Vertex

VRTX

RESEARCHER/ANALYST: Argene Monton Pelo

DATE: June 27, 2020

https://www.johnsonsbaby.com.ph/
https://www.jnj.com/
MEANING
Definition: Is it understandable, well within your Circle of Competence?

Abbott Laboratories:
VRTX is an American biopharmaceutical company based in Boston, Massachusetts. It was one of the first biotech firms to u
A global biotechnology company that invests in scientific innovation to create transformative medicines for people with se
Discovered and developed the first medicines to treat the underlying cause of cystic fibrosis (CF), a rare, life-threatening ge

MISSION:
"THE SCIENCE OF POSSIBILITY"

https://www.dnb.com/business-dire
http://fernfortuniversity.com/term-p
MOAT
Definition: Does the company have sustainable competitive advantage over its competitors?
Is it INTRINSIC (it is built-in, or is in the nature of the company, the advantage cannot be separated from the company; and
Is it DURABLE (expensive or difficult to overcome the intrinsic advantage)

List of Moats: which of these is the Moat of this company?

(google: "What is the competitive advantage of ______?")
1. Brand YES
2. Switching What industry standards makes it hard to switch?
3. Network Effects YES What network effects dynamics make it hard to duplicate? H
4. Toll Bridge What is the toll bridge?
5. Secrets What are its proprietary technologies and patents?
6. Price How does it compete with the lowest price? What structure

Brand
Vertex Pharmaceuticals Incorporated is one of the leading firms in the Biotechnology. Over the years Vertex Pharmaceutic
Vertex Pharmaceuticals Incorporated is listed at New York Stock Exchange (NYSE) and have a market cap 30.89B USD.

Network Effects
Vertex Pharmaceuticals is focused on developing treatments for cystic fibrosis (CF) and other life-threatening diseases.
The biotechnology firm has three commercial drugs --- Orkambi, Kalydeco, and Symdeko/Symkevi -- used to treat CF.

aligned to these there are some

factors that are need to consider and
may vary depends to the place's
resources and conditions. Through
this it is difficult to replicate its
mobility access just like from where it
is.

http://fernfortuniversity.com/term-p

MANAGEMENT
Definition: Is the company run by owner/shareholder-oriented CEO, who has integrity, talent, and honest

RISKS of the BUSINESS HOW they Management the RISK

1) Threats of new entrants By innovating new products and serv
also give old customer a reason to bu

2) Bargaining Power of Suppliers By experimenting with product desig

material then company can shift to a

3) Threats of Substitute Products or Services By being service oriented rather tha

https://www.fool.com/investing/202

INVESTMENT THESIS or Three Reasons to Own this Company

1. Trikafta is already successful

Trikafta is already making significant headway. During Vertex's first quarter, revenue from Trikafta was $895 million. Note
2. Vertex revises its guidance
Impressive revenue and earnings growth wasn't the only good news in Vertex's latest quarterly update. The company also
And while many companies are slashing or outright withdrawing their initial revenue and earnings prediction for 2020 due
3. Exciting opportunities
Vertex is looking beyond the CF market to find other growth opportunities. Two of these opportunities are worth mention
First, the biotech acquired privately held Semma Therapeutics last year in an all-cash transaction valued at $950 million.

STORY INVERSION and its REBUTTAL

(research outside analysts negative news and opinions on Starbucks
#1 Reason not to buy:
https://www.fool.com/investing/201
https://www.fool.com/investing/201
REBUTTAL:
 Zoetis shares trade at more than 23 times expected earnings, which isn't a cheap va
The stock is considered somewhat recession-proof, a quality that justifies a premiu
Livestock can be cyclical -- after all, commodity prices fluctuate considerably -- but
don't usually stop people from caring about their pets.
It's not a foolproof argument, as economic slowdowns tend to cause people to visit
practices a bit less, but the evidence is that animal health does well enough in a re

#2 Reason not to buy: https://simplywall.st/stocks/us/phar

At the end of March 2019, Zoetis had US$6.44b of debt, up from US$4.95b a year a
REBUTTAL: Liabilities total US$5.80b more than the combination of its cash and short-term rec

