October 11,2012 ----- Summary: We attended VRTX's Investor Event at the NACF conference in Orlando, FL, where we had the opportunity to spend an extensive amount of time with management discussing the full ph.II Kalydeco/'809 combo data, phase III plans, biological basis for testing the 400mg BID dose and VX-661, and the longer-term vision for the CF franchise. Overall, while the full ph.II data does not address all questions, we continue to believe that on balance it points to a clear treatment effect for Kalydeco/’809 that should improve in a longer- duration ph.III and could be further improved upon longer term. Though we acknowledge there is a greater degree of uncertainty around the upcoming CF data readouts ('661 and possibly 400 BID), which could potentially cause stock volatility, we came out of the meeting with increased confidence in VRTX's ability to ultimately capture the multi-billion dollar opportunity in CF. We continue to believe VRTX's valuation underappreciates this promise. --- Valuation Range: $65.00 to $69.00
We value VRTX based on a DCF through 2027 with an 8% terminal value which we believe is warranted due to the CF franchise, sustainability of the HCV franchise, and VRTX's deep pipeline. Risks include failure of ph.III '770/'809 in CF and longer-term HCV competition.-------Investment Thesis:
We believe ph.II '770/'809 CF data increase likelihood of ph. III success and approvability of combo, and nuc data provides likelihood of sustainable HCV revenues in 2015+.