Up 33%: Is Vertex Pharmaceuticals Stock Overpriced?

It became apparent that Vertex Pharmaceuticals (NASDAQ: VRTX  ) is ready to grab a lot more market share in cystic fibrosis (CF) after the company recently released overwhelmingly positive clinical trial data from two huge phase 3 trials meant to establish the efficacy of a new drug combination designed for CF patients who are homozygous for the f508del mutation. Those positive data were a big reason why the stock is up 32% year-to-date. 

These trials-nicknamed "TRAFFIC" and "TRANSPORT" enrolled a total of 1,100 patients across 200 research centers. Patients in the treatment arm received an established CF drug called ivacaftor (VX-770), as well as an experimental lumacaftor (VX-809). Placebo patients received lookalike versions of this drug combination.

After 24 weeks, the phenomenal performance of patients who took the ivacaftor/lumacaftor made it clear that Vertex had another blockbuster product in CF. Across both trials, treated patients had 30-39% reductions in pulmonary exacerbations relative to placebo patients (p ≤ 0.0014) and saw a mean 4.3% to 6.7% improvement in FEV1 by the end of the trial. Basically, this means that cystic fibrosis patients on ivacaftor/lumacaftor improved their ability to breathe, and they reduced sudden "worsenings" of their breathing function relative to placebo-treated patients.

However, there was major drawback to this drug that should also be considered. 4.2% of patients receiving ivacaftor/lumacaftor dropped out of the trial due to adverse events (e.g. infective pulmonary exacerbation, cough, headache, etc.), while only 1.6% of placebo-treated patients dropped out due to adverse events.

Although this is something that the FDA would rather not see, I still agree with Vertex bulls that ivacaftor/lumacaftor has a very high likelihood of being approved based on these results.

Because Vertex plans to submit the New Drug Application to the FDA (and a few other regulatory agencies) later this year, we should expect an advisory committee meeting and a final decision in 2015. 

What about commercialization?
With the pivotal trial out of the way, and an FDA approval looking likely, VRTX followers are now trying to determine the commercial potential of this new combined therapy and the future impact on Vertex's bottom line.

Given that ivacaftor alone costs $294,000 per insured patient each year, it won't take all 28,000 f508del CF patients to reach analysts' peak annual sales estimates of >$3 billion for this new drug combination if the ivacaftor/lumacaftor combination is priced similarly (or higher). However, this is still quite optimistic as it doesn't factor in Vertex's co-payment programs and free treatment programs.

Optimism can be dangerous!
The problem is that the market added an optimistic $6 billion to the valuation of Vertex based solely on the phase 3 results, and it doesn't seem like there's enough upside left to justify the risk of a subpar launch of ivacaftor/lumacaftor. Even if the new combined drug product meets the optimistic sales expectations that are being thrown out there now, the market will have little reason to push VRTX higher.

If the new drug combination reaches $3 billion after 5 years on the market – say in year 2020 – we will have already seen loss of exclusivity for Vertex's ivacaftor (Kalydeco) monotherapy too, which is currently the company's best seller. The recent sale of Incivek also prevents Vertex from seeing much growth in the hepatitis c space throughout the next few years.

That puts way too much pressure on the success of ivacaftor/lumacaftor going forward, and gives ammunition to a growing pool of short sellers who question the valuation metrics supporting Vertex's $23 billion market cap.

So while Vertex is set to make an absolute killing on this new ivacaftor/lumacaftor product, I think that shares of the company are nearly priced to perfection. There might be more upside when Vertex gets close to phase 3 trials in heterozygous f508del (another large CF patient subpopulation), but until then I will only be following Vertex as a spectator.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 14, 2014, at 6:30 PM, andyzhu wrote:

    Go Vertex!! Go!!

  • Report this Comment On July 15, 2014, at 12:55 PM, rsree wrote:

    Much of this is based on the assumption that - in the absence of competition - Vertex can charge what it wants for its CF drugs. And at $300,000+ per patient per year for Kalydeco (ivacaftor), this appears to be the case - although there have been huge delays to getting it covered at this price under public health plans, for instance, in Canada it has taken nearly two years to negotiate a price for it - and it is still not covered in all provinces. New Zealand has said outright they will not cover it, and Australia is reluctantly covering it with significant restrictions with respect to patient eligibility. Now Kalydeco by itself targets only 4% of the total CF population. With price projections for the new ivacaftor/lumacaftor product at the same $300k per patient per year, but now able to to treat up to 80% of the CF population, it has to potential to bankrupt public and private drug plans in most OECD countries. In Canada alone, it would require as much as a billion dollars to cover the potentially eligible 80% of 4,000 CF patients there, and the majority of those funds would have to come from provincial coffers. Expect years of delays to see it funded there, as it will continue to run into the argument that it is simply not cost effective at that level of pricing. Unless Vertex comes up with a significant price reduction for their CF products, expect the competition to kick in with a similar product (Galapagos NV, for instance) and at a much more affordable level before the various countries get around to agreeing to pay the simply unsustainable high price Vertex wants for it.

  • Report this Comment On July 31, 2014, at 10:46 AM, MayTepper wrote:

    $VRTX Janney Capital Markets Reiterates Buy On Vertex Following 2Q14 Revenue Release http://bit.ly/1s6X0iL

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