Since publicly traded Zoetis shares are worth a very impressive total of US$54.6b, it
that this level of liabilities would be a major threat.
Zoetis’s moderate net debt to EBITDA (earnings before interest, tax, depreciation, a
ratio ( being 2.13), indicates prudence when it comes to debt.
And its strong interest cover of 10.3 times, makes us even more comfortable.
Over the most recent three years, Zoetis recorded free cash flow worth 66% of its E
around normal, given free cash flow excludes interest and tax.
This cold hard cash means it can reduce its debt when it wants to.
w.johnsonsbaby.com.ph/our-mission

he first biotech firms to use an explicit strategy of rational drug design rather than combinatorial chemistry.
dicines for people with serious and life-threatening diseases.
a rare, life-threatening genetic disease.

w.dnb.com/business-directory/company-profiles.vertex_pharmaceuticals_incorporated.d1f9146a8bd86d95ffe3a27028b6f2d6.html
ortuniversity.com/term-papers/porter5/analysis/2156-vertex-pharmaceuticals-incorporated.php

d from the company; and is not typically characteristic of other competitors?)

hard to switch?
ke it hard to duplicate? How many users?

es and patents?
est price? What structure, organization?

ars Vertex Pharmaceuticals Incorporated has redefined the ways of doing business in Healthcare.
ket cap 30.89B USD.

threatening diseases.
 -- used to treat CF.

ortuniversity.com/term-papers/porter5/analysis/2156-vertex-pharmaceuticals-incorporated.php

Management the RISK

ng new products and services. New products not only brings new customers to the fold but .
d customer a reason to buy Vertex Pharmaceuticals Incorporated ‘s products

enting with product designs using different materials so that if the prices go up of one raw
en company can shift to another.

rvice oriented rather than just product oriented.

w.fool.com/investing/2020/05/08/3-reasons-to-buy-vertex-pharmaceuticals-stock-righ.aspx

a was $895 million. Note that Vertex's other three products recorded a total revenue of $620 million during the quarter.

pdate. The company also announced that it was adjusting its guidance for the current fiscal year.
s prediction for 2020 due to the ongoing pandemic, Vertex revised its guidance upward for the year.

nities are worth mentioning.

valued at $950 million.

w.fool.com/investing/2017/06/03/zoetis-just-hit-an-all-time-high-heres-why-the-sto.aspx
w.fool.com/investing/2016/11/25/3-top-recession-proof-stocks-to-buy.aspx
gs, which isn't a cheap valuation.
ty that justifies a premium to some extent.
uate considerably -- but recessions

d to cause people to visit veterinary

does well enough in a recession.

Recession in US 2008-2009

plywall.st/stocks/us/pharmaceuticals-biotech/nyse-zts/zoetis/news/zoetis-nysezts-seems-to-use-debt-quite-sensibly/

p from US$4.95b a year ago. 

cash and short-term receivables.

ssive total of US$54.6b, it seems unlikely

erest, tax, depreciation, and amortization)

more comfortable.
h flow worth 66% of its EBIT, which is
6d95ffe3a27028b6f2d6.html
uring the quarter.
quite-sensibly/
RULE #1 Valuation Methods
Research Analyst: Eldrick Vincent C. Ang

Name of Company: ZTS

Date: October 18, 2019
Number of Shares Outstanding 483,063,000

BIG FIVE NUMBERS: (must growing at 10% per year consistently for 10 years, compare them to 1-year, 3-year, 5-year if its
Looking at the Growth Rates of these companies (percentages)
Source: MSN Money or Yahoo Finance
(source: FINBOX.com/SBUX/explorer) / MacroTrends.net

SBUX = 2019 10-Year

1. Return on Invested Capital (growth rate)
2. Sales (growth rate)
3. Earnings per Share (growth rate)
4. Equity (growth rate)
5. Free Cash (growth rate)
6. WACC (2019-11-28) Google Search Gurufocus.com
* It is important to compare this against competitors in its market segment. E.g. Dell vs. Gateway; Walmart vs. Target vs.

OWNER EARNINGS METHOD:

Definition: Profit Plus Changes in cash minus the cost to sustain the business (deducting c
Net Profit $1,424,000,000.00
+ Depreciation & Amortization $308,000,000.00
+ Net Change in Accounts Receivable -$67,000,000.00
+Net Change in Accounts Payable $37,000,000.00
+ Income Tax $266,000,000.00
+ Maintenance Expenditures (this is a negative number, -$1,884,000,000.00
= OWNER EARNINGS (SUM TOTAL) $84,000,000.00

