Why This Beaten-Down Growth Stock Is a No-Brainer Buy on the Dip

Every investor has heard the phrase "buy low, sell high." It's a simple enough piece of advice that's less simple to apply. What exactly qualifies as "low"? One possible answer is when a company's shares fall significantly in one day following a setback that barely affects its long-term prospects.

That's what recently happened to Vertex Pharmaceuticals (NASDAQ: VRTX), a biotech company. Here is why now is as good a time as any to "buy low" when it comes to this stock.

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Vertex's pain medicine underwhelms

Vertex Pharmaceuticals' suzetrigine is an investigational pain treatment. Its first approved indication could come as early as next month in treating acute pain. It will seek label expansions thereafter, including in targeting painful lumbosacral radiculopathy (LSR, a condition that results from a pinched or inflamed nerve in the lower back). Vertex Pharmaceuticals recently released data from a phase 2 study for suzetrigine in LSR. Unfortunately, the market was not impressed.

The medicine hit its primary endpoint of a decrease in the average daily leg pain intensity as measured by the Numeric Pain Rating Scale after 12 weeks of treatment. Suzetrigine led to a statistically significant reduction in pain, but so did a placebo, and the difference between the two was not particularly large.

This data created some uncertainty concerning suzetrigine's efficacy in people with LSR, a condition that affects millions of patients every year, and could, therefore, be a large and lucrative market for Vertex Pharmaceuticals. That's why the company's shares dipped by more than 10% in one day after it released this data.

Focus on the long game

Vertex will likely still run a phase 3 study for suzetrigine in LSR that could break its way. But what if it doesn't? The biotech has many more tricks up its sleeves. It recently earned approval for its next-gen cystic fibrosis (CF) therapy, Alyftrek. Vertex has a monopoly in the CF drug market. Alyftrek is yet another improvement from its latest gem, Trikafta. Among other things, Alyftrek is just as effective despite its once-daily dosage (Trikafta is taken twice a day).

The company's CF franchise continues to drive strong top-line growth. Third-quarter revenue increased by 12% year over year to $2.77 billion. There is still a good chance suzetrigine will earn approval in acute pain next month. Vertex has also been ramping up its gene-editing treatment, Casgevy, which targets two rare blood diseases. Although it has been approved for over a year in some markets, including the U.K., Casgevy will take time to impact Vertex's financial results significantly.

That is the nature of gene-editing treatments. However, the medicine has a massive, multibillion-dollar opportunity. You can also look at Vertex's pipeline. It has phase 3 programs in APOL-1 mediated kidney disease and Iga nephropathy (also a kidney disease). It has earlier-stage programs in type 1 diabetes, a particularly promising project for Vertex Pharmaceuticals. The company's VX-880 could be a functional cure for patients with this chronic condition and allow them to make their own insulin, something that is typically impossible for people with type 1 diabetes.

In an ongoing phase 1/2 study, 12 patients treated with VX-880 11 showed reduced or complete elimination of the need for synthetic insulin. Three of them with more than a year of follow-up also showed elimination of severe hypoglycemic events. There is still a long way to go before Vertex earns approval for VX-880, but the company has consistently demonstrated its innovative qualities. Though the phase 2 data for suzetrigine in LSR is a bit of a setback, it does little to change Vertex's long-term prospects.

What happened last time the company's shares fell off a cliff following a clinical setback? That was on Oct. 14, 2020, when it announced it was giving up on a phase 2 trial for VX-814, an investigational therapy for Alpha-1 antitrypsin deficiency. And since Oct. 15, 2020, Vertex's shares have outperformed the S&P 500, even taking into account its recent massive drop.

VRTX Total Return Level data by YCharts

I expect the same thing to happen this time around. Patient investors will benefit from scooping up shares of this biotech stock on the dip.

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Prosper Junior Bakiny has positions in Vertex Pharmaceuticals. The Motley Fool has positions in and recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.