmaceuticals is the leader in cystic fibrosis (CF) treatment. The company’s CF franchise consists of Kalydeco, Orkambi and Symdeko, which treat different genetic variations of the disease.
What I like about Vertex is these drugs are throwing off huge amounts of cash. Since 2015, Vertex has grown its cash balance from $ 1 billion to more than $ 3 billion for a stunning average annual increase of more than 44%. This performance is important because it enables Vertex to invest in R&D and maintain its lead in cystic fibrosis, while diversifying its portfolio into new diseases including sickle-cell disease, kidney diseases, antitrypsin deficiency (which can lead to liver and kidney disease) and acute pain.
Product expansion doesn’t mean the sun is setting on Vertex’s CF franchise. To wit, Vertex has been able to achieve financial success with a relatively low penetration of its existing market in the U.S., Europe and Australia. Currently, just 18,000 patients are on Vertex cystic fibrosis medicines against 37,000 who are eligible.
Additionally, Vertex says it can expand the eligibility pool in two ways. First, by “expanding the label,” Vertex can treat younger patients and increase the eligibility pool to about 44,000 patients. Second, by combining its formulas into a triple-combination therapy, VRTX estimates it can increase the pool of eligible patients to approximately 66,000. Vertex said it plans to file its New Drug Application (NDA) for its combo treatment in mid-2019.
Growing cash, new markets and continued dominance of the CF market. Vertex offers a lot to like.