TEN-CAP METHOD:
= OWNER EARNINGS (SUM TOTAL) $84,000,000.00
Ten-Cap Price $840,000,000.00

PAYBACK TIME METHOD

Definition: Free cash flow, grown by the compounded Growth Rate for eight years.
Why 8 years? Charlie Munger says a fair price is about half of what the same private company would sell for a public comp
Public companies sell for about twelve to twenty years of free cash flow, about 16 years on average. Half of sixteen years

Net Cash provided by Operating Activities $1,790,000,000.00

+ Purchase of Property and Equipment (a negative numb -$1,884,000,000.00
+ Any Other Capital Expenditures for maintenance and g $0.00
= FREE CASH FLOW (more accurate) -$94,000,000.00

Net Earnings or Net Profit $1,424,000,000.00

+ Purchase of Property and Equipment (a negative numb -$1,884,000,000.00
+ Any Other Capital Expenditures for maintenance and g $0.00
= FREE CASH FLOW (less accurate) -$460,000,000.00

Sample:
Year Free Cash Flow
0 -$94,000,000.00
1 -$104,622,000.00
2 -$116,444,286.00
3 -$129,602,490.32
4 -$144,247,571.72
5 -$160,547,547.33
6 -$178,689,420.18
7 -$198,881,324.66
8 -$221,354,914.34
-$1,254,389,554.55

MARGIN OF SAFETY METHOD:

Definition: Price of company within 10 years, accounting for Growth in EPS and PE multiple. Then discounted to present d
Encode this number
1. Earnings per Share (TTM EPS) $2.84

2. Growth Rate of EPS

a) Historical growth rates from year 2010-2018: 38.22%
b) Analyst average five-year growth estimate: 11.30%
c) The lower of 38.22% and 11.30% is: 11.30%

Therefore the Growth Rate is: 11.30%

3. Price to Earnings Ratio 11.30% x 2 = 22.60 PE

(Rule of thumb: Growth Rate% X 2 = PE)

ZTS had a range of P/E Ratios of 26.81 to 68.84 over the last ten years. The high was 68.84 PE.
Average PE is 47.825
Therefore PE is 47.825
Current PE of Zoetis Inc. is 45.11

4. Minimum Acceptable Rate of Return (MARR) 15%

Step One:
EPS x (1+ Growth Rate) (repeated 10 times)
= Future 10-Year EPS
Future - EPS
Year 0 $2.84
Year 1 $3.16
Year 2 $3.52
Year 3 $3.92
Year 4 $4.36
Year 5 $4.85
Year 6 $5.40
Year 7 $6.01
Year 8 $6.69
Year 9 $7.44
Year 10 $8.28

Future 10- Years EPS: $8.28

Step Two:
Future 10-Year Earnings Per Share X PE $8.28
= Future 10-Year Share Price $396.21

Step Three: Sticker Price

Future 10-Year Share Price / (1.15) Years = /4 $99.05
What is the future 10-Year share Price at a MARR of 15% $97.94

Excel Present Value Formula $97.94

=PV (rate, nper, pmt,[fv],type)

Step Four: Margin of Safety Price

Sticker Price / 2 [or 50% Margin of Safety] $49.53
Benjamin Graham's MOS Formula (countercheck) $49.53

Company Valuation: $47,309,715,099.38

ASSET METHOD:
What are the value of the assets? Cash, Land, etc., apart from its Profits or Earnings
for example
Number of Shares Outstanding: 483,063,000

Price as of Date: October 21, 2019 $128.12

Market Capitalization $61,890,031,560.00

ASSETS - Look Out

Cash (Balance Sheet) $1,602,000,000.00
Cash per Share $3.32

0 $1,658,000,000.00
PPE per share $3.43

LIABILITIES - Watch Out

Long term Debt 6,443,000,000.00
Long term Debt per Share $13.34

Altman Z-Score 6.04

When Z-Score is less than 1.81
When Z-Score is greater than 2.99 SAFE
When Z-Score is between 1.81 and 2.99
 SUMMARY DASHBOARD
Total Price of Business Price per Share

Ten-Cap Method $840,000,000.00 $1.74

Payback Time 8 Years -$1,254,389,554.55 -$2.60
Margin of Safety Method (Sticker P $47,309,715,099.38 $97.94
Margin of Safety Price $48.97

shares (source: ZTS 10-K 2018) p.110 21,254,772,000 47,823,237,000

mpare them to 1-year, 3-year, 5-year if its slowing down)

/SBUX/explorer) / MacroTrends.net

5-Year 3- Year 1-Year 2012

12.2% 14.4% 16.6%
6.0% 6.9% 9.8%
23.2% 61.6% 66.3%

2.44%
. Dell vs. Gateway; Walmart vs. Target vs. Costco vs. Amazon(?)

