# Vertex Pharmaceuticals Inc. (NASDAQ:VRTX)

## Present Value of Free Cash Flow to Equity (FCFE)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to equity (FCFE) is generally described as cash flows available to the equity holder after payments to debt holders and after allowing for expenditures to maintain the company’s asset base.

### Intrinsic Stock Value (Valuation Summary)

Vertex Pharmaceuticals Inc., free cash flow to equity (FCFE) forecast

US\$ in thousands, except per share data

Year Value FCFEt or Terminal value (TVt) Calculation Present value at 17.17%
01 FCFE0 1,464,740
1 FCFE1 1,608,867  = 1,464,740 × (1 + 9.84%) 1,373,052
2 FCFE2 1,785,156  = 1,608,867 × (1 + 10.96%) 1,300,200
3 FCFE3 2,000,715  = 1,785,156 × (1 + 12.08%) 1,243,616
4 FCFE4 2,264,663  = 2,000,715 × (1 + 13.19%) 1,201,356
5 FCFE5 2,588,745  = 2,264,663 × (1 + 14.31%) 1,171,991
5 Terminal value (TV5) 103,320,526  = 2,588,745 × (1 + 14.31%) ÷ (17.17%14.31%) 46,775,860
Intrinsic value of Vertex Pharmaceuticals Inc.’s common stock 53,066,076

Intrinsic value of Vertex Pharmaceuticals Inc.’s common stock (per share) \$204.68
Current share price \$225.48

Based on: 10-K (filing date: 2020-02-13).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 1.15% Expected rate of return on market portfolio2 E(RM) 12.18% Systematic risk of Vertex Pharmaceuticals Inc.’s common stock βVRTX 1.45 Required rate of return on Vertex Pharmaceuticals Inc.’s common stock3 rVRTX 17.17%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

3 rVRTX = RF + βVRTX [E(RM) – RF]
= 1.15% + 1.45 [12.18%1.15%]
= 17.17%

### FCFE Growth Rate (g)

#### FCFE growth rate (g) implied by PRAT model

Vertex Pharmaceuticals Inc., PRAT model

Average Dec 31, 2019 Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015
Selected Financial Data (US\$ in thousands)
Net income (loss) attributable to Vertex 1,176,810  2,096,896  263,484  (112,052) (556,334)
Revenues 4,162,821  3,047,597  2,488,652  1,702,177  1,032,336
Total assets 8,318,465  6,245,898  3,546,014  2,896,787  2,498,875
Total Vertex shareholders’ equity 6,085,244  4,435,203  2,028,579  1,156,582  939,967
Financial Ratios
Retention rate1 1.00 1.00 1.00 1.00 1.00
Profit margin2 28.27% 68.80% 10.59% -6.58% -53.89%
Asset turnover3 0.50 0.49 0.70 0.59 0.41
Financial leverage4 1.37 1.41 1.75 2.50 2.66
Averages
Retention rate 1.00
Profit margin 9.44%
Asset turnover 0.54
Financial leverage 1.94

FCFE growth rate (g)5 9.84%

Based on: 10-K (filing date: 2020-02-13), 10-K (filing date: 2019-02-13), 10-K (filing date: 2018-02-15), 10-K (filing date: 2017-02-23), 10-K (filing date: 2016-02-16).

2019 Calculations

1 Company does not pay dividends

2 Profit margin = 100 × Net income (loss) attributable to Vertex ÷ Revenues
= 100 × 1,176,810 ÷ 4,162,821 = 28.27%

3 Asset turnover = Revenues ÷ Total assets
= 4,162,821 ÷ 8,318,465 = 0.50

4 Financial leverage = Total assets ÷ Total Vertex shareholders’ equity
= 8,318,465 ÷ 6,085,244 = 1.37

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 1.00 × 9.44% × 0.54 × 1.94 = 9.84%

#### FCFE growth rate (g) implied by single-stage model

g = 100 × (Equity market value0 × r – FCFE0) ÷ (Equity market value0 + FCFE0)
= 100 × (58,459,882 × 17.17%1,464,740) ÷ (58,459,882 + 1,464,740) = 14.31%

where:
Equity market value0 = current market value of Vertex Pharmaceuticals Inc.’s common stock (US\$ in thousands)
FCFE0 = the last year Vertex Pharmaceuticals Inc.’s free cash flow to equity (US\$ in thousands)
r = required rate of return on Vertex Pharmaceuticals Inc.’s common stock

#### FCFE growth rate (g) forecast

Vertex Pharmaceuticals Inc., H-model

Year Value gt
1 g1 9.84%
2 g2 10.96%
3 g3 12.08%
4 g4 13.19%
5 and thereafter g5 14.31%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 9.84% + (14.31%9.84%) × (2 – 1) ÷ (5 – 1) = 10.96%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 9.84% + (14.31%9.84%) × (3 – 1) ÷ (5 – 1) = 12.08%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 9.84% + (14.31%9.84%) × (4 – 1) ÷ (5 – 1) = 13.19%