Vertex Pharmaceuticals Stock Is Down 13%. Here's Why You Should Buy the Dip

Vertex Pharmaceuticals (NASDAQ: VRTX) fell by 13% on Dec. 19, when the rare-disease drug developer reported some lackluster results from a late-stage clinical trial. But far from being a reason to doubt the long-term potential of this stock, this setback is an opportunity to buy the dip for those who are willing to hold onto it for at least a few years. Here's why.

This growth prospect just took a heavy hit

Vertex is best known for its therapies for the rare lung disease cystic fibrosis (CF). They provide the vast majority of its sales revenue -- which totaled $2.8 billion in the third quarter -- and a significant portion of the programs in its research and development (R&D) pipeline. Its steady work over the year delivered a large market share in CF therapies.

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Meanwhile, to continue growing, management opted to diversify into new areas. One of those, a program for treating acute pain, could be particularly lucrative. But that prospect is now in question.

Vertex ran a phase 2 clinical trial investigating the efficacy of its non-opioid painkiller candidate suzetrigine in treating pain derived from lumbosacral radiculopathy (LSR). Judging by the results, the company may not have a winner on its hands. The candidate is already being considered for approval by regulators at the Food and Drug Administration (FDA) for treating acute pain, so the study testing it for pain from LSR is best understood as an attempt to expand its total addressable market.

Based on patients' responses to a numeric pain rating scale (NPRS) that ranges from 0 (no pain) to 10 (the worst possible pain), both patients in the placebo group and patients in the treatment group reported, on average, that their pain was a 6 out of 10 before treatment. After treatment with either suzetrigine or placebo, patients reported on average that their pain decreased by 2 notches on the NPRS. The problem is that patients in the placebo group reported roughly the same degree of pain reduction as patients who were treated with suzetrigine.

Vertex still plans to advance the candidate into phase 3 trials, provided that regulators assent. The prospect of the FDA granting the green light here is now deeply uncertain, as the company has not convincingly demonstrated that suzetrigine is more effective for the target indication than a placebo. The new data may also detrimentally affect the pending application for approval for the broader indication of acute pain.

So this potential new growth driver is now looking quite wobbly, and it's not at all shocking that the stock dropped so much upon publication of the trial data.

There's still a strong investment thesis

Despite the real problems with the additional indication being sought for suzetrigine, this drop in the stock is still an unambiguously appealing opportunity to buy the dip. Overall, Vertex's data on the candidate's efficacy for general acute pain look better than the new data on acute pain in a specific disease context.

Because suzetrigine is intended to fill an underserved medical niche -- sufficiently powerful anti-pain medicines that don't have the same addiction potential or incapacitating effects as opioid drugs -- it will still be able to find a market share if it's approved.

Plus the company has a handful of other non-opioid analgesic candidates in clinical trials right now, so it will have other chances to succeed in that market. And that's before even getting into the other areas of the pipeline dedicated to treating other conditions.

Finally, it isn't as though Vertex's dominance in the market for CF drugs is going anywhere anytime soon. Remember, that segment is responsible for nearly all of its earnings, and it intends to tighten its hold on the market and dominate it even more comprehensively. As long as it can rely on its ongoing work in CF to continue to grow -- a very reliable assumption for the next few years -- those who invest now can expect decent returns.

And don't count out the chances of the suzetrigine program bringing in big revenue if it gets approved. The size of the potential windfall may shrink a bit, and the probability of the windfall actually happening may decrease. But businesses like Vertex don't just give up on a candidate when they hit a bump in the road, so investors shouldn't give up on it either.

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Alex Carchidi has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.