Vertex Misses, Cuts Incivek Outlook

Zacks

Vertex Pharmaceuticals Inc. (VRTX) posted second quarter 2012 earnings (including stock-based compensation expense) of 32 cents per share, well below the Zacks Consensus Estimate of 57 cents. The company’s year-ago loss was 82 cents per share. Earnings were positively impacted by increased revenues.

Revenues for the reported quarter came in at $418.3 million, above the year-ago figure of $114.4 million, but significantly below the Zacks Consensus Estimate of $467 million. The year-over-year improvement in revenue was mainly due to hepatitis C virus (:HCV) treatment, Incivek (telaprevir), which was launched in the second quarter of 2011.

Revenues

Vertex Pharma’s second quarter revenues consisted of revenue earned from the sale of Incivek ($327.7 million), Kalydeco ($45.5 million; launched in January 2012), royalty revenue (up 234.5% to $33.5 million) and collaborative revenue (down 61.3% to $11.6 million).

Incivek is the primary revenue contributor for Vertex Pharma, which is looking to expand its label to drive growth.

Vertex Pharma’s other marketed product, Kalydeco, recently gained approval in the EU to treat patients with cystic fibrosis (CF), aged 6 years and above and who have at least one copy of the G551D mutation in the cystic fibrosis transmembrane conductance regulator (:CFTR) gene.

Royalty revenue for the quarter included $28.0 million received from partner Johnson & Johnson (JNJ) on sales of Incivo in Europe.

Vertex Pharma has exclusive US commercialization rights to Incivek and has agreements with Johnson & Johnson and Mitsubishi Tanabe Pharma for the commercialization of the drug outside the US. While Johnson & Johnson is responsible for the commercialization of Incivek outside North America and the Far East, Mitsubishi Pharma markets it in certain areas of the Far East including Japan.

While Incivek gained European approval under the trade name Incivo during the third quarter 2011, the product is marketed in Japan as Telavic.

Other Details

Research and development (R&D) expenses for the quarter increased 13.2% to $196.5 million, mainly due to continued investment in development activities.

Second quarter 2012 selling, general and administrative (SG&A) expenses shot up 21.6% to $117.5 million, as a result of expansion activities related to the company's commercial organization and costs related to the US launch and preparation activities for the European launch of Kalydeco.

Pipeline Update

Vertex Pharma is currently enrolling for its phase IIb study of VX-509 in moderate-to-severe rheumatoid arthritis (:RA) patients. The company plans to initiate additional studies with the candidate in the beginning of 2013.

Vertex Pharma is also running a phase II study of VX-787, which is being developed to treat influenza A, including recent H1 (pandemic) and H5 (avian) influenza strains. The company expects phase II data in the second half of this year.

Incivek Guidance Cut

Vertex Pharma cut its 2012 Incivek revenue guidance to the range of $1.1–$1.25 billion from the old guidance of $1.5–$1.7 billion. The company attributed the downward trend in the number of patients initiating HCV treatment as the reason for the curtailed guidance. Vertex Pharma believes that the reason behind the downward trend is mainly that physicians are adopting deferral treatment in some patients. Another possible reason as per the company is the increasing number of clinical trials in hepatitis C, which is drawing increasing number of patients.

The company reiterated its operating expenses guidance of $1.03-$1.13 billion.

Our View

CF drug Kalydeco is off to a strong start and should continue performing well. But, the decreasing number of patients for Incivek can be a matter of concern for the company.

We currently have a Neutral recommendation on Vertex Pharma. The stock carries a Zacks #3 Rank (Hold rating) in the short run.

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