DCF Studio

    VRTX · NMS · Healthcare

    Vertex Pharmaceuticals Incorporated

    Also onShortfallConsensus DriftCrosscheck

    Implied value per share

    USD 285.43

    Market price

    USD 508.34

    Implied upside

    -43.9%

    5-year forecast · Perpetuity growth terminal value · Mid-year discounting · Base case

    AdjustedCapital expenditure runs at 3.2% of revenue against depreciation of 1.8%. A perpetuity has to be a steady state, so the terminal year uses maintenance capex at depreciation and then charges the reinvestment terminal growth requires (g/ROIC of NOPAT). The bridge is shown under Terminal Value.

    Current EV/EBITDA of 26.1x sits outside a defensible 3-20x band, so the exit multiple is capped at 20.0x. A multiple that far out usually means EBITDA is the wrong denominator for this business.

    Value Per Share

    Perpetuity growth
    USD 285.43-43.9%
    Exit multiple
    USD 414.35-18.5%
    Market price
    USD 508.34

    Same forecast, different terminal treatment. Percentages vs price.

    Forecast Cashflows

    Reporting currency (USD). Outflows negative.

    0bn2bn4bnFY26FY27FY28FY29FY30
    Nominal FCFFDiscounted to todayUSD
    LineFY26FY27FY28FY29FY30CAGR
    RevenueUSD 13.2bnUSD 14.6bnUSD 16.1bnUSD 17.8bnUSD 19.6bn+10.4%
    EBITUSD 4.0bnUSD 4.4bnUSD 4.9bnUSD 5.4bnUSD 6.0bn+10.4%
    NOPATUSD 3.2bnUSD 3.6bnUSD 4.0bnUSD 4.4bnUSD 4.8bn+10.4%
    Add depreciation & amortisationUSD 235.9mUSD 260.4mUSD 287.3mUSD 317.1mUSD 349.9m+10.4%
    Less capital expenditureUSD -429.1mUSD -473.6mUSD -522.6mUSD -576.7mUSD -636.4m+10.4%
    Less increase in working capitalUSD -555.7mUSD -613.3mUSD -676.7mUSD -746.8mUSD -824.1m+10.4%
    Free cashflow to firmUSD 2.5bnUSD 2.8bnUSD 3.0bnUSD 3.4bnUSD 3.7bn+10.4%
    Discount factor0.96260.89180.82630.76560.7093-
    Present valueUSD 2.4bnUSD 2.5bnUSD 2.5bnUSD 2.6bnUSD 2.6bn+2.2%
    Present Value Of The ForecastUSD 12.6bn

    Discount Rate

    Source shown per component. All overridable above.

    Risk-free rate5.00%US 10-year Treasury (^TNX)
    Equity risk premium5.50%Market assumption
    Beta0.544Reported 0.320, pulled toward 1.0 (Blume)
    Cost of equity7.99%Risk-free + beta x equity risk premium
    Cost of debt5.00%Floored at the risk-free rate (implied cost of debt was lower)
    Market capitalisationUSD 128.8bn98.4% of capital
    Total debtUSD 2.0bn1.6% of capital, book value as a proxy
    Tax rate19.4%Effective, capped at statutory
    WACC7.93%E/V x Re + D/V x Rd x (1 - t)

    Terminal Value

    Perpetuity growth is intrinsic. The exit multiple defaults to the company's current EV/EBITDA, so it answers a different question - what the shares are worth if today's rating holds and EBITDA grows as forecast.

    Perpetuity growth at 2.50%

    Value per shareUSD 285.43

    82% of EV

    Forecast FCFF, final year
    USD 3.7bn
    Capex at depreciation, working capital in reinvestment
    USD 4.8bn
    Less reinvestment at g/ROIC (12.7% of NOPAT)
    USD -614.8m
    Capitalised
    USD 4.2bn
    ROIC (reported)
    19.7%
    Terminal value, undiscounted
    USD 79.6bn
    Terminal value, discounted
    USD 56.5bn
    Enterprise value
    USD 69.1bn
    Less net debt
    USD -4.6bn
    Equity value
    USD 73.6bn

    Exit at 20.0x EBITDA

    Value per shareUSD 414.35

    88% of EV

    Terminal value, undiscounted
    USD 126.5bn
    Terminal value, discounted
    USD 89.8bn
    Enterprise value
    USD 102.3bn
    Less net debt
    USD -4.6bn
    Equity value
    USD 106.9bn

    Spread between methods: 37%.

    Sensitivity

    Value per share (USD) by discount rate and long-run growth.

    Long-run growth
    Discount rate1.50%2.00%2.50%3.00%3.50%
    5.93%374.81405.88445.90499.46574.89
    6.93%306.92325.19347.50375.40411.33
    7.93%260.25271.81285.43301.75321.67
    8.93%226.23233.91242.74253.00265.09
    9.93%200.35205.64211.60218.38226.15

    Outlined: this model. Green text: above today's price of 508.34. Shading: distance from this model's own value.

    Priced In

    What each input would have to be to justify the current price, one at a time.

    InputModelImpliedGap
    Revenue growth, every year10.4%26.6%+16.3pp
    EBIT margin30.4%54.5%+24.1pp
    Discount rate7.9%5.5%-2.4pp
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    Yahoo Finance and RBA data. General information, not advice. Methodology.