Vertex Pharmaceuticals (VRTX -1.02%) has enjoyed a remarkable run so far in 2017. Just last week, the biotech stock was up 81% year to date.
There has been a lot of good news for the developer of cystic fibrosis (CF) drugs. However, over the past few days, Vertex stock has slipped somewhat. Is Vertex running out of steam or just taking a breather?
Image source: Vertex Pharmaceuticals. https://www.vrtx.com/pipeline-medicines/independent-research
Why Vertex soared
To answer the question, it's important to understand why Vertex Pharmaceuticals stock soared in the first place. The company got off to a good start in 2017, reporting strong revenue growth for the full year 2016 and reaching profitability in the fourth quarter.
However, it was the announcement in March of results from two late-stage studies of the tezecaftor/Kalydeco combination in treating CF that really lit a fire beneath Vertex stock. Those results showed significant improvement in lung function for patients taking the combo. Vertex stated that it planned to submit for regulatory approval in the U.S. and Europe in the third quarter of 2017, based on the positive results.
In April, Vertex reported more solid revenue and earnings numbers for the first quarter of 2017. A few weeks later, the biotech won approval from the U.S. Food and Drug Administration for patients with CF ages two and older who have one of 23 residual function mutations in the CF transmembrane conductance regulator (CFTR) gene.
All of this good news had a compounding effect. Vertex's share price climbed higher and higher throughout much of the first half of the year.
Has anything changed?
A key question investors need to ask to determine if Vertex might be running out of steam is this: Has anything changed in the underlying factors behind the stock's tremendous gains? The short answer is "no."
Vertex seems likely to continue posting strong numbers throughout the year. In April, the company upped its full-year revenue guidance for Kalydeco and reiterated its revenue guidance for Orkambi. If those two drugs perform well, Vertex will perform well.
There don't appear to be any roadblocks in the way for Vertex to file for regulatory approval of the tezecaftor/Kalydeco combo as planned. And while anything can happen in the approval process, the late-stage results appear to bode well for Vertex's chances in winning approval.
The only thing that has really changed about Vertex is the valuation of its stock. After a run-up of over 70%, it only makes sense that the stock trades at a higher earnings multiple. However, if you factor in earnings growth projections, Vertex stock isn't really too expensive even after the huge gains so far this year.
A short breather
I think the recent small decline in Vertex's share price will be only a short breather. Vertex seems poised to continue its strong momentum.
The company said earlier this year that a key part of its growth strategy was to finalize reimbursement arrangements for Orkambi in European countries. Vertex appears to be making good progress on this front. On June 1, the biotech announced a long-term reimbursement agreement with Ireland. Vertex previously secured reimbursement deals for Orkambi in Austria, Denmark, France, Germany, and Luxembourg.
At this point, competition doesn't appear to be a big concern. Galapagos (GLPG -2.31%) and AbbVie (ABBV -1.03%) formed a partnership in 2013 to develop CF drugs. The two companies' goal is to develop a triple combination therapy that can treat 90% of CF patients. Galapagos recently announced that the companies won't start clinical studies for their triple combination until the fourth quarter of this year. Vertex probably has at least a year's head start over the two potential rivals.
In a recent article, I ranked Vertex as one of the best personalized-medicine stocks on the market. I still think that's true and expect the stock to keep up its winning ways.
