Paired Trade Opportunity: Sell Vertex, Buy Cephalon
Vertex (VRTX) is one of the hottest large cap biotech stocks based on FDA approval (May 23 review) of its lead drug candidate Telaprevir, an oral HCV protease inhibitor. The stock is off its highs of $52+in early March and is down 4% today at $47.50.With a market cap of $9.7B and 97% institutional ownership there is limited upside.A major assumption is a large pharama buyout. BMO Capital Markets downgraded the stock today to market perform based upon potential competition from Pharmasset (VRUS). Vertex revenue estimates for 2011 are $642M.
Cephalon(CEPH) is off 20% over a one year period and is now trading near its 12 month low of 55. The stock is up 3% today to $56.95.On March 7 Oppenheimer downgraded the stock to Market Perform. The Company’s CEO recently passed away and the Company recently received a subpoena from the FDA regarding its cancer-pain drug Fentora related to off-label marketing. Revenue estimates for FY 2011 have been cut from $3.08B to $2.65B with EPS cuts from $8.43/sh. to $5.77/sh. With a current market cap of $4.31B the stock is trading at a P/S of 1.62.Cephalon recently made a major investment in stem cells with the Australian Company Mesoblast Ltd (MSB.AX).