VX-548 appears to fill the therapeutic gap between NSAIDs and opioids.

I believe that Vertex (NASDAQ:VRTX) stock is significantly undervalued because investors are massively underestimating the value of the company's pain treatment, VX-548. In my view, there's a good chance of VX-548 becoming a huge blockbuster. That's because I think there's a great hunger in America for a drug which treats pain more effectively than acetaminophen and NSAIDs and which patients are unlikely to abuse. And according to my calculations, Vertex's shares do not come close to reflecting VX-548's huge potential. As a result, I recommend that long-term investors buy VRTX stock.

As of last quarter, Vertex had begun the process of submitting the drug for FDA approval, but the agency has not issued a decision on the application yet. However, the agency had previously granted the treatment breakthrough status, suggesting that it thinks the therapy has significant potential.

In Phase III trials, VX-548 relieved the pain of post-surgery patients significantly more than placebos. What's more, the drug reduced the pain of patients who had undergone "tummy tucks" more than Vicodin, which incorporates an opioid and often becomes addictive.

But the difference in the amount of pain relief offered by VX-548 and Vicodin for these patients did not reach statistical significance. And among patients who underwent a bunionectomy, Vicodin relieved pain significantly more than VX-548. Overall, my takeaway from the data is that, given the ability of VX-548 to relieve pain more than Vicodin among tummy tuck patients, in all probability VX-548 is meaningfully more powerful than NSAIDs and ibuprofen which are much, much weaker than opioids. However, the data amoong tummy tuck patients suggests that VX-548 is probably not as potent as opioids.

CEO Reshma Kewalramani has said that VX-548 can " fill...(the) therapeutic gap" between NSAIDs and ibuprofen on the one hand and opioids on the other. My research suggests that this thesis is quite valid, as there does not appear to be any treatments between the two classes that can be used to reduce pain in a wide variety of patients. For example, discussing the options for patients with lower back pain, Aetna (AET), the giant health insurer, listed "physical therapy, acupuncture and/or cognitive behavioral therapy­" as possible treatments. And it noted that " opioids, though effective at blocking short-term pain signals, don't offer much help for people with chronic pain. " It did not list any other drugs that could potentially be used to reduce patients' lower back pain.

VX-548 works by inhibiting an ion channel, NAv1.8, which has been found to be "vital.... for the voltage changes across the nerve membrane and the transmission of painful stimuli in the peripheral nervous system."

Because the drug, unlike opioids, does not interface directly with the brain, it is unlikely to trigger either high levels of addiction or abuse. And Stephen Waxman, MD, PhD, the director of the Center for Neuroscience and Regeneration Research at Yale School of Medicine, stated that because NAv1.8 is not present in the brain, inhibiting it may provide pain relief "without central side effects such as...drowsiness or the potential for addiction." Kewalramani, Vertex's CEO, said that VX-548 "does not hold addictive potential."

Opioids are highly addictive. Moreover, just between 2020 and 2022, prescription opioids were involved in the deaths of about 48,000 Americans, according to the NIH. Since the opioid crisis began in the late 1990s, the drug have ended or ruined the lives of many hundreds of thousands of Americans.

In the past, payors have been reluctant to cover expensive, narrowly tailored painkillers, such as lidocaine patches, that are less addictive but more expensive than generic opioids. But due to the huge number of deaths that prescription opioids have caused, along with the extensive, negative publicity that the drugs have received in the U.S., I believe that there will be significant pressure by the American public and to some extent the country's political leaders on private insurers to cover VX-548.

Also importantly, opioid addiction is actually quite expensive for the country. According to one study by the CDC, for example, " opioid use disorder and fatal opioid overdose" cost the U.S. a combined total of over $1 trillion in 2017 alone.

Moreover, Vertex, with $5.8 billion of cash and little debt as of the end of last quarter, has plenty of funds to spend on advertising VX-548 in order to mobilize support for it among the public. It can also spend significant funds on lobbying politicians to back the drug.

Given all of these points, I expect Medicare to offer widespread coverage for the drug.

In 2022, about 130 million opioid prescriptions were dispensed in the U.S. Teva's (TEVA) medicine for migraine pain, Ajovy, costs about $1,000 per dose. If we assume that VX-548 will cost about the same and patients will be given an average of five doses, that works out to revenue of $5,000 per patient for Vertex. We can also assume that the drug's gross margin will be about 80%, in-line with the general pharmaceutical market. So I will assume that, for each patient who takes the drug the company's cash flow will be lifted by $4,000.

I believe that Vertex will start out with relatively low market share in its early years before ramping quickly as its salespeople inform doctors about the drug, as more insurers, including Medicare, are successfully cajoled to cover the plan, and as more patients hear about the drug. As a result, I estimate that, from 2025 to 2029, VX-548 can capture 0.2%, 0.5%, 0.8%, and 1.2% of the opioid market in the U.S., respectively. Using our previous assumptions, that would boost the firm's cash flows by about $1 billion, $2.5 billion, $4 billion, and $6 billion in each of those years.

According to the Discounted Future Cash Flows model that I used, with an 8% Discount Rate, these cash flows have a present value of $10.65 billion. Last year, Vertex generated cash from operations of $3.5 billion. If we add $10.65 billion to that figure, the result is $14.15 billion. The average forward price-cash flow multiple for the pharmaceutical sector is 16.35. Multiplying the latter two figures results in a total of $231 billion. That's 85% above the stock's current market capitalization of $125 billion.

For one reason or another, the FDA may decide not to approve VX-548 or most insurers may decide not to cover the drug. If the FDA does not approve the drug, it will generate no revenue, and if insurers do not cover it, it will likely not significantly lift Vertex's sales. After the drug is approved, it may be discovered that the treatment has dangerous side effects, causing it to be taken off the market. Finally, revenue from the company's other treatments may drop a great deal, causing my estimates to be overly bullish.