September has not been a good month on Wall Street. The S&P 500 fell almost 5%, and many stocks performed significantly worse. For example, the shares of the biotechnology giant Vertex Pharmaceutical (NASDAQ: VRTX) fell about 8% while the cloud computing company Veeva Systems (NYSE: VEEV) saw its stock plunge nearly 14%.
But if you intend to hold stocks of companies for five years or more – which is a smart strategy to generate above-average returns – then a single month’s results will only amount to a drop. your portfolio performance. And in the long run, Vertex and Veeva both have what it takes to beat the market despite their recent poor performance.
The case of Vertex Pharmaceuticals
Boston-based Vertex Pharma has a strong catalog of drugs. Among them are several drugs to treat the underlying causes of cystic fibrosis (CF) – and they are the only ones on the market that do so. Its current line of therapies is approved to treat up to 90% of patients with cystic fibrosis.
The growth potential is therefore there. Of the 83,000 CF patients currently in North America, Europe and Australia, only about half are treated, so Vertex has considerable leeway to increase sales. The company’s best-selling drug, Trikafta, was approved in October 2019 and generated $ 3.9 billion in 2020. According to some estimates, Trikafta’s annual sales will reach $ 8.7 billion in 2026.
Vertex also has an exciting pipeline of potential treatments for type 1 diabetes, acute pain and other conditions. The company plans to release some clinical trial data for these programs in the next six months or so.
Perhaps Vertex’s most promising candidate is CTX001, a potential treatment for sickle cell anemia (SCD) and transfusion-dependent beta-thalassemia (TDT). There are few effective treatment options for either of these blood disorders. Vertex is also developing gene therapy in partnership with Therapeutic Crispr, and it has already produced promising results in a phase 1/2 clinical trial.
For example, 15 beta-thalassemia patients treated with CTX001 were transfusion independent two months after therapy with follow-ups ranging from 3 to 25 months. These patients needed 20 to 61 blood transfusions per year prior to treatment. Phase 3 studies in both indications are ongoing. If the results are positive, Vertex could seek marketing authorization from regulatory authorities for CTX001 in the coming years.
Overall, Vertex’s current drugs can still drive revenue and profit growth, but it also has a pipeline of candidates that could help it move beyond its CF franchise. Trading at a forward price-to-earnings (P / E) ratio of 14.5 – compared to an average of 11.3 for the biotech industry – Vertex seems a bit expensive. But paying a small premium for a company with excellent growth prospects seems more than fair. In my opinion, this biotech action remains a purchase.
The case of Veeva Systems
Veeva Systems provides cloud-based software solutions with a particular focus on the life science industry. Its product line is designed with one goal in mind: to help businesses improve their operational efficiency. Its customers include many of the world’s largest drug manufacturers. Veeva provides them with tools for clinical trial management, which helps speed time to market, regulatory compliance, and more.
It’s not hard to see the selling points here. The faster a drug hits the market, the faster it can generate money. Additionally, for biopharmaceutical companies, failure to meet regulatory requirements can result in severe penalties, lawsuits, a tarnished public image and worse. Considering all of this, it’s no surprise that Veeva Systems has been successful – and that its revenue, profits, and share price have all increased noticeably.
Here are three reasons why it can continue. First, Veeva has a retention rate of over 100%, which means it has a habit of attracting more customers than it loses. Second, the business benefits from high changeover costs: if customers get off ship, they risk losing data and spending time training employees on a new system.
Third, Veeva Systems has multiple avenues for growth. Management still sees significant untapped markets in the life science industry, and it is also expanding into cosmetics and chemicals. I have no doubts that he can replicate his earlier successes in these new areas.
One of the issues new investors will have with Veeva Systems is its high forward P / E ratio – around 80 at the time of writing. Investors could therefore see some volatility in the short term. When the stock market goes down, high growth stocks with high valuations tend to fall even more sharply – and September was a prime example of that. But given the long-term potential of the company, I think its valuation is not a problem. This is why I intend to add shares of Veeva Systems to my portfolio.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.