Source: ZTS 10-K Year 2018 (FY ending Dec 31, 2018)
2018 Cash Flow Statement Line 2; page 116 (find it in Cash Flow statemepage 116 of ZTS 10-K 2018.pdf
2018 Cash Flow Statement Line 4 (find it in Cash Flow statemepage 116 of ZTS 10-K 2018.pdf
2018 Cash Flow Statement Line 13 (find it in Cash Flow statemepage 116 of ZTS 10-K 2018.pdf
2018 Cash Flow Statement Line 16 (find it in Cash Flow statemepage 116 of ZTS 10-K 2018.pdf
2018 Income Statement Line 11 (find it in Income Statement)page 110 of ZTS 10-K 2018.pdf
2018 Cash Flow Statement Line "Acquisition of Abaxis, (find it in Cash flows from Invpage 116 of ZTS 10-K 2018.pdf
(add them whether they are negative or positive numbers)
 Note: Ten-Cap price does not take into account growth rates of the company. It only accounts for Owner Earnings in 2015
Company Valuation

ivate company would sell for a public company.

16 years on average. Half of sixteen years is 8 years.

2018 Cash Flow Statement Line 19 (find it in Cash flows from Invpage 116 of ZTS 10-K 2018.pdf
2018 Cash Flow Statement Line 22 (find it in Cash flows from Invpage 116 of ZTS 10-K 2018.pdf

2018 Cash Flow Statement Line 2

Expected Growth in Free CashflowCumulative Free Cash Flow

Growth Rate to be applied the next Year and Payback Time Buy Price
11% -$10,622,000.00 -$94,000,000.00
11% -$11,822,286.00 -$104,622,000.00
11% -$13,158,204.32 -$221,066,286.00
11% -$14,645,081.41 -$350,668,776.32
11% -$16,299,975.60 -$494,916,348.04
11% -$18,141,872.85 -$655,463,895.37
11% -$20,191,904.48 -$834,153,315.55
11% -$22,473,589.69 -$1,033,034,640.20
11% -$25,013,105.32 -$1,254,389,554.55 <= 8 Year Payback Time Buy Price
Company Valuation

PE multiple. Then discounted to present day, then 50% margin of safety

Source:
MacroTrends.Net (2019/06/30)

FY 2018
MacroTrends.Net (Calculated Compounding) 3.21
Zacks.com 63%

Put this in Payback Time Growth Rate %

h was 68.84 PE.

Macrotrends (2019/10/18)

(if we want to change this %, it will increase the hurdle rate or lower it)
increasing this hurdle rate, will lower the Estimated Value of the company
which increases the effective Margin of Safety

1 + Growth Rate
111%
111%
111%
111%
111%
111%
111%
111%
111%
111%
111%

47.825
ESTIMATED VALUE OF COMPANY in 10 YEARS

VALUATION OF THE COMPANY TODAY (approximately)

(you can change the MARR to revise this calculation

MARGIN OF SAFETY PRICE

[(1+g)^10 * EPS * FuturePE] / 8.

Purchase price of the whole business

shares

2018 Balance Sheet Statement Line 2; page 112

2018 Balance Sheet Statement Line 8; page 112

2018 Balance Sheet Statement Line 23; page 112 Debt went up from $4,953,000,000 in 2017. WHY?
 Meaning Moat Mgmt Predictability Rule #1 Score
DONE
DONE 67 76 84 0 67
DONE
DONE Date Symbol Price Change Change%
11/19/2019 ZTS 118.8 0.88 0.75%

Dec-12 Dec-13 Dec-14 Dec-15 Dec-16

Source: ROIC Mac
ROIC % 63.12% 15.39% 16.69% 11.46% 20.89%

MacroTrend.net
Source: EPS Macr Dec-12 Dec-13 Dec-14 Dec-15 Dec-16
EPS 0.87 1.01 1.16 0.68 1.65
EPS % 16% 15% -41% 143%

Source: ROIC FINBOX.IO Dec-13 Dec-14 Dec-15 Dec-16

Free Cash Flow Yield % 12.94% 37.36% 29.51% 21.80%

ZTS 10-K 2018.pdf

ZTS 10-K 2018.pdf
ZTS 10-K 2018.pdf
ZTS 10-K 2018.pdf
ZTS 10-K 2018.pdf
ZTS 10-K 2018.pdf
r Owner Earnings in 2015

