Vertex Investors Rightfully Ignore Earnings

Vertex Pharmaceuticals (NASDAQ: VRTX  ) didn't exactly have the best fourth quarter:

  • U.S. sales of its previous blockbuster hepatitis C drug Incivek were down 91% year over year, to just $19 million
  • Contributions from royalties Vertex receives from Johnson & Johnson (NYSE: JNJ  ) , which sells Incivek elsewhere, dropped, as well.
  • The biotech's net loss more than doubled.

And yet Vertex's shares were up 4% today.

Sounds about right.

Incivek has crashed and burned with the launch of Gilead Sciences' (NASDAQ: GILD  ) Sovaldi, but investors saw it coming. Incivek set a new standard of care for hepatitis C patients in 2011, but Gilead's Sovaldi, and cocktails that will contain it, are so much better that doctors are waiting for the next standard of care to be set.

All about its cystic fibrosis program
Sales of Kalydeco were up 87% year over year. Fourth-quarter sales came in just under $110 million, so it's replacing Incivek yet. With 2014 guidance of $470 million to $500 million, there's a little growth left. The top of the range implies quarter-over-quarter growth of 9%.

The big growth for Kalydeco could come from combining Kalydeco with an experimental drug VX-809 in cystic fibrosis patients with a mutation called F508del. That subgroup is substantially larger than the G551D population, which only needs Kalydeco monotherapy.

Data from two phase 3 trials testing Kalydeco and VX-809 -- dubbed Traffic and Transport -- are expected to be released in the middle of this year.

Backup plan in question
Vertex wrote down the value of its next-generation hepatitis C drug, VX-135, which it licensed from Alios BioPharma. Management said that it's still looking for a way to bring VX-135 to market, but after safety concerns were raised, investors shouldn't hold out hope (clearly Vertex's pencil pushers aren't). The drug was being tested in combination with Bristol-Myers Squibb's (NYSE: BMY  ) daclatasvir, so Vertex is likely at the mercy of Bristol-Myers to determine if the development continues.

The biotech also has a rheumatoid arthrtitis drug, VX-509, which passed its phase 2 trial; but there were two deaths in the six-month study, which might make it hard to justify continuing. Vertex is looking for a partner for VX-509, so hopefully, if development of VX-509 continues, it won't be on Vertex's dime.

Ultimately it's going to come down to the Traffic and Transport clinical trials to see Vertex's future. Until then, investors can ignore year-over-year revenue changes.

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