Here's Why Vertex Was Willing to Pay a Premium of More Than 100% for Crinetics Pharmaceuticals

When a company acquires another business, there's often going to be a premium involved, especially if it's in good shape or has some promising assets in its portfolio. But normally, you don't see a company pay double what its current valuation is.

That's what Vertex Pharmaceuticals (NASDAQ: VRTX) recently did when it announced a $10 billion purchase of Crinetics Pharmaceuticals (NASDAQ: CRNX), a company that specializes in endocrine disorders and diseases. Vertex agreed to pay a 102% premium for the stock, slightly more than double its valuation. While it was great news for Crinetics investors, it didn't sit all that well with Vertex investors, and the stock proceeded to fall sharply on the news.

Why did Vertex pay so much for the healthcare company?

Image source: Getty Images.

Management was "floored" by this one drug

Vertex expects the assets it gets from Crinetics to add as much as $5 billion in revenue. And what really stood out to management was a particularly attractive drug: atumelnant. The drug isn't approved yet, but Vertex executives were thrilled with its progress in clinical trials as a treatment for congenital adrenal hyperplasia (CAH).

Atumelnant is a once-daily pill that has been well-tolerated in trials without serious adverse events and which helped bring patients' hormone levels back down to near normal levels. It has the potential to be a leading therapy for CAH, assuming it obtains approval.

"When we saw that data, we were floored. That is very, very important to this field."

"We are also excited by the significant potential of atumelnant to transform the treatment landscape for CAH, setting a new standard of care where patients do not have to choose between managing their excess adrenal androgens and enduring the side effects of high-dose steroids."

- Dr. Reshma Kewalramani, Vertex CEO

Vertex remains a top growth stock to own

The high price tag that Vertex paid for Crinetics stock may have alarmed investors, as shares of Vertex fell sharply on the news. Prior to the announcement on July 6, the stock was trading near its 52-week high at around $530, but would end up falling to just over $485 as of the end of last week. While it's not a huge sell-off, it does indicate that investors had a bit of initial apprehension when it was announced.

If, however, management is correct in assessing the value of the drugs it acquired and they do generate significant revenue and profit growth for Vertex, buying the stock today could prove to be a good move in the long run. Paying top dollar for quality assets can be necessary, and the good news here is that Vertex didn't have to take on debt to do the deal and is funding it via cash.

Overall, it looks like a good low-risk move for Vertex to make, reinforcing why it's an excellent growth stock to hold for the long run, as it's always looking for ways to expand.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vertex Pharmaceuticals. The Motley Fool has a disclosure policy.