Vertex Combo-Drug Trial For Cystic Fibrosis Scores

Investor's Business Daily

Vertex Pharmaceuticals sailed through one of the most crucial tests in its 25-year existence when its cystic fibrosis (CF) treatment hit goals in a late-stage study. Upon disclosure Tuesday, Vertex stock soared to a 14-year high, closing up 40.4% to 93.53.

Vertex (VRTX) pooled results from two phase three clinical trials looking at patients with a homozygous pair of genes with the F508del genetic mutation, the most common cause of cystic fibrosis. Patients taking a combination of lumacaftor and ivacaftor for 24 weeks showed a statistically significant improvement in lung function as well as a significant reduction in the rates of pulmonary exacerbations and improvements in body mass.

"These pivotal results validate our strategy of using a combination of a corrector, lumacaftor, and a potentiator, ivacaftor, to treat the underlying cause of CF," Vertex CEO Jeffrey Leiden told analysts Tuesday.

The company plans to file for approval in both the U.S. and Europe in Q4. Analysts say it will probably launch in mid-2015.

Wall Street Hesitated

The size of the stock move reflects how uncertain Wall Street was that the treatment would work, as well as how significant the news is for Vertex. In 2011, Vertex enjoyed what was, at the time, the biggest drug launch in history with its hepatitis C treatment Incivek. But a year later, sales fell sharply as competition came online, especially Gilead Sciences' (GILD) Sovaldi, which has already surpassed Incivek's launch record since it was approved in December.

In 2012 ivacaftor, one of the two drugs in the latest study, was approved for sale as Kalydeco. But it was approved only for patients with the G551D mutation. They represent only 4% of CF sufferers in the U.S., according to the Cystic Fibrosis Foundation.

Thanks partly to controversially aggressive pricing — around $300,000 a year — Vertex still has been able to pull hundreds of millions in annual revenue off a patient base of just a few thousand. But being able to treat the 50,000 or so patients with the F508del mutation, whether homozygous or heterozygous, would turn ivacaftor into a blockbuster.

Nonetheless, prior trial results didn't inspire full confidence. Just last week, Bernstein analyst Geoffrey Porges warned of a high risk of failure, based on talks with scientists at a CF conference.

On Tuesday, ISI Group analyst Mark Schoenebaum wrote that while the results were "not a home run" due to the modest rate of lung-function improvement (the mean improvement was 2.6% to 4%), the lack of better alternatives means that peak annual sales could hit $3 billion.

A $4.5 Billion Franchise?

RBC Capital Markets analyst Michael Yee pointed out that Vertex is also testing a third drug, VX-661, and has a whole library of other correctors that could work in a wider range of genetic types. He estimates peak annual sales of $4.5 billion for the whole CF franchise.

"The big picture that investors should remember is this is a major improvement for sick CF patients (typically kids), and all our doc feedback is that, if the drug is FDA approved, the patients will get access to it," he wrote.

Yee raised his price target to 120 from 95, maintaining an outperform rating.

One question still up in the air is how the combo will price. Vertex could get away with pricing Kalydeco so high because its patient pool was so tiny and because its efficacy was so good, but analysts generally expect the combo to price much lower. Yee estimates $225,000 but writes that the Street is mostly thinking of $150,000 to $175,000.

Either way, Vertex will likely have the only disease-altering CF treatments on the market for quite a while, says Morningstar analyst Stefan Quenneville. "We also believe that these results may have longer-term moat implications for the company by positioning it as the dominant player in cystic fibrosis," he wrote in a research note Tuesday.

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