ZTS 10-K 2018.pdf

ZTS 10-K 2018.pdf

yback Time Buy Price

FY 2017 FY 2016
1.97 1.92
3%

Source: MacroTrends.net Source: MacroTrends.net

 Zoetis PE Ratio Historical Data Zoetis Annual EPS

TTM Net
Date Stock Price EPS PE Ratio Year
10/18/2019 128.12 45.11 2018
6/30/2019 113.49 $2.84 39.96 2017
3/31/2019 100.67 $2.86 35.2 2016
12/31/2018 85.37 $2.93 29.14 2015
9/30/2018 91.25 $2.38 38.34 2014
6/30/2018 84.78 $2.28 37.18 2013
3/31/2018 82.99 $1.99 41.7 2012
12/31/2017 71.47 $1.75 40.84 2011
9/30/2017 63.16 $1.90 33.24 2010
6/30/2017 61.79 $1.77 34.91
3/31/2017 52.67 $1.72 30.62
12/31/2016 52.73 $1.65 31.96
9/30/2016 51.13 $1.38 37.05
6/30/2016 46.65 $1.28 36.45
3/31/2016 43.4 $0.76 57.1
12/31/2015 46.81 $0.68 68.84
9/30/2015 40.16 $0.89 45.12
6/30/2015 46.94 $0.84 55.88
3/31/2015 44.98 $1.18 38.12
12/31/2014 41.73 $1.16 35.98
9/30/2014 35.77 $1.12 31.94
6/30/2014 31.17 $1.05 29.69
3/31/2014 27.89 $1.04 26.81
12/31/2013 31.43 $1.01 31.12

min 26.81
max 68.84
 Sticker MOS PBT
50.26 25.13 15

Dec-17 Dec-18

24.87% 21.77%

Dec-17 Dec-18
1.75 2.93
6% 67%

Dec-17 Dec-18
17.27% 12.21%
urce: MacroTrends.net
etis Annual EPS

Calculated
Compoun Compounding
EPS Growth ding %
$2.93 67% $ 2.93 38.2% keep changing this % number until the EPS smooth
$1.75 6% $ 2.12
$1.65 143% $ 1.53
$0.68 -41% $ 1.11
$1.16 15% $ 0.80
$1.01 16% $ 0.58
$0.87 78% $ 0.42
$0.49 123% $ 0.30
$0.22 $ 0.22
Source: MacroTrends.net ZTS ROI
Zoetis ROI - Return on Investment Historical Data

LT
Investm Return on
TTM Net ents & Investme
Date Income Debt nt
6/30/2019 $1.67B $9.03B 19.05%
3/31/2019 $1.65B $8.90B 20.04%
12/31/2018 $1.69B $8.63B 21.77%
9/30/2018 $1.70B $8.56B 23.34%
6/30/2018 $1.70B $6.94B 24.62%
3/31/2018 $1.61B $6.93B 24.59%
12/31/2017 $1.53B $6.74B 24.87%
9/30/2017 $1.33B $6.97B 22.33%
6/30/2017 $1.25B $5.47B 21.81%
3/31/2017 $1.23B $5.35B 21.24%
12/31/2016 $1.23B $5.97B 20.89%
9/30/2016 $1.07B $6.07B 18.45%
6/30/2016 $1.01B $5.84B 18.70%
3/31/2016 $0.65B $5.65B 12.86%
12/31/2015 $0.55B $5.55B 11.46%
9/30/2015 $0.63B $4.48B 13.69%
6/30/2015 $0.60B $4.45B 12.56%
3/31/2015 $0.82B $4.55B 16.91%
12/31/2014 $0.82B $4.96B 16.69%
9/30/2014 $0.79B $5.03B 16.39%
6/30/2014 $0.74B $4.93B 15.72%
3/31/2014 $0.73B $4.74B 15.83%
12/31/2013 $0.69B $4.60B 15.39%
 9/30/2013 $0.65B $4.51B 14.45%
6/30/2013 $0.67B $4.46B 20.15%
3/31/2013 $0.74B $4.36B 33.16%
12/31/2012 $0.72B $4.55B 63.12%
er until the EPS smoothens out from $0.22 to $2.93 under the Compounding column