Key risks for Vertex
In addition to research-related risks witnessed by the biotechnology sector, individual biotechnology companies face additional risks due to their unique business models.
Business concentration risk
Biotechnology companies such as Regeneron (REGN), Alexion Pharmaceuticals (ALXN), Vertex Pharmaceuticals (VRTX), and Biogen (BIIB) earn the majority of their revenues from a small number of drugs. So these companies witness excessive business concentration risk.
Vertex Pharmaceuticals depends majorly on sales of its cystic fibrosis (or CF) drug, Kalydeco, approved in 2012. Vertex has been actively involved in expanding the indications and geographies for the drug.
To further increase Kalydeco’s market penetration, Vertex is conducting clinical trials to establish the safety and efficacy of the drug in different patient populations. However, over-reliance on a single drug coupled with uncertainty in the clinical trials, which can lead to limited use of Kalydeco, can lead to limited revenues for Vertex Pharmaceuticals.
Operating expense risk
Since 2012, Vertex Pharmaceuticals has recorded significant losses, as the company’s operating expenses have exceeded total revenues. This, in turn, affects the company’s shareholder equity, total assets, and working capital. Continued high operating expenses and subsequent losses can thus impact the viability of the business.
Orphan drug reimbursement risk
Drugs that treat diseases affecting a small number of people are called orphan drugs. To make up for the low patient volumes and ensure viability of research and development, orphan drugs enjoy higher pricing flexibility than other mainstream drugs.
However, increasing pressures by governments around the world to control healthcare costs have increased uncertainty about whether costly drugs such as Kalydeco will be approved for reimbursement.
You can reduce exposure to Vertex Pharmaceuticals’ unique risks by investing in the iShares Nasdaq Biotechnology ETF (IBB). Vertex Pharmaceuticals accounts for 4.24% of IBB’s total holdings.