Curing Diseases Makes For a Bad Business Model

Curing diseases is great for patients, but as a business model, it rather stinks.

Vertex Pharmaceuticals (Nasdaq: VRTX  ) has had one of the best drug launches in history. The meteoric rise of its hepatitis C drug Incivek is even more impressive considering that it had to compete with Merck's (NYSE: MRK  ) Victrelis, which launched at the same time.

Drug

Q2 2011 (in millions)

Q3 2011 (in millions)

Q4 2011 (in millions)

Incivek $75 $419.6 $456.8
Victrelis $21 $31 $87

Source: Company releases.

Too bad it won't last. Once a patient is rid of the virus, they don't need the drug anymore.

Vertex is guiding for revenue of $1.5 billion to $1.7 billion. Impressive for the first full year of a launch, especially since it doesn't include sales in Europe, where Johnson & Johnson (NYSE: JNJ  ) will sell the drug and pass on a royalty. Pfizer (NYSE: PFE  ) sold $865 million worth of Lipitor during its first year. More recently Merck's Januvia franchise cleared $754 in the first full year Januvia was on the market. Sales of both drugs continued to rise because diabetes and high cholesterol are chronic diseases, so many patients from the first year continued taking the drug.

Even if Vertex hits the top of its guidance, that's only an average of $425 million per quarter, under what Vertex sold in the fourth quarter; we're either at or near its peak sales. Investors' best hope is that sales flatten out for a period instead of face a steeper ramp down -- assuming Vertex didn't lowball its estimate, of course.

However the ramp-down happens, it appears that Vertex is running out of patients to treat. Hepatitis C infection generally isn't immediately life-threatening, so patients have the ability to delay treatment, which worked in Vertex's favor as they waited for its approval, but it also means many patients can now wait for an all-oral combination being developed by Gilead Sciences (Nasdaq: GILD  ) and others. Just be forewarned: They might follow the same pattern, as patients wait for something better or the inevitable generics.

If Incivek was all Vertex had, I'd be tempted to say write off the company and move on. But it recently gained approval of cystic fibrosis drug Kalydeco, which is used on only a subset of cystic fibrosis patients, but could be combined with other drugs to be used on a larger population.

At least Vertex will have plenty of cash coming in -- for now -- to help fund research for its next big thing.

Vetex is up about 250% since it was first recommended in the Fool's Rule Breakers newsletter. Fool analysts think they've found another healthcare company with just as much upside. You can read about it in their new free report "Discover the Next Rule-Breaking Multibagger." You can get your copy for free by clicking here.

Fool contributor Brian Orelli holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of Johnson & Johnson. Motley Fool newsletter services have recommended buying shares of Vertex Pharmaceuticals, Johnson & Johnson, Pfizer, and Gilead Sciences. Motley Fool newsletter services have recommended creating a diagonal call position in Johnson & Johnson. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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